ProBusiness issues, fearing what may come after
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Emerging Markets

ProBusiness issues, fearing what may come after

The EMEA and Latin American primary markets were in summer pause this week, although one Russian issuer is accessing the market ahead of a potential deterioration in EM spreads that it fears could cool the expected September rush.

ProBusinessBank, rated B by Fitch, is set to price a $100m two year Eurobond today (Friday), puttable after one year, via bookrunners BCP Securities and Credit Suisse. Price guidance of 12.5% was set last week after extensive roadshows in Europe and Asia for the Reg S deal.

The Russian financial institution was last seen in the market in October with a privately placed $100m Eurobond at 11.25% via BCP Securities. One market participant argued that the high coupon for a one year risk reflected the lack of investor enthusiasm for single-B rated Russian and CIS financial institutions. He questioned why the borrower was coming to the market during the holiday season.

But a banker on the deal rejected these claims. "The deal is in line with market prices for recent issues," he said. "The risk is that in September, markets may be worse since economic and earnings data may continue to deteriorate, so the borrower took the view to go to the market sooner rather than later."

Prices low, yet nerves remain

Over the last month, emerging market corporate and sovereign spreads have experienced volatility in line with Western equity markets and US Treasury yields. As EMBI spreads widened 5bp to 283bp yesterday on the back of worse-than-expected US data.

According to Standard & Poor’s, default rates for junk credits fell from 11% in the early 1990s to only 1% in 2007, but according to one EMEA bond syndicate head in London, from this low base, the market is "aggressively pricing in a significant deterioration in credit quality". He noted that the iTraxx Crossover for emerging market credits has doubled over the last couple of months.

But Eduardo Costa, emerging markets strategist at Commerzbank, said that emerging market sovereign paper presents a lucrative buying opportunity. "Spreads on EM sovereigns, as measured by the implied spread on the CDX.EM, look way too cheap on a relative basis if compared to the spreads on the HY world," he said. "CDX.EM trades now at 68bp inside of the CDX five year Crossover, having traded as high as 100bp not too long ago.

"We continue to like this trade on a relative value basis, projecting more stability on the EM sovereign world, backed by the scarcity premium in some important credits like Russia, Brazil and Mexico."

Market participants say that prospects for high yielding debt will remain fragile as slowing global growth will trigger significant losses in emerging market bourses and rattle already frightened investors. The potential for such contagion has triggered a shift from low-rated high yielding credits to investment grade names as investors refuse to slide down the credit curve. This is likely to deter cross-border deals from sub-investment credits in the second half of the year, bankers say.

Russia high on first half

In the first half of the year, emerging markets new issuance reached $70bn, compared with $111bn over the same period in 2007, according to Dealogic. A whopping 75% of market volume took place in May and June, with a total of $52bn issued, $13bn of it from Russia and the CIS.

With Western monetary policymakers emphasizing the risks to growth over inflationary pressures, emerging market assets could benefit as investors take advantage of the lucrative interest differential in inflation-torn developing economies. However, thin liquidity and rising corporate default rates will temper the pace of new issues.

Russian and CIS financial institutions and corporates will dominate new market volumes in September, bankers predict. Market veterans VTB and Sberbank are likely to launch deals in September and October, both worth up $2bn.

"These banks want to fund their growing loan portfolios and are prepared to spend the money to do so," said one EMEA origination banker. Meanwhile, Russian Railways (A3/BBB+/BBB+) is rumoured to have mandated for its debut Reg S/144a Eurobond, between $1bn to $3bn, according to bankers away from the transaction. In addition, Russia’s diamond miner Alrosa (BB) is mulling a $1bn 10 year issue this autumn, while Wimm-Bill-Dann (B3/B+), a top Russian dairy producer, is eyeing a $500m bond.

LatAm lets others go first

After a revival in Turkish assets in the wake of the constitutional court’s decision to maintain the legality of the governing AKP party, the Republic of Turkey could visit the Eurobond market in September or October to boost the country’s ailing public finances.

Elsewhere, rumours are flying that South Africa’s state-owned power utility Eskom is seeking to access international markets for a five year dollar bond, with the size still to be determined. The utility, which produces 95% of the country’s electricity, has been criticised for South Africa’s rolling blackouts and is embarking on an R150bn investment programme.

In Latin America, high new issue premiums, low refinancing needs and investor risk aversion has deterred price sensitive companies in the region from launching external bonds, with new issuance for the first half of the year down 61%.

Fee-hungry bankers are unlikely to have a happier time in the second half of the year, according to a research report from ING. "We expect a slow H2 in terms of new deals as recession fears and low refinancing needs — around 10% of LatAm corporate debt outstanding matures in less than two years — have kept investors and firms on the sidelines," said ING analysts.

* The Republic of Lebanon (B3/CCC+/B-) launched a $500m seven year Eurobond last Friday (August 1) through Blom Bank, Byblos Bank and Deutsche Bank. The Reg S deal paid a 8.5% coupon at 99.353 to yield 8.625%.

Just two working days after the deal was priced, S&P raised the sovereign’s rating from CCC+ to B-, citing the diminished risks to civil war. The deal will cover the remaining $400m of Lebanon’s 10.75% 2008 issue that matured on August 6.

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