Volatility threatens Vietnam's bond offering

The sovereign is due to embark on a roadshow soon, but difficult market conditions remain a challenge to the offering.
Rumours were circulating yesterday concerning VietnamÆs $1 billion bond transaction managed by Barclays, Citi and Deutsche. Some press reports stated that the sovereign was to begin its roadshow next week, and said that the deal would price soon after, probably towards the end of this month.

However, it seems that although the roadshow is due to take place relatively soon, the schedule has not been confirmed due to logistical difficulties. The ensuing deal, meanwhile, will only price subject to market conditions, at some undetermined time in the future.

ôItÆs impossible to predict anything in this market,ö says one source. ôThe Vietnam deal can only price if an opportunity presents itself. Although there may be a period of stability, the market could just as easily experience another serious bout of volatility, which may compromise the offering.ö

The most notable casualty of this tempestuous market is Chinese property developer Country Garden, which pulled its $1.5 billion deal last week due to worsening credit conditions. Other offerings are also on hold.

ôThe market hates itself and loves itself every 15 minutes. ItÆs highly schizophrenic,ö comments a bond banker.

It is rumoured that the bookrunners on the Vietnam deal û who were mandated back in July - urged the sovereign to come to market in October to take advantage of a period of relative stability. However, like most Asian sovereigns, Vietnam doesnÆt hold an SEC shelf registration for its 144A offerings. This enables borrowers to fulfil all SEC registration-related procedures up to three years before the actual public offering and - should they be faced with hostile market conditions - to quickly tap the market when conditions become more favourable.

"The bookrunners on this deal will probably be disappointed, but this situation often crops up with Asian sovereigns. Most don't do many international deals, and don't have the infrastructure in place dedicated to dealing with these kinds of transactions," says a banker. "But there's nothing to stop them from pricing if that market window opens. Everybody loves Vietnam, and if there's one deal that can get done, it's this one."

The only SEC shelf-registered sovereign in Asia is the Philippines, which has been a frequent borrower for many years.

As a result, it seems that Vietnam missed its opportunity to price an offering at a time when many other issuers successfully pulled off bond deals, and the market today is not welcoming.

ôLike many, weÆve been net short for some time, and taking profits on our shorts," says one investor. "Everyone is bearish because of the situation in the US and it is clear that the market here isnÆt willing to support the supply, while issuers - to some extent - are not willing to pay too high a price. That said, there is still issuance waiting to get done, but the market is all over the place and the consensus is that the US macro-economic environment will get worse.ö

Nonetheless, this investor is one of the few to feel bullish. ôI believe in Asia's fundamentals and IÆm slowly taking short positions off and starting to go long. The sectors I find most attractive right now are Chinese property, the new high-yield index, and Japanese bank capital. I feel that spreads have come out substantially and represent reasonable compensation for default risk. And since everyone is bearish, they are probably all short. As a result, even just a little bit of good news will cause them to start cutting those positions, which will necessarily increase the bid. I predict a rally before year-end, and the fact that very few think this way makes it even more likely.ö

This view is supported by a high-yield investor. ôWe are beginning to go long as well. We arenÆt feeling very bearish, but we are sticking to credits that we feel reasonably comfortable with, and enjoying very decent yields on those. But the market will be volatile and, while others can stomach that and enjoy the high yields, our aim is to secure as stable returns as possible. As a result, we stay away from sectors likely to be volatile such as Chinese property, and focus on the least cyclical sectors such as telecoms and commodities. These should be resilient."

Another, more bearish, investor says: ôWe are not taking any big positions, but I can see why people would be feeling bullish and it is indeed tempting to go long in certain sectors. The commodities sector is still going strong and you can argue the paper in the banking sector has been oversold, but I think there are lots of problems still to come.ö

Indeed, another investor interviewed by FinanceAsia wasn't feeling optimistic about the outlook for the rest of the year: ôThe general market has been very weak for the last couple of weeks, and it is likely to remain so. I donÆt think the appetite for risk is likely to come back in a meaningful way anytime soon. There is too much bad news on the way from the US and Europe to allow any recovery in the credit market before next year. The environment will be very challenging for new issues, especially in high-yield, and pretty muted until year-end.ö

ôIn terms of our positions, we are flat to the market," he continues. "We arenÆt taking any big positions either way. The market is just too illiquid - at least in the cash bond market - to allow us to put on any big positions. We will stay as flat as we can for the rest of the year.ö
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