Emerging markets prices tumble; Venezuela, Argentina hurting; Ukraine brings $700 million sovereign

By Aaron Hochman-Zimmerman

New York, Nov. 7 - Emerging markets saw a repeat of Monday's stumble rather than continuing with Tuesday's stride.

General Motors Corp.'s losses sent equities down and the flimsy dollar sent oil up while emerging markets credits tried to hold their value in what one syndicate official called a "psychologically imbalanced market."

The market may look worse than it is, but "I think there were some decent headline shocks," he said.

Even with the price of light sweet crude touching $98 per barrel, Venezuela reaffirmed its status as a high-beta by seeing its 9.25% bonds due 2027 lose 2.5.

On an active day in the primary, Ukraine priced a new $700 million sovereign with a coupon of 6¾% while other issuers talked their deals.

"Everything got roughed up," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

The day's conditions were "shaking the category back to a more cautionary mode," he said.

"This is still pretty much profit taking," he added.

Emerging markets have taken hits from the wider financial environment, but "allocations to EM are continuing to increase, even at a time when you would expect allocations to higher-risk asset classes to decline or at least hold steady," said an emerging markets analyst.

"Weakness in global credit markets is still taking its toll on EM external debt spreads, but widening in EM has been minimal compared to what could have happened even just a few years ago under the same external shock scenario," he said.

Volatility went soaring from early in the New York morning and never looked down. The VIX index added 5.10 to close at 26.49. The index is the standard gauge of market volatility.

As a sector emerging markets widened out 7 basis points, according to JP Morgan's EMBI+ index. The index, which measures the amount of extra yield investors demand to hold money in emerging markets debt, was seen with a spread of 212 bps.

LatAm hurt on yen rise

Latin American credits traded softer as they were subject to the same instability the other sectors faced.

Still, the fall of the dollar and rise of the yen has created a problem for Latin America, according to IDEAglobal's Alvarez.

"The dollar is becoming somewhat disorderly in its fall," he said.

Bond prices have been supported by the dollar-yen relationship, which involved borrowing in yen to buy dollar-backed credits elsewhere, such as Latin America.

As the yen is "appreciating too rapidly, you start losing money on your yen bet," he said.

The yen was seen trading at 112.772 to the dollar on Wednesday.

"Credit and mortgage news hitting the Dow doesn't go unnoticed either," he added.

Venezuela had the worst time of the high-beta credits on Wednesday. The 9.25% notes due 2027 lost 2.5 to trade around 104 bid, 105 offered.

Fellow high-beta Argentina was close behind losing 2 points from its 8.28% bonds due 2033. The issue was quoted at 97.2 bid, 97.5 offered.

Brazil again managed to stay mildly out of the fray by only dropping 0.1 from its sovereigns due 2037. The bonds were spotted at 113.5 bid, 113.9 offered.

Ukraine prices new sovereign

"It's very hard to sell new issues," a syndicate official said about the state of the primary market, but the Ukraine managed to price a $700 million 10-year bond at par with a coupon of 6¾% and a spread over Treasuries of 239 bps.

UBS, Deutsche Bank, Credit Suisse and Citigroup were the bookrunners for the deal.

Proceeds will be used to help balance the country's budget.

Price talk and new issues were also added to the calendar.

The Dominican Republic's Cap Cana SA released talk in the 11¾% area for its planned sale of $500 million 10-year senior secured notes (B3//B-).

Deutsche Bank and Morgan Stanley will act as bookrunners for the deal.

Pricing is expected this week.

The bonds have a weighted average life of eight years and six months.

Proceeds will be used for working capital and to fund a debt service reserve account.

Cap Cana is a Santo Domingo, Dominican Republic-based resort.

Panama's Newland International Properties announced talk of 9 3/8% to 9 5/8% for a $220 million seven-year senior secured bond offering (Ba3//BB).

Bear Stearns will have the books for the deal.

A roadshow will be held in the United States and London. Pricing is expected on Thursday.

The amortizing bonds feature three years of call protection and have an average life of five years and six months.

Proceeds from the sale will be used for new construction and the refinancing of existing debt.

Newland International Properties is a property developer based in Panama.

Russia's JSC Federal Grid Co. announced plans to issue benchmark-sized five-year ruble-denominated notes (Baa1/BB+/).

Barclays has been mandated as the bookrunner for the deal.

A roadshow will be held on Wednesday in the Netherlands, on Thursday in Germany and on Friday in London.

Federal Grid is a Moscow-based long-haul energy supplier.

Dubai Electricity & Water Authority has asked Barclays, Citigroup, Dubai Islamic Bank to lead an upcoming bond issue (A1//AA).

A roadshow will be held until Nov. 13.

DEWA is a Dubai-based utility company.

Emerging Europe hanging on

In emerging Europe, trading was light as investors were too cautious to pour money into the market while equities were headed southbound.

"People are cautious, waiting," said a syndicate desk official.

Still, compared to the other markets "EM is better because they're safer," he said about many emerging market credits which have shown stability under a strained market environment.

Rather than wait and see, "people wait and hope," he added.

In Turkey, president Abdullah Gul announced that his country "has decided" how to proceed against the rebels of the Kurdistan Workers Party (PKK), leading many to believe that an assault is impending, reported CNN.

"I definitely think a full-blown invasion of Iraq would weigh on Turkey spreads, but the chances of that are looking pretty low right now," the analyst said.

"A smaller-scale incursion across the border might be problematic diplomatically, but I doubt it would do much to investor confidence," he added.

The Turkish government bonds due 2030 were seen off 0.125 at 158.375.

In Russia, the lower house of parliament, the Duma, voted unanimously to withdraw Russian support for a 1990 treaty which limits the country's military presence along the European boarder.

The bill to abandon the Conventional Forces in Europe (CFE) treaty still faces review by president Vladimir Putin and the upper house of parliament.

Russia has been at odds with the west over the placement of components for a proposed U.S.-backed missile shield in Poland and the Czech Republic.

The Russian sovereign bonds due 2030 were quoted unchanged at 112.75.

Asia pushed lower

Asian trading weakened, but the bellwethers dodged the big losses suffered in Latin America.

Pakistan saw some opportunistic buying, but prices were falling as activists were in the streets to protest the state of emergency declared by president Pervez Musharraf last Saturday.

Adding to the tumult, former prime minister Benazir Bhutto asked her supporters to continue the protests until the government meets a series of conditions.

Bhutto and her Pakistan People's Party (PPP) demanded that the constitution be restored, president Musharraf resign as army chief, elections go on as scheduled in January and for all political prisoners arrested during the protests be released.

The Pakistani sovereigns due 2017 fell 1 point to trade with a bid of 83.

In the Philippines the government bonds due 2030 were seen off by 0.75 trading at 131.75 bid, 132.25 offered.

Indonesia's sovereigns due 2017 fell approximately 0.25 to trade around 104 bid, 105 offered.

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