Emerging market primary active; Colombia adds $500 million; EM fund inflows at $161 million

By Reshmi Basu and Paul A. Harris

New York, Sept. 15 - Emerging markets debt continued to grind tighter Thursday on a steady supply of cash to the market, marking gains despite a U.S. Treasuries sell-off.

"EM doesn't seem to care about Treasuries right now," said a trader.

A slew of U.S. economic data pointed to inflationary pressure, which knocked down Treasuries Thursday. By the end of trading, the yield on the 10-year note stood at 4.22% from Wednesday's close of 4.16%.

Nonetheless, spreads for emerging market debt hit another record low.

The JP Morgan EMBI+ Index tightened by 8 basis points to 262 basis points.

Bonds also saw higher prices. The Brazil bond due 2040 was up 0.45 to 120.35 bid. The Philippine bond due 2025 gained 0.38 to 115 1/8 bid. The Venezuela bond due 2027 gained 1.55 to 113 bid.

"Treasuries sold off," said a sellside source. "There's a lot of inflation. Still the market expected it, but there's a lot of inflation.

"We might have low growth with high inflation and that's not good," he remarked.

However, the search for yield continued to yank emerging markets higher.

"The bottom line is that investors are looking for high-yielding paper and trying to maximize that by minimizing risk, but there isn't as much as paper outstanding as people would think," the sellside source told Prospect News.

"There's a lot of cash right now."

As evidence of how much cash there is, emerging markets saw another week of inflows for the twelfth straight week, according to EmergingPortfolio.com Fund Research. Funds took in $161 million for the week ending Sept. 14.

Total inflows now stand at $5.368 billion.

Primary heats up

Meanwhile market sources said there was good news on the supply side in emerging markets as new issues were easily absorbed.

In the primary market, the Republic of Colombia reopened its 8 1/8% bonds due 2024 (Ba2/BB/BB) to add $500 million in a drive-by Thursday via Merrill Lynch & Co. and Goldman Sachs & Co.

The issue priced at 1033/4, coming at the tight end of price talk. The reopening had been initially talked at 103¾ to 104.

This brings the total size of the deal to $1 billion.

"It's a well-traded bond," said the sell-side source.

Sources said that the increased size of the issue gives some liquidity to the long-end of the Colombian curve.

The sellside source said that prior to the reopening, the 2024 bond "traded very wide on a steep curve."

Two perpetuals price

Also, two Brazilian corporates continued the perpetual-bond trend. And notably, these two new issues traded up in the secondary.

Steel company Gerdau SA priced a $600 million issue of senior fixed-rate perpetual notes (Ba1/BB-/BB-) at par on Thursday to yield 8 7/8%.

The yield came on top of the 8 7/8% area price talk.

HSBC and Citigroup were the bookrunners for the Rule 144A/Regulation S offering.

The new bond traded up at 100.60 bid, 100.80 offered.

And engineering and construction firm Construtora Norberto Odebrecht SA (CNO) sold an upsized $200 million offering of perpetual notes (/BB-) at par to yield 9 5/8%.

The issue, increased from $150 million, came at the tighter end of price guidance. Initial guidance had been set in the area of 9 7/8%.

The size of the book was $900 million with 117 accounts. Asia comprised almost half of the buyers, followed by Europe with 34% and the rest made up of American investors.

Credit Suisse First Boston was the bookrunner for the Regulation S offering. Deutsche Bank Securities was joint lead manager.

The issue also moved up in the secondary to 100.65 bid, 100.85 offered.

"We have been seeing these perpetuals...since Pemex issued its perpetual last year," observed the sellside source.

In the biggest bond sale by a Latin American corporate, Mexico's state-owned oil company Petróleos Mexicanos sold $1.75 billion of perpetual bonds in September 2004.

While the issue has no set maturity, Pemex has an option to buy it back after five years.

"Everybody was thinking that they will issue half a billion or $750 million but they came out with $1.75 [billion]," noted the sellside source.

"I think that gave the market a sense of the liquidity that Asia accounts are willing to put on high-yielding assets."

Pemex received bids of about $5 billion for the bonds, which have a 7¾% coupon.

After Pemex, Mexico's Gruma SA de CV issued $300 million in a perpetual bond in November 2004. While Mexico's issuance of perpetual bonds has shut down, Brazilian corporates have taken over.

"We've been seeing a lot of corporates doing perpetuals, which always have a call," remarked the sellside source.

"I don't know if investors think these bonds are going to be called at some point.

"They are buying them because of the coupon."

Also in the primary market Thursday, Russia's GazpromBank, issuing via GPB Eurobond Finance plc, priced a $1 billion issue of 10-year senior unsecured notes (Baa2/B+) at par to yield 6½%.

The notes came at a 190 basis points spread to mid-swaps, at the tight end of the revised mid-swaps plus 190 to 195 basis points price talk. Earlier in the week the spread had been talked at mid-swaps plus 200 basis points.

Citigroup and Dresdner Kleinwort Wasserstein ran the books for the Regulation S issue.

Brazil to issue local-currency deal

Finally, Brazil is expected to tap the international markets with a reais-denominated bond deal.

This will be the first sovereign issue in reais for Brazil.

The transaction is expected to be the equivalent of $500 million to $1 billion in size with an expected 10-year tenor.

Sources told Prospect News that pricing is expected to happen by the close of Monday's session.

JP Morgan and Goldman Sachs are running the Rule 144A/Regulation S sale.

The sellside source said that for all practical purposes the new issue will constitute local debt.

"It's not much a concern as actually borrowing dollars and the risk of repaying those dollar," in the face of volatility in foreign exchange, he added.

© 2015 Prospect News.
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