Emerging markets debt

  • 13 Feb 1998
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Brazil

* Federative Republic of Brazil

Rating: B1/BB-

Amount: Eu500m (increased from Eu400m)

Maturity: March 3, 2003

Issue/fixed re-offer price: 99.863

Coupon: 8.625%

Spread at re-offer: 390bp over the 8% April 2003 OAT

Launched: Monday February 9

Joint books: Paribas, SBC Warburg Dillon Read

Bookrunners' comment:

Paribas -- We started the deal at Ecu250m but demand was so strong we were able to increase it to Ecu500m. We had a lot of funds tell us that they would not buy an Ecu250m issue but would buy a larger transaction because they wanted liquidity. It seemed that the bigger it was, the more orders it attracted.

The customer base was similar to that which supported Argentine deal. It was quite broad and evenly spread within Europe. We are really now in a world where a euro bond will attract demand inside and outside the Emu region.

As for pricing, there was no yield curve in dollars for Brazil in five and 10 years so we referred to the Argentine Ecu 2003 transaction which was trading around 355bp at the time of launch. We went to customers with a spread range were able to build a good book at 390bp over.

SBC Warburg -- It was a storming deal. It came at 390bp over and was increased to Ecu500m on the back of strong demand.

One of the interesting things with this issue is that it illustrated just how mainstream this product has become.

We got a much wider spread of institutional demand than we have seen before and it was still entirely within Europe. The split between institutional and retail was about 75/25.

The main distribution areas were Germany, UK, Switzerland and Italy but we also saw interest out of Spain, Portugal and the Benelux.

It is trading pretty well. It tightened in to around 370bp and after some general selling in the markets today it is now trading around 380bp.

The price range we went out to investors with was originally 385bp to 410bp which then narrowed it to 390bp to 400bp and then to 390bp. When pricing the issue we looked at; where Argentina came two weeks before, the current trading level of Argentina and where investors valued Brazil over Argentina.

We looked at something around 40bp to 45bp over Argentina, which is not unreasonable if you look at the difference between Argentine and Brazilian dollar spreads. Brazil is about 70bp wider than Argentina in 30 year dollars.

Market appraisal:

"...the deal was a great success. People thought it came at a great premium to Argentina and as a result it was a very successful deal.

Although some may say it was generous in price, the pricing was correct. It was very important for Brazil to have such a high profile successful European deal after the difficult reception its parallel bond issue received last year. The deal was an important marker for the sovereign and shows that investors are very comfortable with the credit."

"...the deal was great, although some think it was expensive for Brazil. You have to be careful with that comment though, because you don't know how much of a premium Brazil would have to pay to do a dollar issue today.

Relative to the difference between Argentine and Brazilian dollar spreads, the pickup over Argentina is about right. The problem is that these euro deals look expensive in general once they are swapped back into dollars."

"...this was a great deal. It was well priced. I might have priced it a little tighter, but even so at the level it came we saw a huge amount of appetite for this deal.

The spread it came at is about 30bp to 40bp over the dollar spreads and that makes it enormously attractive to Italian and other European investors who have been used to very tight lira deals from emerging market issuers."

"...this went very well although it Brazil clearly doesn't have the same cachet as Argentina. We felt it was a little bit aggressive at 390bp over. It seems as if Argentina did the work and Brazil wanted the brownie points.

However, the issue hasn't traded nearly as well as Argentina -- it is barely trading at par while Argentina is at 103 -- and was probably increased to the detriment of its trading performance."

"...we knew that there had been strong flows in the recent offering for Argentina and were pleased to be invited to take part in the syndicate for a high yield offering -- Benelux banks rarely are given the opportunity to participate in such transactions.

Spreads have widened considerably due to the Asian crisis since the last time Brazil came to the market in this currency last August. That Ecu400m issue was launched at 230bp over Oats which was considered generous pricing at that time and was given a warm response from the market.

