Record trades as emerging markets go mainstream

Fri May 17, 2013 10:15am EDT

NEW YORK, May 17 (IFR) - By raising a combined US$14.25bn in one day, Brazil's Petrobras and Indonesia's Pertamina underscored the enormous bid for emerging market credits.

The two oil trades generated nearly US$60bn in demand between them, endorsing the asset class's place in a global credit market that was once the sole domain of G7 borrowers.

The abundance of global liquidity is clearly driving investors into the arms of EM borrowers as they seek higher yields beyond their own borders, but the diversity of accounts in these deals illustrates how EM state champions are becoming an essential part of top investment portfolios.

"Recent jumbo oil and gas deals reaffirm the thesis that the high quality segment of EM is now formally part of 'global credit', a space that was once primarily dominated by only US, European and Japanese issuers," said Robert Abad, emerging market specialist for fund manager WAMCO.

"The global liquidity cycle has only served to make these strong issuers much more formidable in their industries and we shouldn't expect that trend to reverse any time soon."

Both deals on Tuesday were record-breaking in their own right. At US$3.25bn, the 10/30s combination from state-owned oil and gas firm Pertamina (Baa3/BB+/BBB-) represented the biggest offshore print from Indonesia.

The US$11bn multi-tranche deal from majority state-owned Petrobras (A3/BBB/BBB), meanwhile, is the largest EM bond ever, putting the borrower firmly in the ranks of the world's top issuers. Just a handful of high-grade borrowers can boast bigger deals, including tech powerhouse Apple, healthcare company Roche, pharmaceuticals giant Pfizer and GE's financial unit GE Capital.

The record sizes of both the Petrobras and Pertamina trades and the fact that they come on the back of an additional US$8bn from other EM oil companies in recent weeks show that supply has yet to dent investor enthusiasm for certain EM credits - even during a year when international EM debt issuance is set to exceed last year's total of US$430bn.

Demand is especially keen for quasi-sovereign oil and gas names, which arguably offer a safer stepping stone for crossover accounts. Over the past few months, Sinopec, KNOC, CNOG, Gazprom Neft, Alliance Oil, CNOOC and CNPC have all issued. Rosneft and Pemex are still to come.

CASTING THE NET

That said, leads on Petrobras left no stone unturned when it came to tapping into different investor appetites. By offering five tranches with tenors from three to 30 years as well as fixed and floating rates, the deal had broad appeal, luring everyone from rate bears to those that liked duration.

Leads drew demand mostly from the US, but also saw European and Latin American money, and even Middle Eastern and Asian accounts that had never before participated in such deals.

"We did see Japanese money, and it has been a while since we have seen that," said a senior syndicate official.

Japanese investors were familiar with Brazil from the lending spree of the 1980s, while Taiwanese banks, which increasingly participate in Latin American syndicated loans, were buyers. With Pertamina, US, European and Asian accounts were also well represented.

Aside from rising comfort levels with top EM names, abundant global liquidity is also clearly lifting demand for names such as Petrobras and Pertamina, which in the broader global context look cheap but relatively safe given their quasi-sovereign status.

The presence of new Japanese investors is evidence of this trend, as is participation from US high-grade accounts that have traditionally kept EM at arm's length.

"A lot of this has to do with where US interest rates are," said the syndicate manager. "Even if they jump 50bp to 100bp we are still at historically low levels and investors are looking for yield."

STRONG DEMAND

Indeed, investors cast aside credit concerns about Petrobras - the world's most highly indebted company - and bought the paper in force, pushing demand up to US$40bn-plus. Leads may have telegraphed tight new-issue premiums to secondary levels, but the paper was largely seen as cheap in the context of broader comparables and where the credit had been trading earlier in the year.

A 10-year from Pemex (Baa1/BBB/BBB+), for instance, was trading last week at around 3.5%, while split-rated (Ba1/BBB-/BBB-) Mexichem's 10-year was being quoted with a yield of 3.80%. That compares with Petrobras's new 10-year, which was priced to yield 4.522%, and Pertamina's at 4.30%.

"Mexico has a better rating and its economy is different from Brazil's, but a 100bp differential is a little bit exaggerated," said Klaus Spielkamp, a trader at LatAm specialist financial firm Bulltick in Miami. "I have never considered buying Petrobras as, in my mind, it was always too expensive, but when I saw it trading at 4.50%, it was clear to me that it was cheap."

Still, despite a somewhat deteriorating credit story, investors were more than comfortable with what is essentially quasi-sovereign risk.

"It doesn't matter how bad the company may look. It is Brazilian risk," added Spielkamp.

(This story will be published in the May 18 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)

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