Promising day for emerging market debt; Philippines prices upsized $1.5 billion bond at 7.70%

By Reshmi Basu and Paul A. Harris

New York, Jan. 26 - Emerging market debt rebounded Wednesday from a U.S. Treasuries plunge the session before, while the Republic of Philippines priced an upsized $1.5 billion 25-year bond.

Emerging market debt "traded up for most of the day after things were hit pretty hard yesterday [Tuesday], as Treasuries were the main driver yesterday," said a trader.

"Today [Wednesday] it opened up strong and we were doing alright. Then mid-afternoon, there was some selling - maybe some profit taking. It kind of drove the market down in Brazil and Colombia," he added.

During Wednesday's session, the Brazil C bond was up 0.374 to 102.437 bid while the bond due 2040 added 0.70 to 116 bid. The Colombia bond due 2009 lost a quarter of a point to 113 bid.

Russia's 2030 eased to 104 1/8 bid on Wednesday, after reaching 104¾ bid on Tuesday.

"There was active trading in sovereigns, but very light trading in corporate names. People seem to be positioning themselves for an anticipated flattening of Russian curve, factoring in the expected Standard & Poor's upgrade," said a market source.

Overall, the market was a bit tighter on the day, noted the trader.

"There was some institutional selling that drove the market down late, but I believe there is some strong local bid, especially in Brazil, holding it up here," he commented.

In general, riskier names appeared stronger, according to a buyside source.

Philippines issues the long one

In the primary market, the new $1.5 billion 25-year sovereign from the Philippines priced at 98.131 to yield 9.70% via UBS, Deutsche Bank and Citigroup.

"I don't like that part of the curve," said a buyside source, who chose not to play in the new issue.

"I don't like the long end of the curve in the Philippines because the foreigners are always there. I like the bid when there is a problem and the local bid is only at 10 years and lower.

"I've always have been very conservative on the Philippines. But I hold a position and I like it, but I don't like that part of the curve," he remarked.

Some sources had expressed doubt as to how much demand a 25-year bond would attract, given the country's fiscal deficits.

But one trader saw almost $4 billion in demand for the new Philippines 2030 issue while a second market source said that hedge funds appear to have made up 30% of the total demand.

"The better values are in the secondary," the second trader noted.

"A lot of investors have come into the secondary to buy existing bonds instead of the deal. That is because the 2019s and the 2025s, which are the best comparables, have been re-tapped two times.

"The Philippines has never re-tapped a deal more than two times. And they have a history: once they do a deal they re-tap it quickly. For example, the 2011s, the 2013s and the 2014s were all re-tapped two to three months from the time that the deals were issued. And usually that puts a cap on near-term upside when that happens, because they will usually re-tap it a point or two below the market. It's always a technical overhang on the bond.

"The [new 2030] isn't going to trade up a lot because if it does the Philippines will re-tap it immediately."

In the secondary, the new bond due 2030 was bid at 98.15, 98.45 offered.

Also in trading, the Philippines' bond due 2025 closed at 109 7/8 bid, up 1/2.

Argentina sees selling

In the secondary, paper from Argentina were squeezed Wednesday as locals and European retailers look to unload the paper, according to a Latin America debt strategist for Refco EM.

"There has been some selling there by retailers and institutions," he said. "And we're seeing hedge funds buying."

An interesting incident happened when one of the members of the group of banks helping the Argentine government came out with a "non-recommendation" for the exchange, said the strategist. This move obviously caused some resentment.

"As you can imagine if you are part of the book, and your asset management group is rejecting the offer - that created a little bit of animosity within the Argentina government."

Another source said that UBS, which acts as an adviser, said the government could pay more.

Furthermore, the Refco strategist does not expect a high turnout for the country's exchange offer for its $100 billion of defaulted bonds. The country has offered to swap up to $41.8 billion in new securities for about $102 billion of unpaid bonds.

"The retail sector is pretty much in a very difficult spot. And are you going see retailers going through the process, in my belief," he commented.

The story is quite different for institutions and hedge funds.

Furthermore, the strategist said that one should not always believe what they hear, given that so much of the talk is shrouded in hearsay or is agenda-driven.

"There are a lot of rumors and a lot comments. And you don't know if they are based on facts or they are just trying to move or change the position of the bondholders," he remarked.

The Argentine bond due 2009 finished the session down 1.10 points to 31.40 bid.

Ecuador comes down

Ecuador prices fell slightly, although spreads were tighter near the end of session close. Ecuador paper received a boost Monday from an upgrade by Standard & Poor's. The ratings agency lifted Ecuador's long-term foreign and local currency credit rating to B- from CCC+.

"It has come down a bit. The positive reaction was overwhelming," said the strategist.

The market has since digested the news. However, local political noise has had a limited impact on the sovereigns as one of the most powerful men in the country, Guayaquil mayor Jaime Nebot, organized an anti-government march.

The Ecuador bond due 2030 fell 0.05 to 92.10 bid.

Buy Bank TuranAlem, says buyside source

The buyside source recommends the proposed $200 million offering from Kazakhstan's second largest bank Bank TuranAlem (Baa2/BB-).

"We like the Kazakhstan story. The bonds are coming cheap - about an 8½% yield for something that is high B [Beta]," he noted.

"We like the story. We think it is a well-run bank. It's tough to get yield like that these days."

ING and JP Morgan are running the Rule 144A/Regulation S offering. Pricing is expected to take place Friday.

Finally, Dubai-based Emirates Bank International is looking to expand its representation in Europe with its benchmark-size offering of five-year floating-rate loan notes (A1//A), according to the second market source.

Barclays Capital, Dresdner Kleinwort Wasserstein and HSBC are running the Regulation S deal.

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