Emerging markets rally on dollar, Treasury strength; VimpelCom prices, Turkey talks

By Paul A. Harris

St. Louis, Feb. 7 - Some notable muscle in the dollar and in long-dated U.S. Treasury debt sparked a rally in emerging markets debt on Monday, according to sources.

New issue terms were heard on a quick-to-market dollar-denominated deal from VimpelCom, which price at the tight end of talk despite the company's being dogged by the tax commissars.

Elsewhere Turkey showed up with a euro-denominated benchmark 12-year piece of paper that it expects to price on Tuesday.

Russian telecom VimpelCom returned to the bond market with $300 million of five-year paper on Monday, and priced it at par to yield 8%, at the tight end of the 8% to 8 1/8% talk.

UBS Investment Bank and JP Morgan ran the books for the quick-to-market debt refinancing deal.

One market source, citing the deal's tight-to-talk pricing, observed that Russia's second largest telecom appears not to have been penalized by investors for having been hit with what ultimately has become an $18 million back tax bill from the Russian Federation.

Philippines rally despite Chinese New Year

Trading was brisk Monday in Asian paper, particularly that of the Philippines, despite the start of Chinese New Year festivities, one trader said.

"The Philippines are caught in this credit-upgrade vortex," the trader commented. "There is nothing but buyers everywhere.

"The hedge funds are getting killed because they have all been short. And the real money guys are underweight and are buying.

"The Philippines is usually a 'two-by-two' or a 'three-by-three' market," the trader added. "Now guys are coming in and asking for offerings on $5 million and $10 million. It's unbelievable."

The trader noted that the underweights were likely predicated on an anticipated two-notch downgrade of the Philippines by Standard & Poor's.

However back in mid-January the ratings agency downgraded the country's long-term foreign currency rating by only a single notch - to BB- from BB.

"The real-money account-base has been underweight versus their benchmarks, since that ratings scare in the third quarter," the trader said.

"Since then three factors have buoyed optimism:

"* The Philippines stock market is at a five-year high, and appears to be going higher.

"* The Philippine peso is very strong; there's obviously a lot of U.S.-dollar debt, with the peso appreciating versus the dollar, and interest costs are going down.

"*And they are continuing to make good headway on tax reform on the legislative front.

"So all the guys out there who were underweight, versus their benchmarks are finding that there just aren't that many bonds out there.

"And they're getting crushed."

The trader spotted the Philippines 2025 issue at 114.625 bid, 4.5 points higher from 110 bid last Friday

"And the market is very strong," the trader asserted. "They're going higher from here."

Equitable PCI's notes come inside talk

The trader said that the forces at play in the Philippines' sovereign paper could also have come to bear upon last Friday's transaction from the Philippines' Equitable PCI Bank.

The Manila-based issuer, which is the third largest domestic bank in the Philippines, priced $100 million of 6½% three-year senior notes (Ba2/B) at 99.33 to yield 6¾%.

The print on the JP Morgan and HSBC Group-led deal was 50 basis points inside of the 7¼% to 7½% price talk.

One source close to the deal told Prospect News that there was in excess of $700 million of orders for the $100 million issue.

Latins rally with Carneval in full swing

With the streets of Rio de Janeiro and other capitals in the Latin and Caribbean realms swaying to the sounds of Carneval celebrations, Latin paper rallied Monday on the back of the strengthening dollar and the rally in longer-dated U.S. Treasury paper, sources said.

"Even though the Brazilians are out for Carneval, Brazil rallied very strongly today, which led the rest of the Latin sector up," one market sources said.

"You've had continuing gains in interest in buying long-term paper in Brazil, which is now spreading into the double-B category because you have seen a good advance in Colombia, and the same thing in Peru and Panama.

"So it's not only affecting the high-beta credits but you are having people come into the double-Bs also and pushing those up.

"People are focused on the fact that in the U.S. Treasury market there are some very interesting trades being put on: some yield-flatteners in the 10-30 year spectrum, basically pushing the prices on the 30-year higher, with yields coming into 4.42%. That's been very helpful to the Latin American category."

The source spotted the Brazil bond due 2040 at 118.60 bid, 118.70 offered, up 0.95.

Meanwhile, the source added, the Brazil EMBI closed with a spread of 404, tighter by eight points.

"The double-Bs had more activity that you would have expected," the emerging markets source added. "Panama made some strides in that sense. It was up 0.86, according to the EMBI.

"The overall leader in the category, Brazil, pushed up 0.48, but looked very strong throughout the day."

Meanwhile a trader reported seeing a "huge reaction to Treasuries," with prices up and spreads tightening.

"That held throughout the emerging markets," the trader said.

"With these levels I think we'll be seeing issuance this week."

The first such prospective issuer would appear to be the Republic of Turkey, which is talking a benchmark-sized euro-denominated 12-year eurobond at mid-swaps plus 215 basis points, and is expected to price the new paper on Tuesday, via Deutsche Bank Securities and UBS Investment Bank.

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