Gazprom's $1.2 billion 30-year bond garners respect; Dominican Republic debt soars

By Reshmi Basu and Paul A. Harris

New York, April 23 - The big news of the day in emerging markets was OAO Gazprom's oversubscribed issuance of $1.2 billion of 30-year bonds on Friday.

Both emerging market and high-yield investors eyed the deal from world's biggest natural gas producer because Russian corporates seem to be the few credits that have some value these days.

In trading at mid-afternoon, the new bonds were up half a point, said a buy-side source. He had sold his holdings of Gazprom's old 9 5/8% bond due 2013 to buy the new 8 5/8% bonds due 2024.

The new issue had weighed on trading Thursday, knocking down existing bonds.

"The old ones, the '13s, yesterday [Thursday] got slammed, which is what caused the price talk to widen out," the source said.

"And then they came back. But they look like they're down half a point or so after pricing."

The deal was priced the day after Gazprom completed its European and American roadshow, which ran April 19 through April 22.

"It was kind of weird that I went to the lunch yesterday [Thursday] but nobody was there," said the buy-side source.

"The deal was very oversubscribed but I don't have a sense who is involved and who isn't.

"In the past when they have had roadshows it was packed," he added.

Gazprom priced its $1.2 billion bonds due 2034 with a 10-year put option at par to yield 8 5/8%.

Price guidance of 8¾% surfaced Thursday on what market sources believed would be a downsized $1 billion deal. However that amount had been reduced from initial plans for $1.2 billion.

Credit Suisse First Boston and Deutsche Bank Securities ran the bulging books for the Rule 144A/Regulation S deal.

Looking forward, emerging markets are expected to be hearing a lot from Russian corporates.

"We know Russia is going to be doing a lot. We heard yesterday that Russia is going to do $20 billion is corporate issuance," said the buy-side source.

"They seem to be able to survive."

Dominican debt jumps on payment hopes

Meanwhile in secondary trading Friday the Dominican Republic's bonds rose sharply on expectations the Caribbean nation would make its overdue $24 million coupon payment.

"Up a little bit yesterday, up a lot today," said the buy-side source. "Up 4 or 5 points."

Credit Suisse First Boston conducted a conference call with government officials regarding whether or not the nation would restructure its bond with the Paris Club.

"They seemed to imply that they would not restructure," said the buy-side source.

"Remember we're talking about something trading in the mid-70s with a 13% yield - a high beta name already," he added.

"Local events are going to drive it. It's a distressed name, not trading with the market - even more so than Ecuador."

More Korea deals seen

Looking ahead, Russia is not the only country expected to be the source of new supply. Korean issuers are also anticipated to be active.

"The one area that seems to be rolling is Korea," said a buy-side source. "There's a new deal every week out of Korea."

Prospect News asked the buy-side source if the recent tight-pricing deals from Korea could be seen as extraordinarily sensitive to the risk of rising interest rates.

"Look at it this way: if you buy a Korean company at 150 basis points over, versus buying JP Morgan at 50 over, you know you're going to lose either way," the source said.

"But if you're buying a name that can come in, in spread, then you're up slightly as opposed to breaking even."

Asian credits have that constant bid from the Asian banks, which will cause them to tighten in to prices that you think are really silly."

Finally Prospect News asked to what extent Kim Jong-Il's howitzers pointing at Seoul factor into a risk analysis of a Korean credit.

"I always think about it," said the buy-sider. "But he's been quiet for a while."

Interest rate fears priced in

More generally, the current uneasiness about possible future U.S. interest rate increases means a rise in borrowing costs is already priced into the market, said the buy-side source.

"Remember in January, when people got worried about the Fed and emerging markets got killed and how markets performed very poorly in February," he said.

"I think the market just got carried away. Just looking at expectations, a lot of it is already priced in. It will be interesting to see how the markets react when the hike actually comes.

"And looking at things like gold and the dollar, even on these hits the markets responded much more positively than I would have expected. Gold was at $420 a month ago. Today it is at $395."

From swap prices, he calculated the market has built in 150 basis points of rate rises over the next year and 250 in the next year and a half.

"We already are expecting a fairly aggressive Fed. If inflation stabilizes, it will probably have to be about 200 basis points, and the market has already built in more than that in the next year and a half," he said.

"If things are relatively well positioned, you're not catching anyone by surprise when the Fed hikes. You might have a knee-jerk reaction trading down when the Fed does hike but at the same time it's expected."

As one of the most liquid names, Brazil tends to suffer most.

"I think that's what happened with Brazil is the knee jerk reaction was to sell hard." Then people reconsidered and thought "maybe it didn't have to go down that much and so we had a bit of a rally."

Turkey still a volatile investment

While Turkey benefits from hopes that it might be able to join the European Union, the buy-side source says the country is riddled with problems.

"I don't think you're being compensated given the current prices. I'm not involved," he said.

"Having said that, a lot of people believe that because it's a secular Muslim state, the U.S. will continue to support it."

But he added: "The yields being so low, it's all downside. If things go wrong, you can lose a lot of money fast."

Funds see $18.9 million outflows

Investors pulled out of from emerging market bond funds for the second week in a row as emerging market debt sold off on rising U.S. Treasury yields and expectations of interest rate hikes, according to EmergingPortfolio.com Fund Research.

Emerging markets bond funds lost $18.9 million to outflows during the week, but are still sitting on total net inflows this year of $1.4 billion, or 8.6% of beginning-of-year assets, according to the firm.

Reliance postpones, Slovakia roadshows

Among upcoming deals, the planned $750 million five-year bond from India's Reliance Industries has been pushed back to the third quarter.

In mid-April, it had been rumored that Reliance was abandoning the bond offering for a loan.

Credit Suisse First Boston and ABN Amro are joint bookrunners for the deal.

But the Republic of Slovakia is planning a European roadshow for its €1 billion offering of 10-year notes (A3/BBB+) starting the week of May 3.

ABN Amro, Dresdner Kleinwort Wasserstein, and Morgan Stanley are the bookrunners on the Regulation S deal.

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