Primary paralyzed by market conditions; trading environment difficult; Sabic postpones deal

By Christine Van Dusen

Atlanta, May 26 - The emerging markets looked a little bit more solid on Wednesday, but issuers still didn't dare bring new bond offerings and investors remained risk-averse on continued concerns about the global economic crisis, market sources said.

"We don't really have much to do," a Europe-based trader said.

Treasury yields rose even after two U.S. Commerce Department reports showed positive economic progress. April orders for durable goods beat forecasts with a 2.9% increase, and sales of new single-family homes in the United States climbed a better-than-expected 14.8% during the month.

"Although markets seem a bit more solid today, the mood has not really changed," the Europe-based trader said. "Secondary trading activity is still paralyzed, and brokers and investment banks have only very small positions."

These investors are "not really willing to take on more positions, so selling for us is very difficult," he said. The investors also aren't willing "to go short, so even buying is difficult for us. So if clients want to increase positions now, they move prices a few points with a bigger order."

Backdrop firming

Still, at least one market source believes the underlying market backdrop is firming up.

"We're seeing very high cash balances from many of the global real-money investors," said the source, based in New York. "That means that upon some stability in the market - whether it's that everyone's had enough of the pressure to push markets lower or we've gotten it out of our system - the money will come back in and can certainly spark a rally. Some of the valuations are extremely attractive at this point."

He pointed to the fact that inflows into emerging markets bond funds have been increasing - up about 23% to $533 million for the week ended May 19 - even during this period of instability.

"That's quite extraordinary, given the volatility we're seeing and the lower price points reached on high-yield and investment-grade names," he said.

A lot of the inflows are going into local currency deals, he said. "They offer the dynamic of easy liquidity and incremental yield. This is a trend that will continue."

When stability does return to the market, the names that will get attention will be "anything sort of BB," he said. "Those prices have come off quite a bit."

No new deals

On the primary side, "it is still dead," the European trader said.

The New York-based source saw the same trend. "There really aren't any deals in the market right now. There have been some roadshows, and some have been pulled or quietly gone away."

Indeed, another issuer postponed a deal due to adverse market conditions. This time it was Saudi Arabia's Sabic Capital and its planned five-year senior unsecured notes.

The petrochemical, fertilizer and metals conglomerate will reconsider its note offering once market conditions stabilize, another market source said.

There's also speculation that Bahrain-based BBK may delay its planned dollar-denominated issue of eurobonds via Deutsche Bank, HSBC and Citigroup.

Meanwhile, it appears that the planned 10-year eurobond from Russia's Mobile Telesystems with Bank of America Merrill Lynch, Credit Suisse and RBS is still open for subscription. The yield has been whispered at 8%.

"Investors now demand 9% instead of the 8% that the company management originally wanted to pay for the 10-year bond," the European trader said. "But I think that even at 9% it does not compensate for the current volatility."

The long bond of its closest peer, Moscow-based mobile phone service provider Vimpelcom, "lost about 12 points during the last three weeks, and investors are scared that this can also happen to the MTS bond. So they are very prudent," he said.

Overall the primary market has been "on pause," the New York-based source said. "We'll probably see a relatively light start to June. It's a chance for many of the issuers to update their first-quarter numbers and go from there."

Soon enough, the issuers who delayed their deals will come back to the market, and "this overhang of supply is going to work itself out," he said.

Sabic Capital postpones notes

Sabic Capital postponed its planned offering of five-year senior unsecured notes (expected ratings A1/A+/A+) due to adverse market conditions, a market source said.

JPMorgan, HSBC and RBS are the bookrunners for the Regulation-S only deal, which was talked at mid-swaps plus 175 basis points.

Sabic has been unable to achieve internal price targets and has no immediate need for funding, so the company is delaying the deal and will review its options when market conditions stabilize, the source said.

Proceeds from the issue would be used to refinance debt.

Sabic Capital is a petrochemical, fertilizer and metals conglomerate 70%-owned by the Kingdom of Saudi Arabia and based in Riyadh.

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