Posco, Brazil price notes amid firm market, lower prices; spreads wider, volumes thin

By Christine Van Dusen

Atlanta, Oct. 21 - Though spreads tightened on Thursday following improved economic data from the United States, emerging market investors mostly sat it out and issuance was light, with new deals from the Federative Republic of Brazil and Korea's Posco.

Weekly jobless claims declined and the Federal Reserve's Beige Book reported that economic activity increased somewhat through the early part of this month, but investors didn't necessarily take the news as a definitive sign of better days to come.

The market has "gone back to the routine of having a burst of activity and then holding off until there's more concrete news," a source said.

What market-watchers are waiting for is clarity about quantitative easing from the United States.

"The dollar is stronger today, equities are soft. People are waiting for more information," a Connecticut-based trader said. "They're also waiting to see if new cash comes into EM bond funds that could potentially spur additional need to buy paper."

In general the focus is on "currencies and emerging commodities, particularly after the China tightening announcement," he said. "That has kind of closed accounts and had them rethinking and taking stock for the moment. So we're kind of patiently waiting as we approach month-end."

The JPMorgan Emerging Markets Bond Index Plus closed 8 basis points tighter with "broad-based spread narrowing" led by Turkey, Ukraine, Venezuela and Argentina, according to an RBC Capital Markets report.

Volumes stay thin

Volumes on Thursday remained "very, very light," the Connecticut trader said. "The market is generally firm but [with] just light volume with trading sideways and a slight inclination to move lower. Guys are just running out of money or don't have buying interest at the current levels."

Most prices drifted lower amid a U.S. Treasury market sell-off, a New York-based trader said. "Volatility in the equity market today also caused some volatility in our prices."

Colombia, for one, traded with "more volume today than prior weeks with the long-end 2041s having a range of 113.25 to 112 before closing at 112.20," he said. "Maybe they are next to issue?"

Venezuela was an outperformer with prices up as much as "0.25 with the 2022s at 85.50," he said.

Argentina traded "off a little," he said.

Meanwhile, some of the recent new issues, like the R$1 billion add-on to Brazil's 10¼% global bonds due 2028 that priced Wednesday at 112.226 to yield 8.85%, have been "absorbed pretty well," a source said.

But buying, for the most part, has "stopped abruptly," the Connecticut trader said. "There was some feverish buying in the two weeks before this week on both the corporate and sovereign side. But it stopped once this week started."

He pointed to the $1 billion 5¾% notes due 2110 from Mexico - which priced earlier this month at 94.276 to yield 6.1%, or Treasuries plus 235 bps. At one point in the past two weeks the notes were tighter by as much as 50 bps.

"It traded as tight as 190 to the old long bond. Since then it's widened out by about 25 bps, giving back about half as the market has come to more sensible levels," he said. "That's an example of a bond that overshot to the upside."

Posco prints notes

In the primary market, Thursday saw Brazil bring to market another add-on to its 10¼% bonds due Jan. 10, 2028. This time the amount was R$100 million, which priced at 112.226 to yield 8.85%, according to a company filing.

The add-on brings the total issue size to R$4.89 billion.

The bonds, via bookrunners Barclays Capital Inc. and Deutsche Bank Securities Inc., are not callable.

Also coming to market on Thursday was Korea-based integrated steel producer Posco's $700 million 4¼% notes due Oct. 28, 2020 at 99.557 to yield 4.305%, or Treasuries plus 179 bps, a market source said.

BNP Paribas, Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and Morgan Stanley were the bookrunners for the Rule 144A and Regulation S transaction, which is non-callable.

This was one of the few benchmark-sized deals to come out of Asia as of late, a source said.

"There have been a couple small deals in Asia," a source said. "They're smaller with shorter maturities and they've been OK because there's still some money in Asia. But the deals are small. There are few bigger deals. So the market's been treading water as a result."

In general, the new deal pipeline has "slowed down considerably over the course of this week, and it's probably happening just in time," the Connecticut trader said. "Some of the buyside guys are running out of fresh cash for new deals, so we've seen very little buying, even in the secondary."

PDVSA eyed

Most investors were keeping an eye on the $3 billion bond issue from Venezuela-based state-owned oil company Petroleos de Venezuela, which recently came to market with a coupon of 8½% and priced at par.

Investors can buy the notes at a rate of 4.3 bolivars to the dollar and then trade the bonds in dollars in the secondary market. The notes are offered concurrently with a debt swap of $3 billion 2011 local-law bonds for a new 8% semiannual 2013 Luxembourg law bond.

"Venezuela has traded a bit heavy and people are waiting to see how that deal develops before buying a lot of anything in the Latin American sovereign area," the trader said.

Russia gets busier

Russian issuers, meanwhile, continued to line up plans for new deals.

Oil and energy company Lukoil OAO is planning a roadshow from Monday to Oct. 28 for a dollar-denominated benchmark-sized offering of bonds via Royal Bank of Scotland, Barclays Capital and ING, a market source said.

Also from Russia, hydroelectricity company subsidiary Rushydro Finance Ltd. set price talk for its ruble-denominated offering of notes due 2015 at a yield of 7 7/8% to 8%.

Proceeds will be used for general corporate purposes and capital expenditures.

This followed Wednesday night's pricing of $800 million 5 3/8% notes due Oct. 27, 2017 from Russia-based maritime shipping company subsidiary SCF Capital Ltd., which came to market at par to yield Treasuries plus 360.8 bps, a market source said.

JPMorgan, Deutsche Bank and VTB Capital were the bookrunners for the Rule 144A transaction, which is guaranteed by Sovcomflot JCF.

BBK, Petron on tap

In other news on Thursday, Bahrain-based lender BBK set price talk for its planned benchmark-sized issue of dollar notes due 2015 at mid-swaps plus 337.50 bps, a market source said.

Citigroup, Deutsche Bank and HSBC are the bookrunners for the deal, which could price as soon as this week.

This follows the company's May roadshow for a notes offering.

And Kazakhstan-based lender Kazkommertsbank will open subscription for its issue of up to $750 million notes due 2017 on Monday and close on Wednesday, according to a company announcement.

JPMorgan and UBS are the bookrunners for the deal, which is being marketed on a roadshow.

And Philippines-based oil refining and marketing company subsidiary Petron Fuel Success is planning an issue of peso-denominated bonds that will be settled in dollars, according to a company announcement.

No other details were available Thursday.

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