Emerging market debt posts gains despite soft equities; Brazil reopens 2028 bonds

By Reshmi Basu and Paul Deckelman

New York, June 19 - Emerging market debt extended gains on a dollar basis Tuesday despite a lukewarm performance by U.S. stocks. Appetite remained healthy as sovereigns across the spectrum, in particular high beta credits Argentina and Ecuador, moved higher.

Nonetheless, the asset class could not keep pace with the strong rally posted by U.S. Treasuries.

Brazil retaps 2028 bonds

In the primary market, the Federative Republic of Brazil reopened its 10¼% local currency-denominated global bonds due 2028 to add R$750 million.

The retap priced at 115½ to yield 8.626%.

Credit Suisse and JP Morgan were joint bookrunners for the offering, which was registered with the Securities and Exchange Commission.

The deal is denominated in Brazilian reais while payments will be paid in dollars.

Furthermore, the country said it may sell up to R$50 million more of the bonds to investors during Asian trading hours.

This is the fourth time the country has reopened the 2028 issue. With the additional bonds, the total size of the deal stands at R$3.7875 billion.

Russian corporates bring deals

Two corporates from Russia tapped the market during Tuesday's session.

Russian automotive dealer Rolf Group, issuing via Cyprus-based financing vehicle Colgrade Ltd., sold a $250 million offering of three-year bonds (Ba3) at par to yield 8¼%.

ABN Amro and Citigroup were the lead managers for the Regulation S deal.

Cyprus-based Delance Ltd, which is the holding company of Rolf, will guarantee the issue.

Also pricing, Renaissance Capital Bank sold a $300 million offering of three-year loan participation notes (B-/C) at par to yield 9½%.

The deal priced at the tight end of revised talk of 9½% to 9 5/8%, which was narrowed from initial guidance of 9 3/8% to 9¾%.

Citigroup and Renaissance Capital were lead managers for the Regulation S deal.

Renaissance Capital is the fourth largest specialized consumer finance bank in Russia.

Two corporates set talk

Also Tuesday, two corporates issued price guidance for upcoming deals.

From Turkey, retail bank BankPozitif set price guidance for a dollar-denominated offering of five-year loan participation notes (//BB) at mid-swaps plus 230 basis points area.

Deutsche Bank is the bookrunner for the Regulation S deal.

Elsewhere, DB World Ltd. (A1/A+) set preliminary price guidance for its two-part bond offering, which includes a $1 billion tranche of dollar-denominated 10-year sukuk bonds and a $1 billion tranche of 30-year conventional bonds.

Guidance for the 10-year sukuk bonds has been set at Treasuries plus 115 to 120 basis points while the 30-year bonds have been talked at Treasuries plus 50 basis points area.

Bookrunners for the 10-year sukuk bonds are Barclays, Citigroup, Deutsche Bank and Dubai Islamic Bank. Bookrunners for the 30-year conventional bonds are Barclays, Citigroup, Deutsche Bank and Lehman Brothers.

The Dubai, United Arab Emirates-based port operator is entirely, but indirectly owned by the government.

Pricing is expected to take place this week.

EM higher on dollar basis

Back in secondary trading, things remained largely quiet - but firm, as the market continued to take its cue from United States Treasury issues, steadily recovering after having bottomed out around the middle of last week on inflation fears.

The U.S. bonds were up for a third straight session, with the yield on the benchmark 4½% bonds due 2017 contracting by another 6 basis points to 5.07%, as the price of the security gained about half a point, ending at 95 18/32.

The catalyst for Tuesday's rise was a report showing slower-than anticipated new-home starts in May - a sign that the American economy remains in a basically non-inflationary mode in which further rate hikes by the Federal Reserve will likely not be necessary.

The yield on the 10-year issue hit an intraday high of above 5.30% last Thursday, and closed only a basis point or so below that, the culmination of a prolonged downturn in Treasuries which dragged equity and bond markets in the United States, Europe and the emerging markets sphere lower as well. However, Treasuries have been firming since then, and other markets have come along for the upside ride.

With Treasuries firming, spreads have not moved much as EM bonds have moved pretty much in parallel. The widely followed EMBI+ index compiled by JP Morgan & Co., which among other things tracks the spread separating the average U.S. yields from comparable emerging paper, was seen by market participants having hung in little changed from around the 151 bps mark seen on Monday - not far from the index's all-time tight levels in the upper 140s.

U.S. Treasuries main trigger

A New York-based trader in Latin American issues said that from where he sat, "Treasuries were the main thing, and everything's unchanged on spread on that."

He said that while key bonds moved up, price-wise, they did not narrow their respective gaps over Treasuries, owing to the latter's advance.

For instance, he said that while Venezuela was "well bid-for," its 9¼% dollar-denominated benchmark bonds due 2027 firming to 112.60 bid, 113 offered, "everything is kind of up in line with Treasuries," and there was little or no spread tightening.

He saw Brazil's 11% dollar-denominated global bonds due 2040 at 132.25 bid, 132.30 offered, up 0.35 price-wise, but "around unchanged" on a spread basis.

At another desk, the Brazilian benchmarks were quoted at 132.20, up 0.30 on the day, although there the bond's yield was seen to have narrowed by 4 bps to 5.95%.

The yield on Brazil's real-denominated 10¼% bonds due 2028 was seen at 8.63%, the level at which the Brazilian treasury sold R$750 million reals of the bonds in the European and U.S. market Tuesday, the fourth such bond sale this year. The latest yield on the bonds compares favorably with the 8.94% yield at which it sold R$750 million of the bonds in May, the most recent sale, and is well inside the 10.68% yield seen at the first such bond sale, in February

The trader said that unlike in past days, there was "no unusual story" in the market - "nothing of any major significance" that stood out.

Sizzling Argentina

Also on the Latin American debt scene, Argentine bonds - which led last week's sharp downturn in emerging market bonds, but which have since turned red-hot as Treasuries and the EM markets turned around, continued their rally for a sixth consecutive session, the country's benchmark 8.28% notes due 2033 moving up more than a point on the day to 102.5, its highest point since the first week in June, while the yield was quoted as having come in about 10 bps to 8.03%.

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