Emerging market debt sees support from strong core markets; three issuers set talk; Ecuador down

By Reshmi Basu and Paul A. Harris

New York, Sept. 12 - Emerging market debt saw support Tuesday as U.S. core financial markets posted strong performances.

On the primary market front, three issuers unveiled price talk.

Brazil's Banco Industrial e Comercial SA (BicBanco) set talk for a dollar-denominated offering of three-year senior unsecured notes (Ba3) at the 8½% area.

UBS is the bookrunner for the Regulation S transaction, which is expected to be sized at around $100 million.

Out of India, Bank of India set price guidance for a $200 million offering of 15-year upper tier II bonds (Baa2/BB-) at 145 to 155 basis points over mid-swaps.

The issue is non-callable for 10 years.

Barclays Capital, Citigroup, Deutsche Bank and HSBC are joint bookrunners for the Regulation S transaction. The deal will come off the bank's euro medium-term note program.

And in Korea, Shinhan Bank (A3/A-/A-) will price a $350 million offering of 30-year hybrid tier 1 securities on Wednesday.

Price guidance was set at Treasuries plus 200 to 205 basis points.

The securities will be non-callable for 10 years.

ABN Amro, Barclays Capital, JP Morgan and Morgan Stanley are lead arrangers for the Regulation S transaction.

EM sees higher prices

Emerging market debt moved up Tuesday following Monday's dismal performance on the back of sluggish stocks and Treasuries. Overall, spreads for emerging markets were unchanged from the previous session.

On Monday, commodity-exporting Latin countries saw the blunt of the pressure, triggered by lower commodity prices.

But on Tuesday the region's credits saw a reversal as strong equity markets counterbalanced the lower commodity prices, according to a market source.

During the session, the bellwether Brazilian bond due 2040 added 0.25 to 129.90 bid, 129.95 offered. The Argentinean discount bond due 2033 edged up 0.65 to 97.10 bid, 97.60 offered. And the Venezuelan bond due 2027 gained one point to 121.65 bid, 122 offered.

Ecuador down

However while the rest of Latin America scored gains, Ecuador bucked the trend as its sovereign curve was dragged down by market unfriendly comments by former finance minister and presidential hopeful Rafael Correa.

Correa spoke with investors in New York via his cell phone at a meeting hosted by the Ecuadorian American Association.

His answers to audience questions were described as a "market event," according to Alberto Bernal, fixed income analyst, for Bear Stearns & Co. Inc.

In his presentation, Correa said as president he would consider an Argentinean type-default and would renegotiate the debt again. He said that Ecuador spends roughly 7% of GDP servicing debt. Bernal noted that the more accurate figure was closer to 3% of GDP.

In reference to the impasse between state-run oil company PetroEcuador and Los Angeles-based Occidental Petroleum Corp., Correa said the issue was closed. Additionally, he said that any Ecuadorian who participated in an arbitration process would be committing treason, according to Bernal.

In May, the Ecuadorian government took over the oil fields operated by Occidental, following a contract dispute. That issue has also marred the already stalled free trade negotiations with the United States.

Correa also delivered a hard-line stance on that process, saying that he would abandon a free trade agreement since the United States subsidizes agriculture.

Correa did little to assuage Wall Street fears, according to market sources. The candidate has seen increased support in polls, now running behind former vice president León Roldos and Social Christian Party candidate Cynthia Viteri.

Bernal noted that political noise would create pressure on the country's external debt, despite Ecuador's positive fiscal and economic picture.

"On the political front, our base case scenario remains that Dr. Correa does not win the upcoming elections on the back of the fact that he lacks a political organization," he added.

"Even if he has money, which we know he has, and even if he reaches the second round, it will prove difficult for him to mobilize votes in far away places. His vote is mostly urban," he added.

Therefore Roldos looks to be the likely victor in a second round poll.

But nonetheless, the risk of Correa reaching the second round will likely drag down prices right up until the Oct. 15 first round election, observed Bernal.

"Therefore, we recently shifted our recommendation from a very profitable outperform to a tactical underperform at this time," he noted.

In trading, the Ecuadorian bond due 2012 lost 0.25 to 101.40 bid, 102 offered while the bond due 2015 gave up 0.90 to 98.50 bid, 100 offered. And the bond due 2030 shed 0.40 to 97.35 bid, 97.60 offered.

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