The Croatian Bank for Reconstruction and Development (HBOR) and Russia’s VTB postponed international bond issues this week as rising credit spreads amid profit taking in emerging markets shut the door on new issues for the first time in nearly three months.
Croatia’s Bank for Reconstruction and Development HBOR cancelled its Eu300m five year offering on Tuesday via Deutsche Bank and Royal Bank of Scotland after poor investor interest. The A3/BBB rated borrower had not embarked on a formal roadshow but the leads had been gauging investor demand over the past month. The government-owned issuer has outstanding 2011s, 2012s and more liquid 2017 notes.
However, Croatia’s (Baa3/BBB/BBB-) Eu750m long five year bond launched at end-May provides a better guide to pricing. On Tuesday, official price guidance at 8.5% to 8.75% was released. This triggered Croatia’s 2014s to plunge to 95.75 compared with its 99.675 reoffer price, according to a banker away from the transaction. The deal would have offered a juicy 200bp pick-up to Croatia’s 2014 notes. State-backed development bank paper from the CEE region has traditionally offered a 100bp concession to the sovereign.
Bankers away from the deal were surprised by the lack of investor demand. "This was the right level for pricing for both dedicated emerging market investors and investment grade accounts," said one head of emerging market bond origination in London. Another banker said investors were reluctant to step up exposure to new Croatia risk as markets have yet to price in deterioration in the sovereign’s medium-term creditworthiness. "This was never going to be an easy sell from a pricing level, relative value and credit story perspective because of concerns about Croatia’s economic and political problems," he said. Croatia’s bid to join the EU has been blocked by Slovenia since December over a border dispute while the IMF estimates the economy will contract 3.5% this year.
The volatility in western stock markets and US Treasuries has led to a wave of profit taking and widening emerging market bond spreads. After rallying by 200bp over the past two months, the JPMorgan EMBI index has drifted wider this week to around 450bp compared with 410bp three weeks ago.
VTB switches to Swiss
Against this backdrop, Russian state-owned bank VTB has postponed its Eurobond issue following its recent meetings with investors via Citi, Deutsche Bank, JPMorgan and VTB Capital. "When we finished the non-deal roadshow [two weeks ago] the general market conditions seemed to just go downhill from there, so the timing wasn’t great and VTB is in no hurry to issue," said a syndicate banker.
The benchmark-setter for Russian issuers was considering a 9% $1bn to $2bn Eurobond with a seven year maturity and three year put option, said bankers. This would have represented a 30bp to 40bp pick-up over VTB’s outstanding curve. VTB is now heading on a roadshow to Zurich, Lucerne and Geneva next week with BNP Paribas and VTB Capital for a short-dated Swiss franc deal. "It makes sense for VTB to access a new capital base and lock in short-dated funds before yield curves steepen, however, the US dollar primary market is still open for VTB if it is willing to pay the premium," said a banker away from the deal.
Macedonia mulls summer lull
The new issue pipeline for emerging European credits is now made up almost exclusively of sovereign names. The Republic of Macedonia is eyeing a long three year bond for Eu150m to Eu300m at 9% to 9.5% via HSBC. However, the news has sent the sovereign’s existing 2015s to sell-off. This upward repricing of its yield may mean the deal is put off until after the summer. Poland — which is expected to be the only economy to escape the regional recession — will finish a roadshow in New York on Tuesday. The A2/A–/A– borrower is hoping to issue a Eu1bn benchmark via Barclays Capital, Citigroup and HSBC. Meanwhile, Hungary has hired BNP Paribas, Citi and ING for a non-deal roadshow to take place over the next two weeks.