Pemex prices $1 billion; local currency funds see record inflows; overall market trades lower

By Cristal Cody and Paul A. Harris

St. Louis, Jan. 28 - Emerging markets weakened on Thursday, according to a syndicate banker in New York, speaking after the close.

News that Mexico's Petroleos Mexicanos (Pemex) was in the market with a $1 billion 10-year deal caused the sovereign bonds of Mexico, the company's owner, to get hit, the banker said.

Mexico's 5½% notes due February 2020 were down 1 point while its 5.95% global bonds due in 2019 were down ¾ point at 105 bid, 105.50 offered.

However the damage during the session wasn't limited to Mexico, the banker said.

Brazil's 5 7/8% global bonds due in 2019 were down almost 1¼ points at 104 bid, 104.50 offered.

"We were riding high four days ago, when Greece got its deal done.

"Now it has widened out by 50 basis points, which is disheartening, and destabilizing for the market."

Nevertheless, the banker said, the technical forces that have driven the months-long rally in EM remain in place.

If stocks get their footing, and the Obama administration ceases daily announcements, that have been distracting at best, emerging markets debt still has room to run, the sell-sider remarked.

The opinion on technical factors was confirmed by fund flows figures from tracking service EPFR Global, which showed another inflow, most of it into local currency bond funds, which saw a record addition of cash.

Pemex prices $1 billion

Pemex priced a $1 billion issue of 6% 10-year notes at a 250 basis points spread to Treasuries on Thursday.

The spread came at the tight end of the Treasuries plus 250 to 255 bps price talk.

The notes came at a reoffer price of 98.788, resulting in a 6.162% yield to maturity.

Credit Suisse, Barclays Capital and Citigroup were joint bookrunners.

A sizable concession

The New York banker, who watched the Pemex deal from the sidelines, expressed surprise that the company brought its deal against the backdrop of increased volatility seen in the capital markets over the past several sessions.

"Right now the all-in cost for high-grade names looks good, because rates have moved in their favor," the banker said.

"But quasi-sovereigns, such as Pemex and Petrobras, as well as sovereigns such as Brazil, always look for the tightest concession to their existing bonds.

"That just wasn't there today."

Pemex's existing 8% notes due 2019 closed the Wednesday session at 115¼ bid, or 5.84% bid, in terms of yield, the banker said.

Hence the new 6% paper, maturing in 2020, which priced to yield 6.162%, came at a 32 bps concession to the 2019 paper - considerably higher than high-grade quasi-sovereign issuers - or sovereign issuers, for that matter - are customarily willing to pay, the source said.

Cyprus prices atop talk

Meanwhile, The Republic of Cyprus (Aa3/A+/AA-) priced a €1 billion issue of 4 5/8% 10-year notes at a 125 basis points spread to mid-swaps.

The spread came on top of price talk.

Deutsche Bank, SG Corporate & Investment Banking and UBS Investment Bank led the sale of notes which were priced off of the Euro medium-term notes program.

Lithuania taps Barclays, HSBC, RBS

The Republic of Lithuania (Baa1/BBB/BBB) mandated Barclays Capital, HSBC Bank plc and Royal Bank of Scotland plc to lead a series of global investor meetings, beginning Friday.

Presentations will be made for a potential bond transaction, subject to market conditions, the source added.

TNK-BP tightens

TNK-BP's new bonds tightened 15 bps to 20 bps from issue price, according to a London trader.

"They're off the highs, with the equity market crumbling a little bit in the afternoon," the trader said after the European markets closed.

TNK-BP priced $1 billion of fixed-rate notes (Baa2/BBB-) on Wednesday in two tranches that included $500 million of 6% five-year notes at 99.157 to yield 6.45%. The yield printed tight to the 6½% area price talk.

TNK-BP also priced a $500 million tranche of 7¼% 10-year notes at 98.263 to yield 7½%. The yield on the 10-year notes printed at the tight end of the 7½% to 7 5/8% price talk.

The bonds gained about a point Thursday, then traded off in the afternoon, the trader said.

Traders also saw the same "pattern" in the Moscow-based company's existing bonds.

TNK-BP's existing 7½% bonds maturing in 2012 and its 7 7/8% bonds maturing 2018 were roughly between ½ to 1 point stronger and then weaker again in the afternoon.

Local currency bond funds post record

Dedicated local currency emerging markets bond funds posted an "all-time record" for the week ended Wednesday, Brad Durham, managing director for data flow tracking firm EPFR Global, told Prospect News.

Meanwhile total weekly inflows for emerging markets bond funds eased slightly to $572.07 million from $574.8 million reported the week before.

Dedicated local currency fund bonds were responsible for $515 million of the $572.07 million, Durham said.

"It's the biggest weekly inflow into the local currency funds going to '05," he said. "Investors are moving money to currency bond funds. They are experiencing strong internal drivers within the emerging market countries and also know the potential expectations of collapse in local currency valuations versus the dollar."

For emerging markets bond funds overall, this is the 20th consecutive week the EPFR tallied with cumulative inflows of $1.73 billion.

"Despite some loss of risk appetite by investors in the last week or two, sentiment still remains pretty positive for emerging market bonds," Durham said.

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