Emerging market debt softer on risk aversion; Kazkommertsbank sells $600 million in two tranches

By Reshmi Basu and Paul A. Harris

New York, Oct. 27 - Emerging market debt inched lower as investors unwound their positions on continued risk aversion.

In the primary market, OJSC Kazkommertsbank sold $600 million in a dual tranche offering of 10-year notes and perpetual notes (Baa1/BB/BB).

The deal included $500 million of 10-year senior notes and $100 million of perpetual tier 1 notes.

The 10-year notes priced at 98.32 to yield 8¼%.

Meanwhile the perpetual tier I notes priced at par to yield 9.20%.

"It looks like we're up about a half point or so," remarked a buyside source who played in the deal, talking after the new bonds had begun trading.

The source said that he likes Kazakhstan credits because it is similar to the Russian story, which is a name that he has liked for a long time.

"In some ways it's [Kazakhstan] even stronger," he added.

"And we have always appreciated the good regulation of the banking story. It's the only place I've ever played banks in emerging markets," he noted.

UBS, ING Investment Bank and JP Morgan managed the Rule 144A/Regulation S transaction

Also pricing Thursday, the Socialist Republic of Vietnam placed an upsized offering of $750 million in global bonds due January 2016 (Ba3/BB-) at 98.223 to yield 7 1/8%.

In the secondary, the new issue traded up to 98¾ bid, 99 offered.

Credit Suisse First Boston was the bookrunner for the Rule 144A/Regulation S transaction.

EM softer

Overall the market traded a little bit softer, said a trader, who added that it was taking its cue from the global equities market.

"Bovespa, U.S. stocks - everything went down and it [EM] just kind of weakened up with that," noted the trader.

During the session, U.S. stocks dove in response to weak durable goods data and news that General Motors Corp. had been slapped with a subpoena from the Securities and Exchange Commission as part of a probe into the company's pension obligations and transactions with bankrupt Delphi Corp.

Also orders for U.S.-made durable goods dropped by 2.1% in September, coming higher than expected.

At session's end, the Dow Jones Industrial Average was lower by 115.03 points to close at 10,229.95.

But what was bad news for equities was good news for U.S. Treasuries. The recent Treasuries sell-off eased as the yield on the 10-year note fell to 4.57% from Wednesday's close of 4.60%.

Meanwhile the buyside source said that emerging markets bond prices had not changed that much and that spreads were wider on the Treasuries rally.

The market is "being quite resilient - the way Treasuries have been fluctuating and the way equities have been sliding a little," observed the trader.

"We've been hanging in there.

"We're still closing near the all-time tights that we saw back earlier this year. Things are still good in EM debt land."

During the session, the Brazil bond due 2040 lost half a point to 118.60 bid. The Russia bond due 2030 slipped 0.38 to 110.188 bid. The Venezuela bond due 2027 added 0.05 to 114.80 bid.

"We did see some real-money selling, but it's been balanced," remarked the trader.

"That's why we're not having this free for all going down."

Furthermore, emerging market bonds traded in tight ranges, finding support levels in the benchmark Brazilian bonds due 2040.

"But all in all, people are still risk averse," added a buyside source. The big question mark hanging over the market is what direction will the Federal Reserve take.

"But GM continues to keep the market spooked and I don't think people have a lot of clarity about what's going to happen next," remarked the buyside source.

Even though GM news has had little impact on emerging markets, it does remain as an overhang in both the high-yield and currency markets, which mean that it may pose a risk to the asset class down the road, warned the buyside source.

Valuations at center stage

While monetary policy is a concern, the buyside source said he is more focused over the issue of valuations in the asset class.

"Valuations have really not cheapened up that much. They did at the beginning of the month, but we rallied pretty well," he said, adding that he is more defensively positioned overall.

"I don't think you buy necessarily when they [the Fed] ease. I think you buy after the easing has been underway for awhile," he noted.

Just like many market participants, the buyside source is amazed at the resilience of the market.

"I think part of it is the high commodity prices that have offset the Fed policy, but nevertheless across the board, it's a strong market," he observed.

Ups and down of perpetual bonds

In the news issue market perpetual issues continue to be popular.

During the session, Kazkommertsbank priced its perpetual tier I notes at par to yield 9.20%. And coming up Sateri International will issue $100 million in perpetual bonds a part of its dual tranche bond deal.

"It's really a question of a price," emphasized the buyside source.

The downside of perpetual bonds is that one is deeply subordinated, he noted.

The upside is that "you pay more."

"If you really like the bank, a sub is a good way to play. In some ways, it almost makes sense to only play banks through sub notes because you either like it or you don't.

"If you don't like it, whether it's sub or senior, you are still going to lose money," he added.

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