Emerging markets debt weaker as equity selloff continues; EM-focused Millicom gains in gray

By Rebecca Melvin

New York, Oct. 11 – Emerging markets debt was weak on Thursday as U.S. markets initially attempted to stabilize, but later succumbed to another downdraft, pushing indexes down another 1.3% to 2%. Milder-than-expected inflation data did little to soothe concerns that the U.S. Fed will continue its trajectory of rate tightening.

“Everything is struggling. Spreads are wider today,” a London-based trader, focused on the Middle East and Africa region, said.

A second market source said EM debt “feels heavy,” although flows and pricing action were not excessive.

Despite the mixed picture for rates, there was a new deal that priced and another one joining the calendar for the Latin America region. Even if the Republic of Peru, which wrapped up roadshow meetings on Wednesday, did not make Thursday its choice to price.

EM-focused Millicom International Cellular SA priced $500 million of eight year notes at par to yield 6 5/8%, a market source said. Those notes were higher by more than a point in the gray market, where the market was quoted 101 bid, 101.125 ask, the source said.

Final talk came tight to earlier price talk in the 6 7/8% area and at the wide end of initial guidance in the mid 6% area. The Luxembourg-based company operates in Latin America and Africa, and plans to use proceeds of the new issue to help fund its acquisition of an 80% stake in Panama-based company Cable Onda.

A Colombian pipeline company also announced a roadshow for a new notes, but further details were not forthcoming by Prospect News’ deadline.

Given the volatility in rates and equities, it was not surprising that Peru did not price its dual tranches of notes, the source said. The sovereign is proposing a benchmark-sized offering of PEN-denominated, euroclearable bonds under Rule 144A and Regulation S and a U.S. dollar-denominated note registered with the Securities and Exchange Commission, with both tranches expected to be intermediate to long duration.

Low beta names including Petroleos Mexicanos were seeing some selling, as the U.S. equity move highlighted the reality of rates moving up and repricing in spreads was finally occurring in the past two sessions, the source said.

“Finally real money is selling across low beta names, although it’s not even close to a fire sale,” the source said.

While the theme is that the leg up in rates is causing repricing of assets in emerging markets, it is expected that once rates and spreads stabilize, demand for emerging markets assets will be strong and the primary market will restart.

A sharp drop lower in U.S. equities on Wednesday spread to global equity markets early Thursday and there was further selling in U.S. markets, which left the Dow Jones industrial average down another 545.91 points, or 2.1%, to 25,052.83, on top of an 831 point drop on Wednesday. Also on Thursday, the S&P 500 stock index fell 57.31 points, or 2.1%, to 2,728.37 and the Nasdaq Composite index lost 92.99 points, or 1.3%, to 7,329.06. U.S. Treasuries edged up, pushing the yield on the benchmark 10-year Treasury down slightly to 3.15%.

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