Emerging markets deal flow stops; investors stay on sidelines; Brazilian corporates busy

By Christine Van Dusen

Atlanta, Nov. 1 - Emerging market investors and issuers were mostly in wait-and-see mode on Monday in advance of Tuesday's mid-term elections in the United States, Wednesday's conclusion of the Federal Open Market Committee and Friday's release of non-farm payroll data.

Even a better-than-expected report from the Institute for Supply Management - along with the excitement about a potentially market-friendlier Argentina, better price manufacturing data from China and India, and anticipation about quantitative easing - couldn't perk things up much on Monday.

"It's a pretty heavy week for risk," an emerging markets strategist said. "The tone's a little bit softer."

But some issuers did take steps toward market, including three Brazilian corporates and AES Andres Dominicana, First Gulf Bank, Gulf General Investment Co. and China Overseas Land and Investment Ltd.

Assets mixed

Emerging market assets "had a mixed Monday," according to a report from RBC Emerging Markets Research.

The JPMorgan Emerging Markets Bond Index Plus spread closed 7 basis points tighter, with Hungary and Turkey staying flat and Venezuela up marginally.

"It seems as though the market is coasting sideways for the most part," a source said.

Argentina, which recently rallied on the news that former president Nestor Kirchner's death might usher in a market-friendlier era for the sovereign, saw its cash bonds end the day 8 bps wider and its five-year credit default swaps wider by 25 bps.

Argentina's big rally "couldn't have been expected to continue," the strategist said. "There might be some additional upside for Argentina but most of the Kirchner-related rally is in the past. The prices today support that view."

That said, I "wouldn't recommend going underweight" on Argentina, he said.

Meanwhile, Mexico was "doing quite well" on Monday, at 10 bps tighter, the strategist said.

"Maybe the market thinks it looks cheap? I don't know," he said. "The 2020 Mexico bond is outperforming Brazil's 2021s on a price and spread basis. Brazil's 21s are down by about 40 cents and Mexico's 20s are up about 42 cents."

Primary on pause

The primary market was quiet on Monday following late-Friday's deal from Brazil-based sugar and energy producer Cosan Overseas Ltd., which priced $300 million 8¼% perpetual notes at par via Credit Suisse, Morgan Stanley and JPMorgan in a Regulation S-only deal.

"It's the beginning of the month," a market source said. "Everyone's waiting to see what happens with the elections, the FOMC and the payrolls release."

Additionally, "there's also been a lot of uncertainty related to both the size and the timing of the next round of quantitative easing," the strategist said. "I've heard forecasts of over $1 trillion."

He expects the number will be closer to $500 billion. "But on all fronts there is certainly an argument for quantitative easing to be increased," he said.

It's possible that Federal Reserve chairman Ben Bernanke could choose to jolt the market with a big round of QE, a source said.

"If you dribble out the medicine it may not have the needed effect," he said. Bernanke "basically wants to rekindle inflation and bring down unemployment. So if you are going to restore confidence among consumers as well as businesses, you almost need to shock them and that's the argument some are making in saying the QE will be closer to $1 trillion."

Brazil heats up

In other news on Monday, Fortaleza, Brazil-based lender Banco do Nordeste do Brasil SA mandated Deutsche Bank, HSBC and UBS Investment Bank as bookrunners for a dollar-denominated offering of five-year notes, a market source said.

The company is expected to launch a Rule 144A and Regulation S transaction following a roadshow. The marketing trip will start on Tuesday in Boston, Geneva and Zurich before wrapping up on Wednesday in London and New York.

Also from Brazil, Sao Paulo-based banking company Banco Santander Brasil is planning a reopening of its 4½% notes due April 6, 2015, a market source said.

Deutsche Bank, JPMorgan and Santander are the bookrunners for the Rule 144A and Regulation S deal.

The original issue totaled $500 million and priced in March at 99.77 to yield Treasuries plus 200 bps.

And Sao Paulo-based residential construction and real estate developer Cyrela Brazil Realty SA has mandated Credit Suisse, Itau and Morgan Stanley for a roadshow that ends on Friday, a market source said.

The marketing trip started Monday in Hong Kong and will travel to Singapore, London, Zurich and Geneva before wrapping up in New York.

Also on Monday, AES Andres Dominicana mandated Credit Suisse and Deutsche Bank for a dollar-denominated offering of 10-year bonds, a market source said.

The company is a special purpose vehicle for Virginia-based AES, which is a private power generator in the Dominican Republic.

Issuers move toward market

The Middle East also saw an increase in activity on Monday with Abu Dhabi-based lender First Gulf Bank planning a roadshow beginning Wednesday for a dollar-denominated offering of notes via BNP Paribas, Citigroup, Deutsche Bank, HSBC and National Bank of Abu Dhabi, a market source said.

Jordan is also planning a roadshow, which will begin Tuesday for its $500 million offering of bonds due 2015, a market source said.

Arab Bank, Credit Suisse, HSBC and JPMorgan are the bookrunners for the Regulation S-only offering.

And Dubai real estate company Gulf General Investment has mandated Deutsche Bank, HSBC and Standard Chartered as bookrunners for a dollar-denominated issue of notes due 2015, a market source said.

A roadshow will begin Tuesday.

Proceeds will be used to refinance and reduce existing short-term debt and for general corporate purposes, according to a Moody's Investors Service report.

In another upcoming deal, China Overseas Land and Investment - a subsidiary of Beijing-based property developer China State Construction & Engineering Corp. Ltd. - mandated BNP Paribas, BOC International, Deutsche Bank, HSBC and JPMorgan to market a dollar-denominated offering of notes, a market source said.

The roadshow will begin Tuesday for the Regulation S deal.

Proceeds will be used to fund new and existing projects, as well to refinance existing borrowings, according to a Moody's Investors Service report.

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