Hong Kong Electric prices as European crisis weighs on market; Venezuela's spreads tighten

By Christine Van Dusen

Atlanta, Dec. 6 - Emerging markets debt was at first buoyed on Monday by news that the Federal Reserve could boost its bond-buying program, but risk aversion returned as the day went on and the focus shifted back to the European debt crisis.

Just one issuer, Hong Kong Electric Holdings Ltd., snuck in a new deal.

Investors were particularly concerned about discord among European finance ministers, who met Monday to discuss ways to control and contain the economic crisis. This came as the International Monetary Fund was recommending that the rescue fund be increased and that bond-buying should grow considerably.

The market also was looking warily at Ireland, which will vote Tuesday on the budget that must be approved in order for the sovereign to receive its planned bailout.

As a result, most EM assets were "stuck in fairly tight ranges," according to an RBC Capital Markets report.

The JPMorgan Emerging Markets Bond Index Plus spread was up by 6 basis points early on Monday before finishing the day wider by 3 bps. But some names, like Venezuela, saw spreads tighten.

"The bearish mood is likely to persist at least through the next two days," RBC said.

Hong Kong Electric prices

The $500 million 4¼% notes due Dec. 14, 2020 from Hong Kong Electric Holdings priced Monday at 99.268 to yield 4.341%, or Treasuries plus 137.5 bps, a market source said.

HSBC, RBS and Standard Chartered were the bookrunners for the Regulation S deal, which was talked at a spread of Treasuries plus 140 bps.

"Besides that, the primary has been really quiet," a New York-based market source said. "I know of a couple of other deals that are on the road."

He pointed to the potential issue of notes from Brazil-based water and sewage company Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp), which could total $350 million, via bookrunners Itau and Santander.

Also continuing to market a deal is Brazilian telecommunications company Telemar Norte Leste SA via bookrunners HSBC, Santander, BB Securities and Espirito Santo Investment Bank.

"It's unclear whether they're going to try to price transactions now or next year," he said.

And the $2 billion notes expected from Development Bank of Kazakhstan are still being marketed with Deutsche Bank, Citigroup, JPMorgan and Halyk Finance, he said.

"That's still on the road," he said.

Dewa, Aldar get attention

Monday saw some buyers of Dubai Electricity and Water Authority's 6 3/8% notes due 2016, which priced in October at par to yield Treasuries plus 522.1 bps.

And local sellers were seen for the 8¾% bonds due 2014 from Abu Dhabi real estate developer Aldar Properties PJSC, which priced in May at par.

The notes were trading Monday morning at 106.25 bid, 106.50 offer.

"Otherwise it's been a relatively quiet morning," the London-based trader said.

In other news on Monday, Moody's Investors Service downgraded Hungary's rating two levels to Baa3, just above junk, due to fiscal issues.

Both the currency and the sovereign's bonds fell in response, and credit default swaps widened by about 16 bps Monday.

RBC called these reactions "surprisingly strong, given how far in advance this change was signaled."

Venezuela in focus

Also of interest to the market on Monday was Venezuela, which remained on radar screens after spreads tightened as much as 35 bps on Friday.

The sovereign's oil company, Petroleos de Venezuela (PDVSA), is still expected to reopen its 2017 8½% bond and issue as much as $7 billion in notes during the new year.

Though the original issue came to market at par, "that was based on the price that locals got," said Paul Biszko, an emerging markets analyst with RBC. "So the real price was in the low 70s."

On Monday, the notes were trading at about 68, he said. "So we're off a few dollars from the real price."

Generally speaking, "people are sort of rethinking the risks in Venezuela around the new supply," he said. "The valuation is quite attractive. It's been the biggest underperformer this year."

Spreads were tighter Monday by about 12 bps early in the day and then finished tighter by about 6 bps.

"Most of the other ones are plus or minus 3 or 4 bps, maximum, so really marginal movement," he said. "On credit default swaps, we're seeing the five-year for Venezuela tighter by 12 bps and Argentina by 8 bps. The higher yielders are clearly outperforming."

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