Europe crisis continues to hamstring issuance; Malaysia could do dollar deal; MTS delayed

By Christine Van Dusen

Atlanta, June 1 - The scene for emerging market bonds remained in slow motion Tuesday, with investors sitting on growing piles of cash and issuers continuing to wait to bring deals due to European economic uncertainty, market sources said.

As a result of that uncertainty and unease, as well as BP's continuing oil leak, Treasury yields fell early in the day. Later on Tuesday the decrease was less dramatic as news broke that U.S. manufacturing saw a smaller-than-expected decline.

But none of this did much to change the plodding pace for emerging market issuers and investors.

"It is very calm here," a Europe-based trader said at mid-afternoon. "I have not had even one single trade today."

Investors are just "waiting for the all-clear on the European front," an emerging markets strategist said.

Trading will be mixed

Tuesday saw Venezuela "down 1/4, and Argentina was down 2 points," the strategist said. "Mexico is kind of sideways, down a little bit, maybe 15 cents on the dollar. Russia is down about a half-point, as is the Philippines. So the direction is still a little bit negative."

But the day shaped up to be "better than expected," a New York-based market source said. "It was looking pretty doom and gloom with the Dow futures down north of 100 points. It has started to improve a little."

If the U.S. stock markets can bounce back, then trading "may turn around tomorrow," the strategist said. "But I think we're going to see this kind of trading for a couple of months: Some days will be up, some days will be down, with investors just buying new bonds based on the amount of cash they have at the time. They'll just be rolling over maturing bonds, more than anything else."

The strategist said he is keeping an eye out for the ADP employment report for May, due out later this week. But even those results won't necessarily turn any tides.

"Those are kind of based on pre-crisis data anyway, so it's not like Europe blew up and now suddenly everyone is cutting jobs again. That will take a while, if it happens at all," he said.

Malaysia could issue notes

On the primary side, "no new deals are expected because the market is still too volatile," the European trader said.

The strategist agreed. "We're not really seeing much. After the Malaysia deal that priced last week, there hasn't been anything to speak of."

The success of that deal - a $1.25 billion sukuk due 2015 that priced at par to yield 3.928%, or Treasuries plus 180 bps - has led market-watchers to speculate that the sovereign might come to market with a $1 billion bond by Sept. 30.

But, the strategist said, "that would be surprising. Their total funding needs for this year are about $1.1 billion. So their plan to raise another $1 billion on top of that is fine but not really necessary."

Delays keep coming

Meanwhile, yet another issuer has delayed a planned bond offering. This time it's Moscow-based phone company Mobile Telesystems' 10-year eurobond via Bank of America Merrill Lynch, Credit Suisse and RBS. The deal was expected to price any day and was whispered at 8%.

The delay results from adverse market conditions, an informed source said.

"They ran into first-quarter numbers," the source said. "Hopefully they can come back to market next week."

Most of the deals that have been postponed - including Saudi Arabia-based Sabic Capital's planned five-year senior unsecured notes - have been delayed "as a function of price and not execution," the New York-based market source said. "But it goes to show that it's volatile out there and investors are nervous."

Deals waiting in wings

In general there is a pretty crowded pipeline of deals waiting to get done, he said. "But the market is not ready for it. We need a number of days or a week of stability before it comes back. Hopefully we'll see some high-grade issuers reopen the market."

For this week, "I don't expect we'll see anything below investment-grade EM getting done," he said.

Going forward, "I think the summer is going to be up and down," the strategist said. "We're not going to see the same levels of issuance as March and April until at least July or September. August is always a dead month, with never more than five or 10 bonds issued."

In the meantime, "cash is piling into investors' hands, and that's going to have to be put to work."

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