We have seen a high level of demand for this paper and its spread has tightened since launch by around 10bp. We are confident that this offering will be a success."

Hungary

* National Bank of Hungary

Rating: Baa3/BBB-

Amount: DM250m (increase to DM500m launched 20/01/98)

Maturity: February 11 2003

Issue price: 99.735

Coupon: three month Libor +37.5bp

Launched: Thursday February 12

Sole lead mgr: DG Bank

Bookrunner's comment:

This is an add-on prompted by the success we have enjoyed with the original issue which we launched lead last month.

Essentially, the strength of the demand we were seeing from Volksbanken and Raiffeisenbanken gave us the confidence to add some added liquidity to the deal. And in the first few hours since we put the deal on to the screens we have sold over half of our position already on the back of some very good flows.

The pricing has been criticised by market participants as too aggressive but we've had no problems convincing investors that it is fair for a well regarded and scarce credit.

Mexico

* Petroleos Mexicanos

Rating: Ba2/BB

Amount: Lit200bn

Maturity: March 4, 2008

Issue price: 100.75

Fixed re-offer price: 99.50

Coupon: 11.25% until year three; thereafter 11.25% minus 12 month Libor

Minimum IRR: 5%

Launched: Tuesday February 10

Joint books: Cariplo, Chase Manhattan

Joint lead: Deutsche Morgan Grenfell

Bookrunners' comment:

Cariplo -- As the first fixed rate reverse floater in the lira market for an emerging market issuer this was an interesting transaction. The structure has proved popular with retail investors over the last few months and we felt that the same trade launched for a strong emerging market name would work well.

As the issue adds credit risk to market risk we decided to incorporate a minimum internal rate of return into the transaction to guarantee a minimum yield. We set this at 5%.

Investors liked the combination of the name, which is one of the best Latin American credits there is, the maturity, which isn't too long and the structure which gives a very high first coupon of 11.25% as well as the protection of a 5% internal rate of return.

We sold our commitment to a mix of retail and small banks and are now flat.

The issue also gives investors the increasingly rare opportunity to buy emerging market paper denominated in lire. Over the past few weeks there has been very little emerging market product in lire as borrowers have been focusing on the euro Euromarket.

Chase Manhattan -- This is the first fixed rate reverse floater launched for an emerging market issuer. We felt that only a top rated Latin American issuer could carry off such a structure and that Pemex was one of those select few.

One of the reasons we chose this structure was that it enabled us to execute the transaction at the issuer's funding levels of 265bp over 10 year US Treasuries.

Although this is in line with the secondary market trading levels of Pemex in the dollar markets there have been a lot of issues for borrowers such as Argentina and Brazil which have been ready to a substantial premium over this level.

This made it very hard for Pemex to achieve its funding levels at the tenor it wanted through a plain vanilla transaction. A three year plain vanilla would have been possible but the issuer wasn't interested in anything lower than five years. Pemex was very flexible and deal oriented when it came to structuring the transaction and we have only praise for their co-operation.

The fixed reverse floater structure has been an incredibly popular trade with retail investors and although it incorporates a certain amount of market risk the high first coupon is a very appealing feature, providing investors with quite a good pick-up for the first three years over what a plain vanilla transaction could provide.

A plain vanilla transaction launched at the same spread would have given a coupon of less than 8%.

During the second leg of the bond the coupon is linked to the movement of 12 month Libor. This is quite an interesting play in the light of the convergence at the short end of the curve.

Most of the reverse floaters that have been launched have been for triple-A names and have had a highly leveraged structure whereby Libor is subtracted twice rather than just once from the fixed rate.

As we were working with an emerging markets issuer we opted for a less leveraged structure, deducting Libor only once. We also incorporated a minimum internal rate of return of 5% which gives investors a sensible level of protection in case Libor moves against them.

Given the structure we were very careful to tailor the size of the issue to the amount of demand we had detected, even though the issuer is used to launching larger transactions. Although the size is smaller than would have been possible had we launched a plain vanilla structure it is actually slightly larger than the average size of the reverse floaters that have been launched in the lira market.

