Emerging market debt tightens after rough start; corporates issue $875 million of new debt

By Reshmi Basu and Paul Deckelman

New York, April 19 - Emerging market debt bounced back from a jittery open Thursday - and Brazil and Colombia managed to go out with a bang as each posted record low spreads.

In the primary market, several corporates issued new debt.

Out of Korea, the National Agricultural Cooperative Federation (NACF) sold a $500 million offering of 10-year lower tier II notes (Baa1/A-) at 99.892 to yield mid-swaps plus 41 basis points, according to a market source.

The notes are callable on April 26, 2012. If the notes are not called, the coupon steps up by 100 basis points.

Citigroup, ABN Amro, BNP Paribas and HSBC were bookrunners for the Regulation S deal.

NACF is a Seoul, Korea-based umbrella organization for Korea's regional cooperatives.

Moving to the Dominican Republic, EGE Haina Finance Co. (/B/B-) sold an upsized offering of $175 million in 10-year senior notes at par to yield 9½%.

The deal, increased from $150 million, came inside of guidance for a yield of 9 5/8% to 9¾%.

Barclays Capital and Deutsche Bank were the joint bookrunners for the Rule 144A and Regulation S transaction.

Proceeds from the sale will be used to refinance debt, for accounts payable and for general corporate purposes.

EGE Haina Finance Co. is a wholly owned and guaranteed subsidiary of Empresa Generadora de Electricidad Haina, SA, a thermoelectric generator in the Dominican Republic.

From Brazil, media company Globo Comunicacao e Participacoes priced a $200 million issue of 15-year senior notes (Ba1/BB) at par to yield 7¼%.

The yield came 12.5 basis points inside the 7 3/8% to 7½% price talk.

Deutsche Bank Securities was the bookrunner for the Rule 144A/Regulation S offering.

Overall, the fresh debt from Latin American corporates has not weighed on secondary dealings. Instead, the opposite has happened, according to a Latin American corporate trader.

"The new deal pipeline has only served to push corps higher, as the rich valuations on these new deals are applied to existing issues. Globo new deal pushing up existing 9.375 perps [perpetuals] by over a point," he said.

"The Dominican EGE Haina deal which priced today [Thursday] dragged [energy companies] AES Dominicana and Itabo to much more aggressive valuations, each better by 2 points on the day," added the trader.

EM recovers

Overall emerging market debt got off to a bumpy start Thursday, as global equities sold off on speculation that China will raise interest rates in order to cool down a possibly overheating economy. But as the day progressed, U.S. stocks clawed their way back and the Dow Jones Industrial Average index posted another record high.

At the end of the session, spreads on the JP Morgan EMBI index were narrower by 2 basis points on the day at 164 basis points versus U.S. Treasuries.

High beta credits Brazil and Colombia each posted record lows on a spread basis. The EMBI global component for Brazil shrank 5 bps to 148 bps over Treasuries while spreads for Colombia narrowed 9 bps to close at 132 bps versus Treasuries.

Elsewhere, Argentina and Venezuela continued to come under pressure on the long end of the curve due to technicals, according to a market source. Furthermore, a slide in oil prices wore on Venezuela.

In trading, the Argentinean discount bond due 2033 gave up 1.15 to 108.10 bid for a yield of 7.61%. The Venezuela bond due 2027 eased 0.75 to 121.75 bid, yielding 7.20%.

But the sell off witnessed in the long maturities of both sovereign credits has had no impact at all on Latin American corporates, observed the first trader.

Brazil firmer on rate cut

Brazilian bonds' continued strength came in the wake of Wednesday's decision by that country's central bank to continue the year-and-a-half-long pattern of interest rate reductions - and the expectations in the market that those rate cuts may even grow in magnitude.

The country's most widely traded issue, the 11% global bonds due 2040, pushed up to 136, a new high, from 135.875 on Wednesday. The 7 7/8% globals due 2015 firmed to 114.82 from 114.65, while the yield contracted by 3 bps to 5.49%.

Among other dollar-denominated Brazilian bonds, prices rose across the maturity curve.

On the short end, the country's 10% notes due 2011 climbed to 118.1 from 118 previously, with the yield down 2 bps at 5.20%. In the middle of the curve, Brazil's 10¼% bonds due 2013 rose to 125.23 from 125.04 on Wednesday, with the yield coming in 4 bps to 5.35%. Out on the long end, the 7 1/8% bonds due 2037 firmed about 5/8 point to just under 114, from 113.35, while the yield came in 4 bps to 6.09%.

In the local-currency instruments, the yield reductions were more marked. The yield on Brazil's real-denominated zero-coupon benchmark bonds due 2008 - which on Wednesday had narrowed by 3 basis points to 11.91% - tightened on Thursday by an eye-popping 23 basis points to 11.68%, a new record low.

The average risk spread for Brazilian debt versus U.S. Treasury paper narrowed 3 bps to 149 bps - the first time it has ever been below 150 bps.

Market-watchers cited investor optimism that the next round of rate cuts might exceed the 25 bps reduction the central bank announced on Wednesday, since three of the seven central bank governors had actually wanted a 50 bps cut, arguing that inflation was well under control.

As it was, the key lending rate was lowered to 12.5%, a record low more than 7 percentage points below the peak of 19.75% at which that rate stood as recently as September 2005.

Inflation, as measured by the consumer price index, fell to just 3% in March - its lowest level since 1999, and well below prior federal forecasts of a 4.5% rate this year.

LatAm firmness offsets Asian dip

Elsewhere, investor hopes that Colombia's government may use some of that country's record foreign reserves to buy back debt pushed the country's bonds up, with Bogota's 7 3/8% bonds due 2037 seen up nearly 2½ points on the day to 112.25. Just a week ago, those same bonds were trading at 108.

The strong performance of those Latin American credits helped to offset weakness in the Asian portion of the emerging markets sphere, sparked by market fears that China's raging bull economy might be overheating, which could encourage Beijing to raise interest rates.

During the Asian session, the widely traded 5-year CDS contracts on Philippines sovereign debt were seen to have widened slightly to 108/110 bps, versus an all-time tight level of 106/109 bps on Wednesday.

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