Emerging market debt gives up gains on flight to quality trade; Russian Standard Bank taps market

By Reshmi Basu and Paul Deckelman

New York, June 21 - Emerging market debt eased for the third straight session as concerns over the U.S. subprime mortgage market and hedge funds that invested in the leveraged subprime products triggered heightened risk aversion and a flight to safety trade.

High beta credits, such as Argentina, Ecuador and Venezuela, were once again the session's worst performers.

In the primary market, Russian Standard Bank sold a $400 million offering of three-year eurobonds (Ba2/BB-) at par to yield 300 basis points more than mid-swaps via ABN Amro and JP Morgan.

The Moscow-based retail bank controls 50% to 60% of Russia's point-of-sale loan market, according to Standard & Poor's.

Coming from the Ukraine, Kiev-based commercial bank OJSC Bank Nadra sold a $175 million offering of three-year bonds (Ba3//B-) at par to yield 9¼%.

HSBC and UBS Investment Bank were lead managers for the transaction.

Bank of Moscow on the road

Hitting the road, JSCB Bank of Moscow plans to start a roadshow Monday for a debut offering of euro-denominated five-year notes (A3//BBB expected).

The roadshow will begin in Amsterdam on Monday, move to Paris on Tuesday and finish in Milan on Wednesday.

Deutsche Bank and JPMorgan are bookrunners for the Regulation S offering of senior unsecured notes.

Adding to the pipeline, Malaysian liquefied gas carrier MISC Bhd. plans to sell a benchmark-sized offering of dollar-denominated 10-year bonds (A2).

Citigroup and Deutsche Bank are the lead managers for the Rule 144A and Regulation S deal.

EM slips on flight to safety

Back to trading, in the secondary market, participants noted a "flight to safety" situation as recently hard-hit U.S. Treasury issues staged a recovery Friday, and attracted money flows from riskier asset classes, which were hurt by fears related to the subprime mortgage market in the United States, brought to the forefront by the ongoing Bear Stearns hedge fund debacle.

With yields on the benchmark 10-year U.S. bonds narrowing about 5 basis points on the day to 5.13%, and yields on emerging market bonds generally widening as their prices fell amid investor selling, the relative spread between the two asset classes also widened. The widely followed EMBI+ index compiled by JP Morgan & Co. widened out by 5 bps Friday, hitting a high of 160 bps late in the session.

The most widely traded EM issue, Brazil's benchmark 11% dollar-denominated global bonds due 2040, were seen down only slightly, about 0.06 on the day to about the 131.06 level.

But losses were greater among credits with more risk attached to them, like Venezuela. At another desk, the high-beta credit's benchmark 9¼% dollar bonds due 2027 were quoted having lost about 7/8 point, finishing at 108.25, while its spread over Treasuries widened about 8 bps to the 8.40% level.

On top of the overall flight to quality, investors in the oil-rich country's paper were mulling over a statement by a key official to the effect that Caracas has no plans to buy back its foreign debt this year unless market conditions improve.

The statement by Ricardo Sanguino, the chairman of the Venezuelan congress' finance committee would appear to throw cold water on earlier hopeful speculation in the market that the government might buy back foreign bonds in order to allow President Hugo Chavez to go ahead with his threat to pull Venezuela out of the International Monetary Fund. Such a pullout could trigger technical defaults in the indentures of many of its bonds - but a recent Caracas newspaper report indicated that the government was considering buying back those bonds, thus eliminating the possibility of a default. After that report appeared at mid-month, Venezuela's bonds firmed smartly, and their spreads versus Treasuries narrowed some 18 bps in a matter of days.

But on Friday, Sanguino said in a press interview that a debt buyback is not high on the government's priority list.

Argentina slides

Elsewhere, Argentina - the worst performer so far this year among any large EM debt issuer - continued to slide, its dollar-denominated 8.28% bonds due 2033 quoted down more than ¾ point on the day to 99.5, while its yield widened 7 bps to 8.32%.

The country's peso-denominated debt fared no better, with the Discount bond seen down 0.83% and the Par bond nosedived 3.71% to 54.50.

Mexico's peso bonds meantime fell after the country's central bankers, while leaving their key interest rate unchanged, kept their bias towards possible further tightening, on top of the surprise rate hike enacted in April.

The 10% benchmark bond due 2024 was quoted down nearly 1 point on the day to 121.46, while the yield widened 8 bps to 7.75%.

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