Egypt news raises, then reduces risk appetite; issuance slows; Sigma Capital prints notes

By Christine Van Dusen

Atlanta, Feb. 11 - The market's eyes on Friday were once again on Egypt as president Hosni Mubarak at first refused to resign, then agreed to step down and cede power to the country's army - undulations that at first raised risk aversion, then buoyed sentiment, then gave way to continued caution from emerging markets investors and issuers.

Indonesia's Sigma Capital Pte. Ltd. was among the scant few issuers to sell international bonds on Friday while Venezuela-based oil company Petroleos de Venezuela SA (PDVSA) moved ahead with a locally placed $3 billion 12¾% bond due 2022.

"The central focus for everyone has been what's going on in Egypt and how that's affecting sentiment across asset classes," said Enrique Alvarez, debt strategist with think tank IDEAglobal.

Said a New York-based trader: "Emerging markets bonds opened a little wider on light volumes. The rally in the U.S. Treasury market and weaker equity markets, along with the Egypt story, put pressure on our spreads."

PDVSA offers notes

PDVSA's deal is first being offered to "productive sector companies" in Venezuela, which could purchase the bonds - expected to price at par and yield 12¾% - at a rate of 4.3 bolivars to the dollar and then trade the bonds abroad in dollars.

"The offer of such bonds will be directed to the productive sector companies, mainly from the sectors of food, health, machinery and equipment and petroleum and natural persons residing in the Bolivarian Republic of Venezuela and supervised financial institutions," according to a statement on PDVSA's website.

Proceeds will be used for general corporate purposes.

"Since it's in the local market, sometimes they announce the pricing and sometimes it takes a few days to get the subscription together," Alvarez said. "Since it's not available to us in the first round we have to wait for it to be trading externally."

Though the size of the deal is significant, investors are somewhat fatigued by PDVSA's and Venezuela's tendency to flood the market with paper.

"Methodically they try to use this to extract some of the excess liquidity," Alvarez said. "We understand that this keeps a lid in general on Venezuela's bond prices because of the oversupply."

Sigma does deal

In a new deal, Sigma Capital - a subsidiary of PT Lippo Karawaci Tbk., a Tangerang, Indonesia-based residential and commercial urban developer - priced a $125 million add-on to its 9% notes due April 30, 2015 at 108 to yield 6.776%, a market source said.

Citigroup, Deutsche Bank and Bank of America Merrill Lynch were the bookrunners for the Regulation S deal.

This followed Thursday's pricing of $750 million notes due Feb. 22, 2018 from Russia-based lender VTB Capital SA, which came to market at par to yield 6.315%, or mid-swaps plus 305 basis points, a market source said.

The deal priced tighter than talk, which was set at mid-swaps plus 312.5 bps to 325 bps.

Goldman Sachs, JPMorgan and VTB Capital were the bookrunners for the Rule 144A and Regulation S deal.

Alsacia sets talk

In other deal news, Chile-based transportation company Inversiones Alsacia SA set price talk for its planned issue of $464 million eight-year notes at 8%, a market source said.

Bank of America Merrill Lynch and JPMorgan are the bookrunners for the deal, which is expected to price as soon as Monday.

The Republic of Croatia has mandated Barclays Capital, Deutsche Bank and JPMorgan as bookrunners for a bond issue that will likely take place during the first quarter, a market source said.

Proceeds will be used to finance the budget deficit and to refinance the sovereign's maturing €750 million bond due March 14, 2011.

Also planning notes is Doha, Qatar-based energy insurance company Qatar General Insurance and Reinsurance Co. SAQ, which is looking to issue up to $500 million of bonds after March 8, a market source said.

And the Republic of Kenya is planning to issue a bond by June 2013, a market source said.

Bank of India oversubscribed

The final book for Bank of India's $750 million two-tranche issue of notes due 2015 and 2021 was $1 billion from 103 accounts, a market source said.

The deal included $250 million 4¾% notes due Oct. 7, 2015 that came to market at 100.18 to yield Treasuries plus 235.5 bps.

Fund managers accounted for 56%, banks 28%, private banks 14% and insurers 2%.

The $500 million tranche of 6¼% notes due Feb. 16, 2021 - which priced at 99.587 to yield Treasuries plus 260 bps - had a final book of $1.9 billion from 185 accounts. About 66% came from Asia, 28% from Europe and 6% from the United States.

Fund managers accounted for 41% while banks took up 32%, private banks 15% and insurers 12%.

Barclays Capital, Deutsche Bank, HSBC, RBS and Standard Chartered were the bookrunners for the Regulation S deal.

RBC: Less optimistic

In looking at the emerging markets debt universe as a whole, it's likely that a correction is in store, according to a report from RBC Capital Markets.

"While we remain strongly bullish on emerging markets assets over the medium-term, we believe odds are increasing of a mid-cycle correction this year as price action is likely to be choppy with a downward bias in the first half of the year," the report said. "In part our less optimistic view is premised on the outlook for a rebound in the U.S. dollar and higher U.S. Treasury yields weighing on emerging markets."

And other EM-specific factors - such as inflation, rate hikes, valuations and weaker inflows - will increase the likelihood of consolidation, the report said.

"We expect inflation will be a key headwind for emerging markets in coming months," RBC said.

The report also pointed to a turn in the cycle of funds flows. Outflows from developed markets funds into EM funds reached its apex the fall of 2010.

"Since then a rapid turn in the cycle seems to have started, with developed market equity funds witnessing rising inflows while EM equity and debt funds are experiencing significantly diminished inflows or in some weeks outflows over the past couple of months," the report said. "Given the magnitude of the fund inflows and their effect on the performance of EM assets in recent months, this turn in the flow cycle could be a very important source of pressure on EM investment performance in the weeks to come."

As a result of all this, EM asset classes will likely underperform and see their returns capped in the single-digit range for this year, RBC said.

Investors are expected to move their allocations into cheaper EMS like Mexico, Chile, Poland and South Korea.

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