Korea tightens modestly amid August lull; market strapped for liquidity; Wing Hang preps $300 million

By Paul A. Harris

St. Louis, Aug. 22 - A Hong Kong typhoon, a pending three-day holiday weekend in the United Kingdom and the typical late August lull rendered the Friday session "dead," market sources said.

The EMBI Global Diversified index closed at a spread to Treasuries of 330 basis points, 5 bps tighter on the day.

Most of the tightening was because U.S. government paper lost ground on Friday, resulting in the yield of the 10-year Treasury moving 3 bps higher, according to David Spegel, global head of emerging markets strategy for ING Financial Markets.

Spegel added that in the same context some of the benchmark EM bonds appeared slightly firmer, but the compression was likewise due to the move in Treasuries.

Hence Brazil's benchmark 11% bonds maturing in August 2040, considered to be the most liquid instrument of the emerging markets asset class, were essentially flat at 131.85 bid, 131.90, according to the ING strategist.

However another source marked the Brazil 2040 paper slightly lower on the day at 131.60 bid, 132.30 offered.

Spegel noted that Brazil has investment-grade ratings from two ratings agencies, and added that the 2040 notes could be considered as occupying the lower tier of the high-grade emerging markets debt universe.

Meanwhile, in the higher beta paper from Latin America, he saw Venezuela's 9¼% notes due September 2027, rated BB- by Standard & Poor's, at 91.35 bid, 92 offered, also flat on the day.

Weak liquidity

Asked whether he anticipated a September pipeline in emerging markets, Spegel responded in the affirmative, and noted that $28 billion of sovereign issuance budgeted for 2008 has yet to materialize, and that there is almost $40 billion on the corporate calendar.

However, he said, the liquidity picture in the emerging markets asset class is by no means a strong one.

"Second quarter trading figures were released a couple of days ago," the strategist said, referring to the EMTA report on activity in the sector.

"You would have thought there would have been a big rebound in trading activity, given that the market sort of recovered after the Bear Stearns bailout, and given that there was a huge amount of issuance versus the first quarter."

Spegel noted that the second quarter of 2008 saw $60 billion of new issuance, whereas the first quarter generated only $19 billion.

"A lot of trading occurs around primary deals," he pointed out. "Investors swap out of existing positions to buy the new bond, or flip the new bond after it comes out.

"But in fact overall trading volumes for the second quarter were only up 2.7% [versus the first quarter].

"That suggests that liquidity conditions in EM are very constrained, which reflects what is happening in all credit markets."

Asia stilled by typhoon, holiday

A trader who focuses on Asian fixed income securities said that owning to typhoon Nuri bearing down upon Hong Kong with hurricane-force winds and heavy rain, generating the most severe storm warnings in the past half-decade and shutting down the financial markets there, in addition to the late summer bank holiday weekend in the United Kingdom, the Asian scene was deader than dead on Friday.

Late Friday morning, New York time, the trader said that the Korea sovereign bond was a couple of basis points tighter at 107 bid, 111 offered. However this source also referred to the softness in Treasuries.

"Korea has been trading on the back of a stronger economy," the trader noted.

In this context the trader also mentioned a story circulating the Street, holding that Korea Development Bank might acquire battered New York investment bank Lehman Brothers.

The trader also expects a post-Labor Day pipeline to materialize, and added that, pending market conditions, a few Korean banks could issue in September.

"There probably will be a pipeline because the past two or three months have been pretty dry," the trader remarked.

Asked whether there is a perception that the light calendar has translated into pent-up cash on the sidelines the trader said "No, the accounts are perceived to be relatively light cash."

Wing Hang plans $300 million

Also from Asia, Hong Kong's Wing Hang Bank is meeting with investors in Asia ahead of the anticipated launch of an expected $300 million offering of bonds, according to market sources.

No syndicate names were known.

The structure of the bonds remains to be determined. One source said that the deal is unlikely to be rolled out before trading resumes on Sept. 2 after the three-day Labor Day weekend in the United States.

Earlier this month Moody's Investors Service assigned A3 long-term foreign- and local-currency ratings to the subordinated and junior subordinated debt to be issued under Wing Hang Bank's new $2 billion medium-term notes program.

Fitch Ratings assigned an expected BBB+ to the medium-term notes program.

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