Emerging market debt trades flats, spreads wider; Malaysia's Southern Bank to hit road

By Reshmi Basu and Paul A. Harris

New York, Oct. 21 - Emerging market debt saw no real flows Friday, as investors took a breather from an active week.

"It's been very, very quiet today [Friday]," said a buyside source, who added that Friday's session was driven by the U.S. Treasuries rally.

"Our prices were pretty much unchanged. Our spreads look wider, but I think that's a function of the U.S. Treasury heading lower," said the source.

At the close Friday, the yield on the 10-year note stood at 4.39% from Thursday's close of 4.44%.

Furthermore, with no news coming out of the United States, investors chose to stay on the sidelines. During the session, emerging market debt traded flat. The Brazil bond due 2040 added 0.40 to 119½ bid. The Russia bond due 2030 gained a quarter of a point to 110¾ bid. The Venezuela bond due 2027 lost 0.15 to 113.70 bid.

Malaysia's Southern Bank to hit road

In the primary market, it was all about Malaysia as two corporates added to the pipeline.

Malaysia's Southern Bank Bhd. will begin a roadshow Monday in Singapore for a dollar-denominated offering of hybrid tier I perpetual notes via UBS Investment Bank.

Southern Bank already has a 10-year non-callable five-year lower tier II deal (Baa3//BBB-), which has been trading in the area of Libor plus 90 basis points, according to a trader who focuses on Asian names.

The lower Tier I deal will likely be sub-investment grade, at least on one side, he said.

Next Megasteel Harta (L) Ltd. plans to issue $400 million to $450 million of five-year and 10-year senior secured notes (B1/B+).

The 10-year notes will be non-callable for five years while the five-year notes will be non-callable for three-years.

Credit Suisse First Boston is the bookrunner for the Rule 144A/Regulation S transaction.

And more out of Malaysia, air carrier Penerbangan Malaysia Bhd.'s $1 billion two-part bond offering (A3/A-) was set to price on Friday but was postponed due to a legal glitch, said a market source.

On Thursday, the company talked an approximately $750 million offering of 10-year bonds at mid-swaps plus 35 basis points, or 83 basis points to U.S. Treasuries.

Meanwhile Penerbangan talked an approximately $250 million offering of 30-year bonds at mid-swaps plus 96 basis points, or 145 basis points to Treasuries.

CIMB Bhd., Citigroup and HSBC are joint bookrunners for the Rule 144A/Regulation S offerings.

Also Bank Sinopac (Taiwan)'s upper tier II perpetual was postponed. UBS was the bookrunner.

Range-bound

Looking ahead to next week, the buyside source expects the market to be weaker.

"It's seems that every time we rally it doesn't really have legs and people sell into the rally," noted the source.

"We'll probably be range-bond until we get some direction," and that may not be until the release of the Federal Open Market Committee's minutes in November, added the source.

Meanwhile, speeches by Fed officials are gaining importance in the last few weeks as investors look for cues into monetary policy.

"Fundamentals are still positive in EM. If anything we had an upgrade in Brazil, a Gazprom upgrade a few weeks ago, so there's nothing happening in the asset class," said the buyside source.

"It's hard to rally when equities are selling off," noted the source, adding that investors are looking at the risk attitude across all asset classes not just emerging markets.

Impact of sell-off more in Latin America

The recent sell-off has not impacted Asia as much as Latin America, said the trader.

He said that there has been some volatility, but spreads that widened have come back.

But the tone has definitely deteriorated over the last few weeks, he noted.

For instance, the new deals that are coming are meeting with more rigorous assessments.

"And we're starting to see clients selling existing positions in order to go into new deals. Whereas before they would just come in, now they're selling other issues to make room for the new ones. There is definitely more caution," he added.

Looking for entry

The buyside source surmised that investors are mostly long with some cash on the side, waiting for an entry point into the market.

"It hasn't sold off enough to make a compelling entry point here," added the source.

And no one can be sure whether the asset class is heading higher or lower, although the bias is towards lower. Wider spreads will produce more buyers, the source said, but added that at the same time the inflation worries need to disappear.

Whether or not this market will enter into a prolonged correction is yet to be seen, but no one appears ready to give up the carry, remarked the source.

The trader does add that there is talk that there is new mandate money waiting to come into the market.

"There is concern that if the volatility continues some of that money might be held up or go elsewhere."

Still, he added, people are fairly sanguine about technicals at the moment.

There might be issuance but it's not an enormous amount, he noted. Plus there are a lot of repayments happening.

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