Ratings agency moves push spreads wider for South Africa, Lat-Am; Chile continues roadshow

By Christine Van Dusen

Atlanta, Dec. 10 – Emerging market credit spreads moved wider on Thursday as investors kept an eye on Latin America and South Africa, which both were being watched by ratings agencies.

Five-year credit default swaps spreads for South Africa opened 20 basis points wider on Thursday after the sovereign's president fired his finance minister, a strategist said.

“No reasons were delivered, but the surprise move is seen as negative,” he said.

This could also weigh on the sovereign’s rating, following its recent downgrade by Fitch Ratings and an outlook revision to negative from Standard & Poor's. The latter ratings agency has also revised its outlook on several South African banks, including FirstRand Bank Ltd., he said.

Later in the morning, South Africa's CDS moved to 333 bps, about 42 bps wider.

“Uncertainty over [South Africa's] financial policy may hurt investors' confidence and trigger funds outflow from the local assets,” according to a report from Schildershoven Finance BV. “We expect some price correction in sovereign bonds until the new finance minister announces his view on the South African economy.”

From Latin America, trading remained sluggish and weak on Thursday, a New York-based trader said.

Clients were mostly quiet during the session, which saw little liquidity and only a few bonds trading. Among them was Brazil-based Petroleo Brasileiro SA. Its notes moved about 2 points lower after Moody's Investors Service downgraded all of the company's ratings.

But late in the day, the company managed some small gains, a trader said.

Brazilian corporates on watch

Several other Brazilian corporates were put on review for downgrade, including Gerdau SA, which saw its curve tumble about 2 points as a result.

Weakness for the Brazil sovereign carried over from Wednesday, another trader said, with five-year credit default swaps spreads moving to 485 bps on Thursday from 452 bps.

Corporates from Colombia were also weaker, a trader said, with almost no selling.

Cemex moves lower

Mexico-based Cemex SAB de CV has also moved lower almost every day this week, with the 2025s standing out as the best performers in the bunch.

“They are only down about ½ to 3/4, whereas others on the curve are down 1¼ to 1½ the past few weeks,” a trader said. “As they usually do in a weak corporate environment, they move lower methodically.”

Some credits from Chile were better-offered on Thursday, another trader said.

CDS widen

Mexico's credit default swaps spreads moved out to 177 bps from 170 bps on Thursday, a trader said.

“Cash prices are well-offered throughout the session and hit intraday lows toward the end of the day,” he said.

Venezuela's 2027s ended at 47 from 47.50 while PDVSA's moved to 59.25 from 61.50.

Argentina edged higher on Thursday, bucking the trend, the trader said.

“Flows heavily skewed to better sellers today, with Street and clients selling both high-yield and lower-beta Latin American credit,” he said.

Ukraine bonds strengthen

Looking to Ukraine, sovereign bonds began to strengthen on the news that the International Monetary Fund will ease its lending-into-arrears policy for countries that default on debt held by other sovereigns. Ukraine owes $3 billion on Dec. 20 to Russia and may not be able to pay in time.

Ukraine's 2020s and 2027s have seen improved bids, said Fyodor Bagnenko, a fixed income trader with Dragon Capital.

Ukraine-based Ukrzaliznytsia (Ukrainian Railways) also received some attention, this time after the company announced a restructuring package.

“The bonds added a point in two-way flows but still seem to be offering good value with a yield of around 14%,” Bagnenko said. “Yet the cash prices of peer bank bonds will probably serve as a cap for now.”

Chile on roadshow

In deal-related news, Chile is on a roadshow for a possible issue of notes, a market source said.

BofA Merrill Lynch, Citigroup, HSBC and Santander are leading the marketing trip, which began on Tuesday.

Other details were not immediately available on Thursday.

Several other Latin American issuers have wrapped up roadshows in recent weeks, including Argentina's Arcos Dorados Holdings Ltd., Gol Linhas Aereas Inteligentes SA and Mexico's Controladora Mabe SA de CV (Mabe), he said.

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