Emerging market debt a tad tighter; Shinhan sells $350 million in bonds

By Reshmi Basu and Paul A. Harris

New York, Sept. 13 - Emerging market debt turned in a modest session Wednesday but failed to capitalize on a strong U.S. equities performance and lower U.S Treasury yields.

In the primary market, Seoul-based private retail bank Shinhan Bank priced a $350 million issue of 6.819% 30-year hybrid tier 1 securities (Baa2/BBB/BBB+) at a 205 basis points spread to Treasuries.

That spread came at the wide end of the Treasuries plus 200 to 205 basis points price talk.

Barclays Capital, ABN Amro, JP Morgan and Morgan Stanley were joint bookrunners for the Regulation S issue.

Elsewhere, China's Agile Property Holdings Ltd. talked its $350 million offering of seven-year senior notes (Ba3/BB) at a yield in the 9¼% area.

The deal is well over-subscribed, according to a source.

Morgan Stanley and HSBC are joint bookrunners for the Rule 144A and Regulation S notes.

The U.S. roadshow started this week, following a roadshow in Asia. Pricing is expected late this week.

EM tighter

Emerging markets were a tad tighter Wednesday on the back of solid performances in both U.S. Treasury and equity markets. Nonetheless, the overall session was described as uneventful as the market failed to post more of a rally, according to market sources.

At session's end, the JP Morgan EMBI+ index tightened by two basis points while the EMBI+ Global index narrowed by one basis point.

And during the session, the bellwether Brazilian bond due 2040 gained 0.25 to 130.15 bid, 130.20 offered.

Furthermore, the day's lack of conviction was characteristic of the broader trend in emerging markets as recent sessions have seen the asset class seesaw, observed market sources.

"I don't think there's much [of a] market," replied a buyside source.

"It's just really quiet. I think more people are long than short," he added.

One explanation behind investors' current positions is that the redemptions which followed the sell off in May and June, have since dried up. The market has been able to grind tighter as the search for yield has brought investors back.

Inflation as #1 enemy

Meanwhile the economic picture in the United States has upset investors' appetite for risk in the last few weeks. Moreover, the buyside source noted that it is the inflation picture, not the growth story, that is at the top of his list of worries.

"Low growth or high growth sort of takes care of itself," he said.

"When inflation runs out of control, that's bad for bonds, bad for risk appetites, bad for equities - that's what really beat up the market back in May and June," he remarked.

And while declining commodities skims off some of that pressure, inflation still remains the number one risk to the asset class.

Additionally, another reason behind the market's lack of determination is because no one can gage where the market is heading.

With spreads at 194 basis points over Treasuries, the emerging markets debt is in a better position than it was, but the asset class is far from cheap. And that makes finding value quite a Herculean task.

"I wouldn't call the market rich, but it's definitely not cheap. In general, markets seem to be fairly well priced," observed the buyside source.

That means investors will need to be more picky when selecting securities.

Ecuador sees red again

In other development, Ecuador once more posted losses, triggered by ongoing election uncertainty.

A recent presidential poll showed that Rafael Correa, former finance minister and friend of Venezuelan president Hugo Chavez, saw his popularity increase to 15%, a day after he delivered tough talk to investors in New York.

Former vice president Leon Roldos maintained his lead, nabbing 20% of support while conservative Cynthia Viteri saw her popularity slip to 13%, putting her in third place behind Correa.

In the prior session, Correa put investors on edge with his hard-edge stance. Among many of his market unfriendly declarations, Correa said as president he would consider an Argentinean type-default and may renegotiate the debt again.

On that news, losses were triggered across the curve. But the political maelstrom is nothing unusual for the Andean country, noted market sources.

"I guess I would be surprised if there wasn't political noise," noted the buyside source.

Even as the country has emerged as one of the year-to-date underperformers, the source warned against buying on dips.

"What bothers me about Ecuador is the whole Venezuelan connection as well as the usual political issues," he said. He expressed astonishment that the country's bonds have been trading around par for most of the month.

"I can't tell you what would give people such great conviction, particularly with oil coming off," he remarked.

In trading, the Ecuadorian bond due 2012 shed 0.25 to 101 bid, 101.75 offered wile the bond due 2030 gave up 0.35 to 96.25 bid, 97.25 offered.

Commodity prices taper off

Recent declines in commodity prices have somewhat taken the shine off of Latin American credits. On Monday, commodity-exporting Latin countries saw the blunt of a sell-off, which was triggered by lower commodities.

Lower commodities prices do not necessarily spell out a doomsday scenario for Latin American. But what it does mean is that investors will be more selective.

"Even if commodities continue to retrace, they are still at pretty high levels. It depends on what commodity," observed the buyside source.

For instance, sliding oil prices would be negatives for Ecuador, Venezuela and to an extent Colombia. But copper, iron and steel are still well bid, and that will remain the trend as long as China continues to grow, which is a plus for Brazil and Chile.

"More EM countries win from commodities rising than lose. But there's different winners and losers, depending on what commodity you are looking at," he noted.

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