European debt crisis weighs on emerging markets; primary remains quiet; trading mixed

By Christine Van Dusen

Atlanta, May 20 - New issuance remained non-existent and secondary trading was mixed on Thursday as emerging markets investors and issuers continued to fret about the European economic downturn and wondered how Germany's parliament would vote on its piece of the bailout, market sources said.

"The tone is awful," a London-based trader said.

A New York-based market source agreed. "It's not too good. The market is basically deteriorating. It's getting squeezed here."

To blame, yet again, was the European debt crisis. Investors and issuers remained concerned that the contagion would continue to spread and watched Germany for signs of how the sovereign's parliament would vote on its share of the €750 billion aid package for European countries. That vote is expected Friday.

"That seems to be what everyone is focused on for some reason. There seems to be a lot of nervousness out there that this will not pass," an economic strategist said. "That's having some influence across the spectrum. I'm not sure why people are very concerned."

Primary still silent

The anxiety once again paralyzed the primary market for emerging market bonds.

"Expected new issues are delayed and most probably need to be priced at quite higher yields than expected," a Europe-based trader said.

"I imagine all deals will be on hold for now," the London-based source said.

The likely scenario is that activity will pick up next week. As the New York source said: "Anything on the calendar for this week is going to be postponed to next week."

Included on that list is Mobile Telesystems' planned 10-year eurobond issue via Bank of America Merrill Lynch, Credit Suisse and RBS. The Russia-based mobile phone company's deal, which is being whispered at an 8% yield, ended its roadshow late Thursday but will be marketed in some meetings on Friday.

"That will likely be next week's business," he said. "Given the market volatility, they didn't want to rush it along."

Market volatility is also to blame for the delayed deal from Banco Cruzeiro do Sul. The Sao Paulo-based lender was expected to price its planned five-year notes earlier this month but postponed the sale. Now it looks like the deal - which was whispered at 9% to 9½% - won't come to market for another couple of months.

"The markets were semi-volatile two weeks ago as well, and the numbers have gone stale," the New York-based market source said. "They're going to come back mid- to late-summer."

Mixed bag in trading

The secondary on Thursday was "very quiet," he said. "There's not a lot of trading. We're off the lows but equities are off anywhere from 2% to 3½%. The euro is trading higher. The broader credit markets are 10 basis points wider."

The Europe-based trader saw the same thing. "There are hardly any trades but lots of inquiries," he said. "And then it's very hard to do the trade."

Mexico's spread was 20 basis points wider, the New York source said. And Korea was "underperforming" after North Korea threatened war if sanctions are imposed in response to the sinking of a South Korean ship in March. "Their spreads are a little under pressure today."

Meanwhile, Malaysia was trading up on Thursday while Thailand was down, the strategist said. "There's definitely a mixture, but generally to the upside," he said. "It's definitely a regional- and country-specific thing. Indonesia is down. Pakistan is up. Hungary is down. The Czech Republic is flat. Abu Dhabi is up."

Difficulties with debt swap

Meanwhile, Argentina's debt swap was not going as well as expected, a market source said.

The sovereign was hoping for 60% participation in this second exchange opportunity for bondholders who didn't take part in a 2005 swap. But the new swap has gotten only about 45% participation so far. The offer's deadline, which was extended to June 7, could be extended yet again.

And there's no word on Argentina's planned $1 billion issue of 8¾% bonds due 2017.

Also on Thursday, Dubai World - which previously was blamed for a great deal of market volatility due to its own financial troubles - reached an agreement with lenders to restructure $23.5 billion in debt. The plan isn't final but takes a step toward resolving the development company's issues, market sources said.

Bond inflows up

Emerging markets bond funds saw inflows of $533 million for the week ended May 19, according to data tracker EPFR Global. That's up from the measly $22 million of inflows seen in the previous week.

"It's not so much that people think things are turning around but that there is a fairly critical mass of investors who are willing to buy into the argument that the debt from many of these emerging markets is a pretty good value given their fundamentals and fiscal profiles," said Cameron Brandt, global senior analyst for data tracker EPFR Global.

"They're a lot better looking than a lot of the higher-rated developed market issuers; so, it really seems like there's something of a fundamental re-rating going on at the moment."

During past downturns, "emerging markets bond funds have been among the first to see the exit signs light up," he said. "That hasn't been happening this time. And the local currency funds have been doing particularly well. So I think people are really sort of looking at emerging markets in a somewhat different light."

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