Emerging market debt narrows to new record low; Bank of Baroda sells debt

By Reshmi Basu and Paul Deckelman

New York, May 17 - Emerging market debt dipped Thursday on a bout of profit-taking amid a lackluster session by U.S. equities. But while the asset class was down on a dollar basis, spreads on the JP Morgan EMBI+ Global index narrowed by 3 basis points to a record low of 158 bps, aided by an aggressive sell off in U.S. Treasuries.

In the primary market, India's Bank of Baroda sold a $300 million offering of 15-year upper tier II bonds (Baa2//BB) at 99.187 to yield mid-swaps plus 147 basis points.

The deal priced at the middle of guidance, which was set at 145 to 150 basis points more than mid-swaps.

The bonds will be non-callable for 10 years. If not called, the fixed-rate coupon changes to a floating-rate coupon and steps up by 100 basis points to 247 basis points more than Libor.

Deutsche Bank, Citigroup and Barclays Capital were lead managers for the Regulation S deal, which came off the bank's euro medium-term note program.

Out of Brazil, Sadia Overseas Ltd. priced a $250 million offering of 10-year notes (Ba2/BB) at par to yield 6 7/8%.

The deal came in line with guidance for a yield of 7% area.

Brazilian food processing company Sadia SA will guarantee the issue.

Proceeds from the sale will be used to refinance existing debt and to finance capital expenditures.

ABN Amro was the bookrunner for the Rule 144A and Regulation S deal.

XXI Century Investments Public Ltd. launched a $175 million offering of three-year guaranteed secured notes at 10% Thursday.

ING is the bookrunner for the Regulation S deal.

Kiev-based XXI Century Investments is a real estate investment, development and property management company in the Ukraine.

More corporates issue talk

In other primary developments, Ukraine's Vseukrainsky Aksionerny Bank (VAB Bank) set initial price guidance for a $150 million offering of three-year eurobonds (B2/B-) at the 10% area.

The roadshow is scheduled to stop in Switzerland on Friday and in Frankfurt and Vienna on Monday.

Credit Suisse and Deutsche Bank are lead managers for the Regulation S deal.

Elsewhere, Colombian commercial bank Bancolombia SA set initial price guidance for a $400 million offering of 10-year subordinated unsecured notes (Baa3//BB) at Treasuries plus 225 to 240 basis points.

Proceeds from the sale will be used to fund operations, to strengthen the bank's capital structure and regulatory compliance and for other general corporate purposes.

JP Morgan and UBS Investment Bank are lead managers for the offering, which has been registered with the Securities and Exchange Commission.

The issuer is a commercial bank in Colombia.

Gazprom on the road next week

Russian state-controlled gas monopoly OJSC Gazprom plans to start a roadshow for a two-part benchmark-sized offering of pound- and euro-denominated eurobonds in London on Monday.

Following London, the roadshow will visit Edinburgh and Paris on Tuesday and again in London and Milan on Wednesday.

ABN Amro and Morgan Stanley are joint bookrunners for the sterling tranche while ABN Amro and Societe Generale are joint bookrunners for the euro tranche.

Both tranches will be sold under Regulation S.

Brazil spreads hit record low

In the wake of Wednesday's ratings upgrade by Standard & Poor's of Brazil's credit, several investment banks on Thursday projected that Latin America's largest economy could eventually rise to investment-grade levels.

Credit Suisse, JP Morgan and Barclays Capital all predicted that Brazil could move up to high-grade by early 2008, joining Mexico and Chile as the only Latin economies in that category.

However, that speculation had only limited impact on bond trading Thursday, with debt spreads against U.S. Treasuries already at or near all-time tight levels.

A New York-based trader in Latin American debt said that while "local [currency-denominated] bonds continued to rally," there wasn't all that much movement in external debt, which saw "very little change, because it's already trading so tight."

The widely followed EMBI+ index showed risk spreads between Brazil's debt and Treasuries narrowing 3 basis points to an all-time tight level of 144 bps - even as the country's benchmark bonds due 2040 declined slightly, down about 3/16 point to 135.5.

While the Brazilian bonds eased from the highs they hit Wednesday, after S&P upped the country's sovereign credit rating one notch to BB+, and the long-term local currency rating two notches to BBB, Treasuries fell faster, with short-term yields swelling to their highest levels in more than two months on jobless claim and manufacturing data pointing to a strengthening U.S. economy and less likelihood that the Federal Reserve will cut interest rates this year.

A little further in on the curve, Brazil's global bonds due 2014 were quoted just above 114, off from 114.20 on Wednesday, while the yield on that paper widened by 2 bps to 5.58%.

The trader said that there had not been much EM reaction to Wednesday's news that well-known portfolio manager Bill Gross - who runs the world's largest bond fund, Pacific Investment Management Co.'s $100 billion Total Return Fund - was touting emerging market currencies and local-denominated bonds as an area of potentially lucrative returns, citing the strong growth of economies such as Brazil, Russia, India and China.

"I think the buying into Brazil is much broader than whether Bill Gross is telling people to buy it or not. It's had a good rally for a good long time, and certainly the upgrade [by Standard & Poor's] yesterday helped it, but I don't think that Pimco was that big a factor in it."

PDVSA higher

Elsewhere in the region, the bonds of Venezuela's state-run oil company Petroleos de Venezuela SA were seen hitting their highest levels in two weeks, as investors continued to be encouraged by signs that President Hugo Chavez will not make good on his recent threat to pull his nation out of the International Monetary Fund - a move that would trigger a technical default on much of its debt.

The PDVSA 5¼% bonds due 2017 were seen up more than ¾ point to 82.5, while yields tightened commensurately by more than a dozen basis points. While the Petroleos bonds would not actually be thrown into default by a pullout from IMF as the sovereign debt would, such a default - or the threat of action that could cause one - does little to boost investor confidence in the obligations of Venezuela's oil company.

Meanwhile, although the signs that Chavez might back down from his threat to bolt from IMF gave the sovereigns a boost on Wednesday, the trader said it appeared to be short-lived.

"Yesterday [Wednesday] there was noise - they weren't going to leave the IMF, then maybe they still were going to leave the IMF, so at the end of the day, they were pretty much unchanged, but I didn't hear anything today.

"Maybe Chavez took a day off."

Ecuador slips

Another Latin name being watched was Ecuador, whose bonds were seen in retreat Thursday, hit by the one-two punch of Wednesday's resignation of the governor of the country's central bank, Mauricio Pareja, and Thursday's announcement that the Quito regime would empanel a commission to examine the legitimacy of Ecuador's more than $11 billion of foreign debt.

The Pareja news raised concerns about the continued independence of the central bank from the government of president Rafael Correa, and the commission news raised the specter of a possible move by the government to default on at least some of that debt. The central bank official's resignation caused Ecuador's bonds to begin their slide on Wednesday, erasing gains they had previously notched after the government said that it would make the scheduled $30 million June 15 interest payment on its 12% bonds due 2012.

In Thursday's dealings, the 9 3/8% notes due 2015 were being quoted down 1¼ point to 94 bid.

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