EM primary still rolling; trading soft; ICICI Bank prices $2 billion

By Aaron Hochman-Zimmerman

New York, Sept. 28 - Emerging markets counted on the primary to provide the action for another day.

Trading was again flat as investors decided to wait until Monday for a fresh quarter to place their money.

In the primary, corporate issuers caused the day's excitement as Corporacion Durango SAB de CV and ICICI Bank Ltd. priced a total of $2.52 billion.

The week's primary rally did not shock one syndicate desk official.

"I'm not surprised some of these issuers are willing to pay up, they're the desperate ones," the official said about the deals, which he considered overdue to price.

"They paid way more then they needed to," the official said.

Trading was subdued because "I think a lot of these deals have had heavy hedge fund involvement," the official said, adding that the hedge funds quickly took their profits.

An analyst called the market "reasonably quiet."

"The tone has been constructive, particularly in the second half of the month [of September], following the Fed rate cut," the analyst said.

"We should be looking for some risks in the short-term," he said about the next three to six months.

Within the last few weeks it seems as though the market is "immune" to negative headlines, a market source said.

The market's recovery since the Federal Reserve Bank's 50 basis points rate reduction has prompted some of the tightest contractions in spreads since the credit crisis struck, he said.

Meanwhile emerging markets funds saw slight inflows during the week ending Sept. 26 as $85 million entered - although that was dwarfed by the $5.5 billion which came into emerging market equities, according to research group EPFR Global.

The emerging market funds have been held back by "strongly negative" flows from international bond funds, or global funds which form 13% or $20 billion of the emerging market funds. Global bonds lost $612 million last week.

Elsewhere, for the first time since the Fed cut, the VIX index, the yardstick of market volatility, started back up. It gained 1.00 to end at 18.00.

The amount of yield investors demand to hold emerging markets debt remained unchanged at a spread of 201 basis points, according to JP Morgan's EMBI+ index.

Corporates clear the calendar

In the primary India's ICICI Bank priced $2 billion of five-year 6 5/8% senior unsecured bonds (Baa2/BBB-/) at 99.916 to yield 6.645%, a spread of 237.5 bps, according to a market source.

The deal came on top of talk for a spread of 237.5 bps.

Deutsche Bank, Goldman Sachs and Merrill Lynch had the books for the deal.

ICICI Bank is a Mumbai-based retail lender.

The deal was oversubscribed with 43% of the notes sold in the United States, 37% in Asia and 16% in Europe. Fund managers accounted for 53% of the sales, banks for 32% and 15% went to pension funds and retail investors.

"It's easily the biggest deal from India," a trader said.

In subsequent trading, the spread initially tightened to around 233 bps, but then gave up some of those gains to close at 234 bps, he said.

But a market source recommended caution in the Indian banking sector because of such new issuance overhang and potential liquidity and asset quality issues.

Also pricing Friday was Mexico's Durango, which sold $520 million of 10-year senior unsecured notes (B+/B+) at par to yield 10½%.

The deal matched talk for a yield in the 10½% area.

Merrill Lynch was bookrunner for the deal.

Proceeds from the sale will be used to refinance existing debt and for general corporate purposes.

Corporacion Durango is a Durango, Mexico-based bag and box manufacturer.

Ahead of pricing, Durango was down 0.25 in the gray market, but after freeing to trade rose from its issue price to 100.25 later in the session.

Primary keeps its stride

The emergence of corporate issues in Friday's session followed the reopening of the primary market by sovereigns earlier in the week.

After so much success in the primary, questions arose over how long the parade of new deals would last.

"It's month's end and we've got to see how the market opens up next week," said an emerging markets syndicate desk official.

"If all the bonds trade well, then we'll be fine," he said.

Russia, CIS banks in short-term stumble

In the secondary, there were fears that the credit crunch is spreading from developed Europe and into eastern Europe.

An emerging markets analyst said that banks in Russia and Kazakhstan may have a bit of trouble with solvency, but added that it is a very localized and short-term issue.

Bank bailouts in the United Kingdom and Germany, along with similar situations cropping up in the former Soviet Republics ire "something which is providing for a more negative feeling," the analyst said.

"Russia shall be reasonably well supported because of higher oil prices," the analyst said about a generally stable Russian economy. Oil prices remain high at $81.79 per barrel.

"There was another liquidity squeeze," the analyst said, but "there is very little risk," he added.

The Russian banks which have been hurt the most are the smaller private banks, not the large state-run banks, he said.

There will likely be small injections into many of the failing banks, but it is just as likely larger banks will buy them out, he said.

The analyst expects "no dramatic rate moves."

The market will probably show little movement on its own. It will wait to react to the headlines on the horizon.

"We're probably waiting for the next stimulus coming from outside," the analyst said.

LatAm corporates steal the show

Even though the past week was light on trading, over the past months issues in Latin America have held up well in the face of local inflation concerns and external credit troubles from the major markets, especially the United States.

Emerging markets, and Latin America in particular, has outperformed other debt sectors, a market source said.

It has survived on strong fundamentals and a lack of direct line of economic contamination from external liquidity woes.

The source believes that issuers, to their credit, used the past three years of strong market and economic conditions to pad themselves against future falls.

Maturities were extended and balance sheets were secured in order to endure a situation like the one the world faces now, the source said.

But some issuers in Mexico were not as fortunate or as prepared, the source added.

Telecommunications firms and home builders have been a drain on Mexico's performance, likely because of their close ties to the U.S. economy.

However the source said there may be the chance to pick up bargains.

Opportunities which the slowdown has presented includes Mexican homebuilder Homex SA de CV and its 7.5% notes due 2015. That issue was seen trading at 100.25 on Friday.

Also in corporates, what has been billed as "the largest corporate bond offering in Colombia ever," by a market source, the new Transportadora de Gas del Interior SA ESP 9½% bonds due 2017, were seen near Thursday's close at 100.60.

The company priced $750 million of 10-year 9½% senior notes at par on Wednesday via ABN Amro.

The usual suspects in the Latin American high-beta sovereign world were mostly flat or mixed for the week as they let the primary take the spotlight.

Argentina's 8.28% notes due 2033 suffered the biggest loss of the day on Friday, as they were seen down 0.75 at 91.25.

Venezuela's 9.25% government bonds due 2027 were seen around 133.5.

Brazil's 11% highly-traded sovereigns due 2040 were seen trading up 0.10 at 133.75.

Asia sees profit taking

Asia softened on the day although sovereigns in the region mostly held steady.

"There has been a degree of normalcy," a trader said about the money markets, "but the market [as a whole] will be a bit more clear when we come back in on Monday," he said.

Indonesia's benchmark notes due 2017 were seen trading relatively flat at 104.50.

The Philippine government bonds due 2031 traded around 111.50.

Overall, "it's been consolidative, we're seeing some profit taking," the trader said.

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