Ecuador CDS widen 25 bps; Turkey lower on 'Iraq incursion' headlines; Air Jamaica plans $125 million

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 6 - Risk aversion following the weakness in U.S. Treasuries was seen in Wednesday's emerging market session.

Meanwhile headline news brought corrosive forces to bear upon the debt of Ecuador, Venezuela and Turkey.

In the primary, meanwhile, the spotlight was largely given over to sovereigns and quasi-sovereign issuers, as state-owned Air Jamaica Ltd. stepped up with a $125 million amortizing deal that it expects to price on Thursday.

Spreads versus Treasuries widen

In the secondary market, emerging debt spreads continued to widen, with some observers now feeling that any prolonged upward move in U.S. interest rates could dampen investor enthusiasm for more risky assets.

Although Treasuries were up a little on Wednesday, and yields declined slightly, the fact that those yields were hovering at those levels, just below 5% for the benchmark 10-year and other short-term issues, was attracting investors - which could prove worrisome for competing asset classes, such as emerging debt.

The comparative risk spread between Treasuries and emerging debt, which had been holding near all-time tight levels over the last few sessions, widened out on Wednesday. The widely followed EMBI+ index compiled by JP Morgan and Co., which measures the average spread of emerging debt against Treasuries, rose 4 basis points on the session to around 156 bps.

Ecuador tumbles on Patino probe

One of the biggest losers was Ecuador's sovereign bonds, which fell on renewed investor concerns that the Andean nation might default on its more than $11 billion of foreign debt.

Those fears had been stoked late last year and early this year by the country's new president, Rafael Correa, and his economy minister, Ricardo Patino, who had been highly critical of the debt burden racked up by previous administrations and who had dropped hints that the country might refuse to honor part of the debt, forcing investors to take a haircut.

However, those concerns had more recently receded as Ecuador made its scheduled interest payments and Patino talked a more conciliatory line to investors.

But now the concerns have resurfaced again, with the emergence in late May of a secretly taped video showing Patino talking with bankers about manipulating the debt market. That has prompted accusations of corruption and insider trading, sparking a congressional investigation of the official - although he denies any wrongdoing, saying he wanted to show how unscrupulous investors could take advantage of market conditions.

On Tuesday, the embattled minister reiterated that Ecuador will not pay what he termed "illegal" foreign debt, and said he would pressure Citigroup Inc., which handles the transfer of some of the government's debt payments, into revealing the identity of some bondholders to help the government draft a plan for dealing with its debt.

Revival of the aggressively anti-debt language by Patino was seen as a factor in Wednesday's slide, which saw prices on the country's 9 3/8% notes due 2015 fall 2¼ points during the session before finally coming off those lows to still end down 1½ points at 91.5. The bonds' yield meantime surged 30 bps, quoted at 10.93% late in the day, and earlier had spiked above 11%.

The cost of five-year credit default swaps on Ecuador government debt grew 25 bps on the day to 710 bps.

Venezuela off as protests continue

In Venezuela, government bonds were seen lower, hurt by the overall weaker tone in emerging markets paper as well as by the ongoing political turmoil created by the recent decision by president Hugo Chavez to silence a long-time media opponent of his regime by denying renewal of its broadcast license. Protests against Chavez' audacious move against Radio Caracas Television - the country's oldest and most widely-watched TV network - continued for a 12th consecutive day.

The country's 2019 bonds were seen down ¼ point on the day, quoted at 103.65, while the bonds' yield stood at 4.85%, 3 bps wider on the day.

The recently issued bonds of Venezuela's state-run oil company were even bigger losers, with Petroleo de Venezuela SA's 5¼% notes due 2019 seen off a full point to 79.5 - their lowest level since they were issued in early April.

The bonds yield ballooned out by some 20 bps, to 8.35%.

Venezuela debt seen much riskier

Venezuela's Finance Ministry meantime issued a report Wednesday indicating that the average risk spread between its debt and U.S. bonds has jumped 68 bps since the start of the year, standing at 253 bps as of the close of trading on Monday.

