Emerging market debt sees better tone; VimpelCom sets new cash at $367.234 million in 2016 note sale

By Reshmi Basu and Paul A. Harris

New York, May 23 - Emerging market debt saw a better tone Tuesday as global volatility eased up a bit from Monday's volatile session. However, by the end of the day, the debt market again turned jittery.

Furthermore market sources warned that the asset class would most likely see more selling pressure in days to come as financial markets prepare for the prospect of higher global interest rates.

In the primary market, Russia's Vimpel-Communications (VimpelCom) announced it has the new cash portion at $367.234 million in its sale of 8¼% loan participation notes due May 23, 2016 (Ba3/BB).

The overall $600 million issue, which priced at par on May 5, settled on Tuesday.

UBS ran the books for the Rule 144A/Regulation S issue.

Meanwhile on the supply front, Hong Kong's Dah Sing Bank plans to sell $150 million of 10-year floating-rate notes via HSBC.

Better tone, but still jittery

Overall, the asset class saw a better tone as core financial markets moved higher for most of the session.

But one source observed that the market returned to a "worrisome frame of mind," noting that U.S. stocks gave up gains during the last half hour of trading on "Fed concerns." The source also added that emerging market local currencies lost momentum, triggered by a weaker Brazilian real.

The source added that the flight to quality sentiment is taking over. But he could not predict whether the positive fundamental story or positive technical backdrop would insulate external debt markets.

He added that local markets have relatively heavier positions, which is why those instruments have been more susceptible to U.S. interest rate concerns.

He pointed out that even good fundamental news for Mexico announced Tuesday could not insulate the peso or its equity market.

Mexico reported a trade balance surplus of $464 million, a surprise. The market had expected to see a $330 million deficit.

But the Mexican Bolsa still closed down 284 points to 19.084. Mexico's sovereign bond due 2016 lost 0.20 to 136.90 bid, 137.55 offered while the bond due 2031 shed one point to 114.50 bid, 115 offered. The bond due 2026 was spotted unchanged.

Local markets and equities have seen the blunt of the correction, but spreads for emerging market debt have moved to their widest levels since January.

At session's end, the JP Morgan Global Diversified index widened by five basis points.

During the session, the Brazilian bond due 2040 lost 0.25 to 122.85 bid, 122.95 offered. The Colombian bond due 2033 gave up 0.25 to 129.25 bid, 130.25 offered. But the Venezuelan bond due 2027 gained 0.95 to 120.25 bid, 120.90 offered.

One market source described the market's recent weakness as position squaring.

A buyside source quantified the emerging market sell-off by pointing out that prior to the sell-off Russia had been up over 50% on the year. Since the sell-off, it is only up 17%. And the correction happened in nine days.

The source invited Prospect News to consider the plight of hedge funds that had leveraged long positions in Russia.

© 2015 Prospect News.
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