Most of the reverse floaters in lire have been equal or smaller in size despite being launched for mainly triple-A names.

The retail nature of the transaction is reflected in the group. Joining us as joint bookrunner is Cariplo which as well as being a very active house in the Eurolira market also has a sizeable retail distribution. The other members of the group, which includes many retail banks, also reflects the mainly retail investor base.

We have had relatively little flowback so far -- just Lit15bn which we were able to place straight away as we were short of the bonds. We are now flat.

Market appraisal:

"...this is a well known borrower in the lira market which it has tapped on two previous occasions.

The reverse floater structure is one we have seen a number of times in the lira market in recent months but these highly leveraged trades are usually launched for triple-A rated issues such as supranationals.

There is no reason why an emerging market issuer of the calibre of Pemex should not bring an issue with the same structure. Most investors feel quite comfortable with the name and they are now very familiar with the structure.

Considering the credit, however, it was a good idea to do something that was slightly less leveraged and that incorporated a minimum rate of return. This added some protection against rising Libor rates and although it must be an expensive option to add to a deal, a borrower such as Pemex is going to be quite generous anyway making it an affordable extra.

We have had quite a few enquiries about the transaction since it was launched and have done quite well placing the bonds."

"...the deal did not go very well. The unfortunate thing is that the reverse floater structure was very popular a couple of months ago for triple-A borrowers in lire but demand for that structure has dried up and also being an emerging market issuer you had the double whammy of a risky structure for a risky issuer.

It was a very bull market trade. The bonds got hit very hard by the brokers and I imagine Chase is long. Last time I looked it was trading at 99.125 from a fixed re-offer of around 99.50.

Ukraine

* Republic of Ukraine

Rating: B2

Amount: DM750m

Maturity: February 26, 2001

Issue/fixed re-offer price: 99.50

Coupon: 16%

Spread at re-offer: around 1200bp over Bunds

Launched: Wednesday

February 11

Joint books: Commerzbank, Merrill Lynch

Note: Issued on a fiduciary basis via Chase Manhattan Bank Luxembourg SA

Bookrunners' comment:

Ukraine were being shown a variety of different structures in a variety of different currencies but we were confident that there would be a good bid for the name in Deutschmarks. Fortunately the Ukrainians agreed with us.

We started off with a DM300m-DM500m indicative size range but on the back of the feedback from the very well attended investor presentations in Frankfurt and London we were able to grow the transaction to DM750m at launch.

There was a lot of scepticism among market professionals about our ability to bring this deal to a successful conclusion but we took a lot of comfort from the roadshows where people told us that they would be prepared to buy into the deal provided they were sufficiently rewarded for taking on single-B risk.

In the end, however, we were able to launch the deal at the bottom of the 16%-18% indicative pricing range and the all-in cost of funds for the borrower was just 16.2% -- around half what the Ukrainian government is paying domestically in foreign currency terms for much shorter term money.

Ourselves and Commerz kept DM740m and we saw very little flowback from the DM10m we syndicated -- in fact a number of the syndicate came back to us for more bonds. We were fully sold going into launch.

Distribution wise this was very much an institutional play as far as our primary market placement was concerned -- less than 5% of our bonds went directly to retail which was a deliberate policy as we didn't want to sell to anyone who didn't understand the risks involved with the transaction.

The very strong institutional participation we saw was pan-European and very high quality in nature -- less than 1% of our

paper went to hedge funds. Geographically we sold bonds to Austria, the Benelux, France, Germany, Italy, Switzerland and the UK as well as to offshore US accounts.

This deal just didn't go to emerging market specialists either, we had Landesbank, money manager, insurance company and pension fund interest as well.

In total we had demand for at least DM1bn of bonds and at least 300 different institutions bought into the deal, most of whom were buying Ukraine for the first time.