With investors in Venezuela's debt spooked by such factors as the RCTV debacle and the bombastic Chavez' threat some weeks back to pull his country out of the International Monetary Fund - which could trigger a default on many of his bonds - the Venezuelan risk spreads have widened out dramatically at a time when similar spreads of such continental peers as Brazil and Colombia have been going in the opposite direction; while Venezuela's bonds started the year with spreads over Treasuries actually 9 bps lower than Brazil's bonds and 20 bps inside of Colombia's, its risk premium is now 112 bps higher than Brazil's, and a bloated 145 bps over Colombia's, as those nations have avoided political turmoil and have continued to make strong economic progress.

Brazil's benchmark 11% bonds due 2040, which had fallen markedly on Tuesday, were seen essentially unchanged Wednesday, quoted at about the 132.5 level.

Brazil's bonds could see some upside movement, however, on Thursday, as the country's central bank announced late Wednesday that it had lowered its benchmark lending rate by half a percentage point to 12% - the biggest reduction this year - as a rally by the country's currency unit, the real, holds inflation at an eight-year low.

Turkey bonds retreat on Iraq concerns

Outside of Latin America, Turkey's bonds retreated amid news reports that country, which shares a common border with war-torn Iraq, had sent troops across the board to chase down Kurdish rebels.

Its benchmark dollar-denominated bonds due 2030 were seen having lost 5/8 point to 154.875. The bonds' yield widened 4 bps to a six-week high of 7.02%

The cost of a five-year CDS contract was seen up 8 bps to 148 bps, while the average risk spread between Turkish debt and U.S. Treasuries rose 5 bps to 180 bps on the EMBI index.

Late Wednesday an emerging markets bond investor maintained that that the economic impact of a Turkish incursion into Iraq would be minimal, and added that such an operation would be unlikely to add to Turkey's fiscal deficit.

Sovereigns take stage in primary

In the primary, sovereigns and sovereign-backed issues made noise as the Dubai Sukuk Centre Ltd. priced a $1.25 billion sukuk on an otherwise quiet day.

"It's so painfully quiet," said a primary market source who added that the market has perhaps settled back from its recent strength.

"Maybe it was too aggressive," the official added.

"The data has been pretty positive, but I think we're going to have to wait and see."

Meanwhile a trader who has been anticipating weakness in EM said that the market "is bailing on risk with a big Treasuries sell off expected."

DIFC sells $1.25 billion Islamic bond

Dubai Sukuk Centre priced a $1.25 billion, five-year Islamic note (A1/A+) at 99.803 with a coupon of Libor plus 37.5 basis points.

The deal will be guaranteed by DIFC Investments LLC, the investment arm of the Dubai International Financial Centre (DIFC), which is a state-owned investment agency.

Deutsche Bank and Goldman Sachs ran the books.

Croatia and Ukraine

The National Bank of Croatia sold a €250 million 10-year note (BBB) issue at 31 bps over mid-swaps.

The price came inside the talk of mid-swaps plus 35 basis points.

The sovereigns sold at 99.953 and carry a coupon of 5%.

Deutsche Bank and UBS were the joint bookrunners for the deal, which was four-times oversubscribed deal and had 40 players.

Of the investors, 25% were from Austria, 21% from the United Kingdom, 11% from Ireland, 9% from the off-shore United States, 8% from Italy, 6% from Germany, 5% from Greece, 5% from Luxembourg, and 10% from various European countries.

Elsewhere the Government of Ukraine (B1/BB-/BB-) expects to price benchmark-sized dollar-denominated 10-year eurobonds on Thursday.

Citigroup, Credit Suisse, Deutsche Bank, and UBS will be the joint bookrunners.

From the Americas

Air Jamaica, wholly owned by the government of Jamaica, plans to place a $125 million issue of 20-year amortizing notes (B1/B) on Thursday via Bear Stearns.

No price talk was available as Prospect News went to press Wednesday night.

Elsewhere Banco Comafi SA will issue up to $100 million of class 1 fixed-rate Argentine peso-linked notes due 2012 at par under its $200 million global notes program.

Citigroup is leading the deal that is expected to be marketed until June 20.

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