Brasil Foods, Evergrande set talk; emerging market accounts migrate toward riskier paper

By Paul A. Harris

St. Louis, Jan. 20 - Emerging Markets saw slightly better selling across the board on Thursday against the backdrop of a sell-off in the stock market, according to a syndicate banker who spoke heading into the East Coast close.

"Cash is still being put to work, but the market is a lot more cautious," the banker remarked.

Five-year credit default swaps of Brazil, Peru and Mexico each widened by 4 basis points during the U.S. trading session, the sellside source said.

Colombia five-year CDS was heading out 7 bps wider.

Sentiment not what it was

The sentiment among the emerging market accounts is not what it was a month ago, the banker reflected.

"The primary driver of that has been some of the first issues to come out of the gate in 2010," the banker said.

Philippines, Turkey and BNDES are the bellwether names.

"BNDES is 30 basis points wider from where it priced," the source said.

Early in the year, Brazil's Banco Nacional de Desenvolvimento Economico e Social SA (BNDES) priced $1 billion 5.5% fixed-rate notes due July 2020 at 98.949 to yield 5.634%, or Treasuries plus 187.5 bps.

Those notes were 97.65 bid, 97.85 offered (5.8% bid, 5.78% offered, on a yield basis) as of Tuesday's close, the banker said.

"That has caused some tension with investors," the source said.

Pulling back from high-grades, sovereigns

Presently investors are pulling back on the high-grade names and sovereigns because they seem too tight relative to rate anticipations that are now taking shape, the banker said.

Consequently the emerging market accounts have been moving toward higher-yielding corporate names.

An example is last week's Cemex add-on.

Cemex Finance LLC's $500 million add-on to its 9½% senior secured notes due Dec. 14, 2016, which priced at 105.25 to yield 8.477%, actually played to a bigger order book than that of the Mexican $1 billion sovereign deal, which came on Jan. 11, the banker said.

The Mexican sovereign deal, which priced at 99.037 to yield 5¼%, was about 98.5 bid Wednesday afternoon, or about 50 cents lower than where it priced.

"On a yield-basis it's only 10 or so basis points wider," the source said. "And on a spread basis it's not bad at all because rates have moved in the other direction.

"In any case, investor demand for that paper was not what was expected."

Meanwhile the Cemex add-on paper demonstrates some resilience, relative to Wednesday's falling prices.

The deal, which priced at 105.25, was holding in at 105.25 bid Wednesday afternoon.

Up until Wednesday that paper was trading steadily at 105.5 bid, the banker said.

The way of all rallies

When Prospect News asked the banker if the migration into risk wasn't a natural outcome to such a hard-rallying bond market, the banker conceded that it was.

"But it's also an investor reaction to the immense amount of supply we saw during the first couple of weeks of the year," the sellsider added.

The upshot is that investors now want greater concessions on new bonds from high-grade issuers, the banker said.

"They've really been hammering the deals," the sellsider commented.

For example, the above-mentioned BNDES 2020 notes came with a concession of 3 points to 4 points to the company's bonds maturing in 2019, right about where the theoretical curve dictates that concession ought to be, the banker said.

"Mexico, when you account for the curve, likewise indicates a concession of 3 or 4 basis points," the source added. "Now investors are looking for a concession closer to 12.5 bps, which is more standard for corporates.

"The euphoria we saw at the beginning of the year has worn a little."

Talking the deals

Wednesday's primary market generated a very slight amount of news.

Brasil Foods SA set price talk for its $500 million offering of 10-year notes (Ba1/BB+) at the 7 5/8% area.

Pricing is set for Thursday.

JPMorgan and Santander are leading the Rule 144A and Regulation S offering.

Proceeds will be used to refinance debt and for general corporate purposes.

Meanwhile China's Evergrande Real Estate Group Ltd. talked its $500 million minimum offering of senior notes (B1/BB-/BB+) at the 13% area.

The deal is expected to price on Friday.

Bank of America Merrill Lynch, Goldman Sachs & Co. (Asia) and BOC International are joint bookrunners for the Rule 144A and Regulation S offering.

The Guangzhou, China-based property company will use the proceeds to repay a structured secured loan, to finance existing and new property projects and for general corporate purposes.

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