There are still a lot of institutions set to put credit lines in place for Ukraine and those investors alongside retail should ensure good followthrough demand for the deal.

Having broke syndicate on Wednesday at 100.50 -- a full point up on the re-offer the deal -- and has priced up since to be now (Thursday pm) at 101.375 bid,

101. 875 offered. The spread has narrowed 75bp to 1,125bp over Bunds from around 1,200bp over.

The co-operation between ourselves and Commerzbank has been very good and has resulted in a deal which has enabled Ukraine to access a quality group of investors. This transaction should stand the Ukrainians in very good stead when they come back to the markets.

Market appraisal:

"...a total and utter blow-out, a great deal which went very well. We started off with a small DM1m allotment but managed to pick up a substantial amount more from the leads and the street to satisfy the overwhelming demand we saw for this issue.

Our buyers have been almost exclusively German and Swiss retail who have been mesmerised by the 16% coupon. Given that Ukraine is only a single-B credit this is a risky transaction but most investors are only allocating 1%-5% of their total portfolios to this deal and so shouldn't get their fingers too burnt if the Ukraine story turns bad."

"...an absolutely blinding deal which went extremely well indeed. We pre-sold our DM1m allotment last week to Austrian retail investors looking to lock in the 16% coupon on a buy and hold basis.

Given the 16% coupon there was an element of greed behind the success of the deal. But 16% was probably the right level to ensure that investors were sufficiently rewarded for the risks involved with buying Ukrainian risk.

Ukraine certainly doesn't have the world's greatest credit story to tell at the moment, but then again when was the last time we had a sovereign default on a Eurobond?"

"...with a 16% headline coupon and a spread of 1,200bp over Bunds -- which is virtually unheard of in the Eurobond markets -- greed was the driving factor behind this issue which has been a great success as a result.

There is a major questionmark over the deal though -- whether investors really understand the underlying credit story and the underlying risk they're being asked to take on."

"...we were heavily oversubscribed on our DM1m ticket with demand coming from Swiss and German retail buying on the back of the 16% coupon.

These investors will continue to support the deal because of the very attractive coupon and we would expect this deal to become illiquid pretty quickly as retail lock the bonds away.

The choice of maturity was also good -- the main risks attached to Ukraine are in the very short term ahead of the elections at the end of next month -- in three years' time the country should be in a much better state.

This remains a gutsy trade, however. Ukraine has gone for it and issued a large deal and investors have gone for it and hoovered up the deal."

"...Bunds plus 12% smacks of desperate funding to us but the deal has traded like a bandit on the back of the demand from retail who have piled into the deal to get hold of the headline-grabbing 16% coupon.

We sold our bonds, however, to a UK hedge fund looking for a short term trading play -- we steered away from targeting this deal at retail as we felt there were too many risks involved with this deal -- borrowing your way out of a budget deficit problem isn't the cleverest strategy in the world for Ukraine to be employing.

For the two leads, however, this has been an absolute goldmine -- they made DM13.5m in fees, kept as much of the deal for themselves as they possibly could and, I suspect, went into the deal long and so have made a bundle of money on trading what for them has been has been a fantastically successful deal."

  • 13 Feb 1998

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
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1 JPMorgan 92.59 388 8.96%
2 Citi 85.30 278 8.25%
3 BofA Securities 63.15 265 6.11%
4 Barclays 58.01 223 5.61%
5 Deutsche Bank 55.74 184 5.39%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
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1 BNP Paribas 60.87 123 14.06%
2 Credit Agricole CIB 28.59 93 6.60%
3 Santander 25.41 90 5.87%
4 JPMorgan 23.88 61 5.52%
5 UniCredit 21.51 103 4.97%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
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1 Goldman Sachs 2.07 11 10.42%
2 BofA Securities 1.40 6 7.01%
3 Citi 1.37 7 6.87%
4 Morgan Stanley 1.36 6 6.85%
5 JPMorgan 1.31 7 6.59%