Market regains momentum; Brazil leads Latam rally; TuranAlem announces hybrid perpetual

By Paul A. Harris

St. Louis, Jan. 6 - After taking a brief post-Santa Claus pause on Thursday, emerging markets charged ahead on Friday, with the EMBI-plus tightening throughout the session to end six basis points better on the day.

The Brazil component of the EMBI tightened by 15 basis points to 281, leading a rally in Latin American sovereign bonds.

Asia also gained on the positive sentiment, with the dollar prices of the new Philippines issues up smartly.

And although the primary market generated very little news - a $100 million to $150 million hybrid tier I perpetual preferred from Kazakhstan's Bank TuranAlem - one source warned Prospect News to watch out for rallying Brazil to issue soon.

Brazil on Monday?

The source who issued that warning was Enrique Alvarez, Latin America debt strategist at think tank IDEAglobal, who suggested that market forces could be combining to present a golden moment for Brazil to issue, and to do it soon.

Alvarez said that Friday's emerging markets rally was an extension of the rally that has gone on for over a month, in particular in Brazil.

He marked Brazil benchmark bond due in 2040 and well as its bonds due 2034 "deeply inside of 300 basis points on a spread basis.

"We're seeing firmness throughout Latin America, spearheaded by Brazil," the strategist contended.

The Brazil 2040 was at 131.15 bid, 131.20 offered Friday afternoon, according to Alvarez.

He added that there is demand across the Latin American curve, with Ecuador and Colombia moving in sync with Brazil. The Ecuador bonds due 2030 closed out the week at 94.40 bid, 94.90 offered, up 0.90 on the day. Colombia was also an outperformer, the strategist added, spotting the Colombia bonds due 2033 at 134 bid, 136 offered, about a point and a half higher.

Elsewhere Venezuela's bonds maturing in 2027 finished at 120.40 bid, 120.75 offered, three-quarters of a point higher.

There was less interest in other names, Alvarez added.

The IDEAglobal strategist, characterizing Friday as a "non-event type of day," said that you could almost sense a pending Brazil deal brewing.

"You had a little bit of a pullback in U.S. Treasuries today and nothing else major popping up," he commented.

"I think you're seeing a lot of support out there from dealers for what I sense is probably a Brazil issue up and coming.

"When we saw this kind of a rally back in December we immediately saw issuance by Brazil. I would not be surprised to see it come on Monday."

When Prospect News followed by asking where on the curve Brazil might elect to issue, Alvarez responded that longer would make more sense than shorter.

"My sense is that they are going to extend as far as they can," he said. "There is really no reason for them to do anything on the short end, or even on the mid-duration part of the curve.

"With this sort of euphoria and this sort of demand you probably want to take it out as far as you can."

A 'severe' rally

Another market source simply characterized the present rally in EM as "severe," and contended that there was "panic buying" taking place on Friday.

When U.S. non-farm payroll numbers proved to be a disappointment early in the Friday session, the source said that the Brazil 2040 drooped to the vicinity of 129.50 bid, whereupon people began scrambling to cover shorts, creating a squeeze.

Approximately an hour after Alvarez hung up the phone this other source had the Brazil 2040 closing at 131.10 bid, 131.25 offered, for a spread to Treasuries of 221 bid, 219 offered.

Earlier Friday an investor, noting that non-farm payrolls rose by 108,000, well below the consensus of 200,000, gave a spot on the EMBI-plus of 232 basis points, four tighter on the day.

Toward late afternoon another source saw it six tighter.

The new issues

Traders and other sources told Prospect News on Friday that recent new issues seemed to be holding firm.

Two new bonds from the Republic of Philippines, which priced a $2.10 billion transaction (B1/BB-/BB) earlier in the week, were both up Friday, according to a trader who focuses on Asian paper.

To recap, on Wednesday the Philippines priced $1.5 billion of 7¾% 25-year bonds at 98.641 to yield 7 7/8%, and €500 million issue of 6¼% 10-year notes at 99.112 to yield 6 3/8%.

The trader saw the dollar-denominated 7¾% bonds going out Friday at 99.375 bid, 99.75 offered, up half a point.

Meanwhile the euro-denominated 6¼% bonds finished the day at 100.875 bid, 101.375 offered, up half a point to three-quarters of a point.

"There were good flows throughout the day," the source commented.

New CVRD bonds lifted

Early Friday a buy-side source saw Brazilian mining firm CVRD's new 6¼% bonds due 2016 at 100.30 bid, up a quarter to a half, with the market, from their 99.97 issue price.

"There is pretty good sentiment," the buy-sider said. "Inflows into the asset class are still good," referring to $111.5 million of net inflows to the dedicated emerging markets bond funds for the week to Wednesday, reported on Thursday by EmergingPortfolio.com.

"There is buying across every country," the buy-sider asserted.

In a Friday press release CVRD said that the new $1 billion corporate issue had been oversubscribed by 2.5 times, and it was placed with over 175 investors from the United States, Latin America, Europe and Asia.

According to CVRD, 75% of the Baa3/BBB issue was placed with high-grade bond investors.

Further, according to CVRD, the 6¼% bonds, which priced at a 190 basis points issuance spread, carried the lowest spread over U.S Treasuries ever paid for a 10-year Brazilian bond.

Roger Agnelli, CVRD's chief executive officer, commented: "This was an excellent transaction, which took advantage of the good conditions prevailing in global capital markets, and its success reflects the strong market confidence in CVRD's financial strength."

TuranAlem parades a perpetual preferred

As investors were focused Friday on the secondary market, very little rattling was heard from out along the pipeline.

Kazakhstani corporate issuer Bank TuranAlem will begin a roadshow Wednesday in Singapore for an offering of dollar-denominated hybrid tier I perpetual preferred securities (Baa3/B+).

The size of the deal, which comes via special purpose vehicle BTA Finance Luxembourg SA, remains to be determined. However a source said that the market anticipates between $100 million and $150 million.

Credit Suisse First Boston and ING are the underwriters.

A buy-side source commented that TuranAlem's perpetual joins a growing parade of issues using the structure, which began in 2005 with Brazilian corporates.

"It seems to have traction, particularly among Asian investors," the buy-sider said."

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