Spreads tighten to end positive week for emerging markets assets; Qatar, Petrobras eyed

By Christine Van Dusen

Atlanta, Dec. 2 - Emerging markets assets ended the week on a mostly positive note as investors continued to enjoy the fruits of a recent rally inspired by the news that several central banks are planning to work together to provide cheaper funding for European lenders.

"The general expectation of more coordinated action to follow the central bank intervention is giving the market a great bid," a London-based trader said on Friday.

This, plus positive - though lower-than-forecast - jobs numbers from the United States, helped tighten spreads on Friday. The Markit iTraxx SovX index spread narrowed by 10 basis points.

Among the names to stand out in the secondary market on Friday was South Africa, which was tighter by 10 bps.

"The latest example of the crazy volatility right now is Turkey's 2030s today," he said. "Two prints, first up at 169.5, pause, then down at 167.5 30 minutes later."

Flows, overall, were busy during the early part of the session, another trader said.

"Flow-wise today it was very busy for the first few hours with some decent Asia and European action before a very quiet afternoon, post the in-line non-farm payrolls," he said. "We'll have liquidity for two more weeks this year and then it's deck-the-Christmas-tree, find some mistletoe and put the toes up near the fire."

Qatar continues to perform

The recent notes from Qatar continued to stand out on Friday.

"Qatar is a rock, but that's not surprising," a trader said. "Time and time again that credit just proves it is never one to short. We've seen superb performance by the 2042s and the curve looks in line now, after a decent pull-back in those 2040s."

Qatar's $5 billion issue of senior notes due 2017, 2022 and 2042 came to the market during the week via Citigroup, HSBC, JPMorgan, Mitsubishi UFJ Securities, QNB Capital and Standard Chartered Bank in a Rule 144A and Regulation S transaction.

The deal included $2 billion 3 1/8% notes due 2017 that priced at 99.719 to yield 3.184%, or Treasuries plus 225 bps. The second tranche totaled $2 billion 4½% notes due 2022 that priced at 98.951 to yield 4.63%, or Treasuries plus 262.5 bps.

The deal also included $1 billion 5¾% notes due 2042 that priced at 98.928 to yield 5 7/8%, or Treasuries plus 287.5 bps.

Petrobras deal 'impressive'

Another deal that caught the market's eye on Friday was the recent €1.85 billion notes due 2018 and 2022 from Brazil-based Petrobras International Finance Co.

The securities - guaranteed by energy company Petrobras - included €1.25 billion 4 7/8% notes due 2018 that priced at 99.021 to yield 5.066%, or mid-swaps plus 285 bps. The second tranche totaled €600 million 5 7/8% notes due 2022 that priced at 99.266 to yield 5.977%, or mid-swaps plus 330 bps.

"It's impressive to see them print in euros in this market," a trader said. "But once again it confirms that anything is possible for good-quality investment-grade EM names. We've seen huge interest in the 2018s, which are now up 3/8 of a point."

Said another trader, "We're very active in the new Petrobras 2018s. There's good, solid two-way interest. It seems to have found a level here, at about 99.30 bid, 99.55."

Rollercoaster day for Turkey

In other trading on Friday, Turkey's sovereign curve went on a "rollercoaster ride," a trader said.

"The 2010s and 2030s have steepened circa 15 bps," he said. "We've seen good two-way interest on the banks, especially on the Garanti Bankasi AS 2017s."

By the afternoon, Garanti's 2021s and Yuksel Insaat were seeing better buying.

From Russia, steel and mining company OAO Severstal was better supported. "But activity is relatively low," he said.

And Gazprombank and KazMunaiGaz staged significant rallies, he said.

BTA Bank in focus

Taking a look at Kazakhstan's banking sector, BTA Bank continues to struggle to get its footing, according to a London-based analyst.

"In our view there are a variety of options to bring BTA back to its feet, but none of them comes without a significant cost," she said. "What we should bear in mind is that BTA is burning cash at $250 million per annum on its government funding. There could be a further $3.9 billion of provisions needed."

The estimated cost of fully underwriting BTA Bank could be as much as $4 billion, she said.

"BTA's future will be a political decision with unpredictable outcome," she said. "Current options include a capital injection, a buy-back of bonds, a haircut on issued debt or a reduction in funding costs."

She does not expect any action will be taken before elections in January.

"We expect the BTA 2018 and 2021 coupons due in January to be fully paid based on management statements of ability and willingness," she said.

Bond fund outflows increase

In other news, emerging markets bond funds saw outflows of $725 million for the week ended Nov. 30, according to data tracker EPFR Global.

That compares to outflows of $204 million the previous week.

"The final week of November saw a coordinated effort by several major central banks to prevent a credit squeeze in Europe, the first cut in China's bank reserve requirements since fourth-quarter 2008 and a general decline in yields demanded for euro zone sovereign debt that triggered a sharp bounce in global equity markets," EPFR said in its report. "But investors appear reluctant to chase this rally or to increase their exposure to euro zone debt."

Against this backdrop, investors in EM bond funds suffered.

They "continued to struggle during a week when redemptions from funds with hard currency mandates exceeded their local currency counterparts for the first time in seven weeks," EPFR said.

© 2015 Prospect News.
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