Oil prices improve; Lat-Am tightens; Pacifico Tres, Qatar, Kenya, Kuwait Petroleum on deck

By Christine Van Dusen

Atlanta, Jan. 26 – Investors in emerging markets debt were cautious at the start of the session on Tuesday, then gained some confidence on hopes that oil producers would reach a deal to decrease supply, which sent some spreads tighter.

On Tuesday, oil prices increased about 6% as OPEC and non-OPEC producers worked on a deal to address oversupply.

This followed remarks from the chairman of Saudi Arabian Oil Co. (Saudi Aramco), who said that he expects that demand for oil is improving and that prices should improve by the end of 2016. He also said that the company would not be cutting back on investments to increase production.

Investors were also keeping an eye on the Federal Open Market Committee, which on Tuesday began its meeting.

“We remain in a fairly distressed environment,” a trader said. “Plenty of action this week, with United States data, the Fed, etc. Let’s see if there are any warming words for risk.”

Looking to Latin America, traders were recommending buying Chile’s 2026s and selling the sovereign’s 2025s in the morning.

“The new Chile 2026 traded poorly from the beginning, but it has underperformed to a point that it is looking way too cheap versus the curve,” a trader said. “The same happened to Mexico’s 2026s versus 2025s, and the 2026 ended up outperforming by 6 bps to 7 bps in just a couple of days.”

By the end of the day, Latin American names were tighter, with Brazil’s five-year credit default swaps spreads moving from 480 basis points to 490 bps and Mexico’s finishing Tuesday at 202 bps from 205 bps.

“Cash prices made a move higher,” another trader said, “and finished at or near highs of the day.”

Venezuela moves up, PDVSA down

High-yield names from the region were mixed, with Venezuela’s 2027s moving up to 34.25 from 34 and PDVSA’s 2017s down to 39.50 from 40.25.

“Good pickup in volumes today, with a skew towards better buying,” he said. “With the Fed tomorrow, the market is hoping that we get a dovish – but not too dovish – statement so that risk can continue to rally.”

Turkey weakens, then firms

From Turkey, bonds opened slightly weaker but firmed up as the day went on, the trader said.

“Cash also looks very cheap here to credit default swaps, which is probably due to the Street being positioned long CDS,” he said. “The basis hasn’t looked this attractive for a while, but there is risk that a new issue in the sovereign cash space could keep the spread wide.”

Turkish bank technicals strong

Turkish banks have held in well, given the volatility and widening in the market, the trader said.

“Technicals are pretty strong, as the lack of supply and selling in the space keeps spreads to the sovereign in a tight range,” he said. “Turkey is favorable versus most of its EM peers, so there are plenty of other issues in an EM corporate portfolio before you get to Turkey banks.”

Finansbank in focus

The market was also watching Turkey-based Finansbank AS, as National Bank of Greece moved forward with its plan to sell 100% of its stake in the Turkish lender to Qatar National Bank.

In light of the progress, Finansbank is on review for an upgrade from Moody’s Investors Service.

The ratings agency said that “Finansbank would benefit from upward pressure from the ownership by a higher-rated parent and will also ‘no longer be constrained by its association with [National Bank of Greece]’.”

“In a second decision, Moody’s also affirmed QNB’s rating at Aa3 with stable outlook,” the strategist said.

Negativity persists

In other trading on Tuesday, Asian bonds were showing “negative dynamics, due to the renewed commodities decline,” according to a report from Schildershoven Finance BV.

“The Indian markets are on holiday today,” the report said. “We don’t expect a clear market direction until commodities stabilize.”

And from Kazakhstan, sovereign paper opened 10 bps wider, another trader said.

Eskom gets attention

Also getting attention on Tuesday was South Africa’s Eskom Holdings SOC Ltd., which saw its prices collapse last week.

“We had the 2025s as low as 76 to 78 only last Wednesday,” a trader said. “They were last seen at 84 1/8 to 85 1/8.”

Investors either love or hate the credit, he said.

“There is no middle ground,” he said. “The worst case I see is a semi-friendly restructure.”

More likely, though, “Eskom muddles on and the bonds trade on headlines and supply and demand and spread to the sovereign,” he said.

Roadshow for Pacifico Tres

Colombia’s Concesion Pacifico Tres SAS (Pacifico Tres) will set out on Jan. 30 for a roadshow to market a possible issue of notes, a market source said.

Goldman Sachs is the bookrunner for the deal.

The issuer is the Manizales-based concessionaire company responsible for the enhancement, maintenance and construction of the Conexion Pacifico Tres toll road project.

Qatar to price Islamic bonds

Qatar is looking to issue Islamic bonds in March or April, a market source said.

The proceeds would be used to fund the $12.8 billion deficit in 2016.

The sovereign is currently in talks with potential bookrunners.

Other details were not immediately available on Tuesday.

Kenya’s issue could be sukuk

Kenya’s upcoming issue of notes could take the form of Islamic bonds, a market source said.

The proceeds will be used to finance infrastructure projects.

The sovereign previously announced plans to print eurobonds. That announcement came as Kenyan officials denied that about $999 million in proceeds from its $2.82 billion bond sale in 2014 had been stolen.

Other details of the new bond sale were not immediately available on Tuesday

Kuwait Petroleum eyes issuance

Kuwait Petroleum Co. is looking to issue Islamic bonds, a market source said.

The proceeds would be used to pay for a $100 billion, five-year investment in oil production.

Other details were not immediately available on Tuesday.

Deal ahead for ADB

African Development Bank is planning to sell dollar-denominated floating-rate notes due in August of 2017, according to an announcement from the lender.

BMO Capital Markets Corp. is leading the transaction.

African Development Bank is based in Abidjan, Ivory Coast.

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