VimpelCom, Gazprombank pull deals; relief rally for emerging markets

By Reshmi Basu and Paul A. Harris

New York, April 30, Two Russian corporates pulled the plug on their planned bonds issues, citing unfavorable market condition.

Early Friday, Moscow-based telecommunication company VimpelCom postponed its $300 million five- to seven-year bond offering, blaming the current volatility in emerging markets.

Despite a successful roadshow, VimpelCom will wait for more stable conditions before it issues.

"I probably would have participated in the deal," said a buy-side source.

But he noted: "They would have had to pay a little bit more than they would have had to a month ago."

However, the promise of higher yields may not have been enough to whet investor's appetites as market volatility may weigh more heavily.

"Given the tone of the market today, if we wanted to, we could have probably pushed it through," said a senior sell-side source.

"But there is definitely a bigger new issue premium for anything after the kind of volatility we have had this week," added the senior sell-side source.

"It would be the wrong thing for the issuer. And from the investors' perspective, even if you're giving them an extra hunk of yield, I think people would rather wait and see things settle down."

JP Morgan and UBS Investment Bank were running the Regulation S/Rule 144A deal.

Another Russian corporate shelving its bond offering was Gazprombank. The company pushed back its $500 million seven- to 10-year benchmark deal.

Gazprombank, a subsidiary of natural gas giant OAO Gazprom, also blamed unfavorable conditions.

"Three months ago, when you saw something being kicked out as market conditions, it usually meant that something smelled on the deal," said the buy-side source.

"These are really being driven out by market conditions."

Citigroup and Dresdner Kleinwort Wasserstein were the bookrunners on the Rule 144A/Regulation S deal.

Selling subsides for now

After days of bleeding, the emerging market sell-off finally was granted a reprieve as spreads tightened on Friday.

"Today it's tighter. The market overall is 12 basis points tighter [in early trading] today versus nine points wider Thursday," said the senior sell-side source.

"In general, the market widened on Thursday. The EMBI was nine points wider. Russia was 13 wider. Brazil was seven wider.

"Russia was playing catch-up Thursday with Brazil, because Brazil had come off more on Wednesday afternoon, and Russia really trades more in the money when London is open," said the senior sell-side source.

But the rebound could be short-lived as investors are eagerly awaiting the Federal Reserve meeting on Tuesday and the release of U.S. employment figures on Friday for information about the future direction of interest rates.

"Things seem to be better, definitely a little firming," said the buy-side source.

"We opened up at a tighter spread. We seem to be slowly getting some of that back. But with Treasuries up in general it's a pretty good day in emerging markets. It's more of a relief rally than a change in the trend."

"Investors are waiting for the dust to settle," said a trader.

"Right now, people have such different expectations on how the Fed will act. I think the market is over-reacting. The Fed hike will be modest, not a violent movement.

"But we're have a better understanding when the Fed meets," he added.

In late afternoon, the JP Morgan EMBI tightened by five basis points, up 0.5%.

While heavy hedge fund selling may have spurred the recent selling frenzy, there is still room for further falls before the market defines a new trading range.

"We've seen much higher volume Wednesday and Thursday with accounts," said the senior sell-side source.

"What seems clear is that there was definitely some heavy hedge fund selling at the beginning of the sell off, that may have helped to trigger it."

In the last five years, the high end spread for emerging markets was 1,036 basis points while the low was 388 basis points, said the buy-side source.

"And right now, we're at 489 [on late afternoon Friday]. We definitely have had a decent correction off the bottom. But within that range, things can still get a hell of a lot cheaper," he added.

"There's nothing about the value of the market that says that it can't go lower."

One buy-side source said China's announced intention of slowing its economy is not the real reason for the selling.

Some in the market had suggested that development had prompted people to bail out - but the source said the evidence shows otherwise.

"If global growth slows, it's clearly a negative for emerging markets, particularly for those who have higher concentrations in commodities," said the buy-side source.

"Since China has been one of the big drivers of global growth, it is clearly a risk."

But he continued: "A lot of the moves in the last couple of days have been attributed to China tightening up its monetary policy.

"My question is that, if it's really China driving these moves, how come dollars/euros moved? "Dollar/euro shifts aren't tied to what happens in China. Doesn't seem to make sense to me," he added.

Latin America seen less vulnerable than 1994

While Latin America may be most threatened by an interest rate hike, it will not experience the hemorrhaging that it did in 1994.

"Everyone keeps on throwing around 1994. Will we have a repeat?" asked a trader.

"But Latin America is not as vulnerable as 1994."

In terms of exposec countries, Brazil could get hit hard because of its high debt load and the slipping popularity of president Luiz Inacio Lula da Silva.

"He may have to stimulate growth to appease the people and displease the capital markets," said the trader. "Argentina is highly vulnerable if commodity prices swing down.

"And reform in Mexico may be coming to an end. (Vicente) Fox is on the election trail."

Aracruz Celulose prices

In primary action Friday, Brazilian hardwood pulp producer Aracruz Celulose priced an upsized $175 million of eight-year notes (Baa3/BBB-/BBB) to yield 125 basis points over Treasuries.

The notes, issued through subsidiary Arcel Finance Ltd., priced at par to yield 6.361%.

The export-backed deal was described a as "very 'buy-and-hold'-kind of issue," by a senior sell-side source.

"It amortizes. They'll set up an offshore collection account," the source explained.

"And as the company exports you clip your fair share every month and get the money offshore. "So it's rated a lot higher than the underlying credit."

One source said the deal went very well.

JP Morgan ran the books.

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