Emerging market debt softer on equities, oil; Ecuador powers ahead; Kexim sets talk

By Reshmi Basu and Paul Deckelman

New York, Feb. 12 - Emerging market debt stumbled Monday amid light trading volumes on the back of lower global equities as well as a slide in crude oil prices.

Meanwhile Ecuador surged ahead as the country reassured the investment community that it would meet its upcoming coupon payment within the 30-day grace period.

In the primary market, the Export-Import Bank of Korea (Kexim) set price talk for a euro-denominated offering of 10-year global notes (Aa3/A/A+) at mid-swaps plus 30 to 33 basis points.

The size of the deal has not been revealed but the issue is expected to be benchmark-sized.

Pricing may take place as soon as during early London trading hours on Tuesday, following the completion of Monday's roadshows in Paris and Frankfurt.

Citigroup, DePfa Bank plc, Deutsche Bank, Merrill Lynch & Co. and UBS Investment Bank are joint lead managers for the issuance of Securities and Exchange Commission-registered notes.

The notes will be non-callable.

EM softer on equities

With the exception of Ecuador, emerging market debt turned in a soft session as the market was squeezed by lower global stocks as well as declining oil prices.

Overall, the JP Morgan Global index was flat to a tad negative on a return basis while spreads tightened by 2 basis points, outperforming U.S. Treasuries, which has been pressured in recent sessions by inflation fears.

Market sources noted that the market is at a standstill, leading up to Wednesday's congressional testimony by Federal Reserve chairman Ben Bernanke, who will speak to the health of the U.S. economy.

Ecuador rallies

A trader in Latin American issues called Ecuador the outperforming credit of the day, seeing that country's 10% global notes due 2030 up 2½ points at 81.5 bid from Friday's closing levels around 79.

He said of the volatile credit "that has its own story to it every other day."

The headline story Monday was that Ecuadorian authorities had apparently ended the weeks-long guessing game over whether the Andean country will or will not make the scheduled $135 million Feb. 15 interest payment due on those bonds.

The answer is they will make it - but not on Thursday as scheduled.

The country's deputy economy minister Fausto Ortiz said during a Monday news conference in Quito that his government lacks the funds to make the payment on the 15th - but predicted that "before 30 days [the length of the grace period during which it can make the payment to avoid default], Ecuador will have the funds for the payment."

Ortiz said that before it can pay the interest on the global bonds, the country is obligated to tackle some $1.2 billion of back payments left by the former government.

Some analysts and other observers, however, do not believe that the reason for the delay in the payment is lack of funds or any other financial cause - they see the delayed payment as a gesture by president Rafael Correa to his supporters, indicating the Ecuador will play hardball in its negotiations with its creditors on the country's more than $11 billion of foreign debt. Correa campaigned hard against the debt when he was running for president, saying the obligations incurred by his predecessors were "corrupt" and "illegal," and since his election, he has said that Ecuador will seek to restructure that debt, which has alarmed bondholders and other creditors who fear they may have to take a haircut of as much as 60% on their paper.

Elsewhere, the trader said that Brazil's benchmark 2040 global bonds were tighter by a basis point at a bid level of 132.40.

At another desk, however, those bonds were quoted at 132.375, seen down 0.125.

The trader said that overall, bonds in his market were "maybe a basis point tighter" Monday, adding that "so really, not too much [was happening] in terms of spread basis. Overall, I guess we did OK, considering that U.S. bond market being a little weaker, and most of the equity market was weaker most of the time."

He added "we did all right - but we didn't do much, just ran in place."

Mexico slips on oil

In the Mexican bond market, yields on that country's peso-denominated bonds rose and prices retreated in line with a drop in the peso on foreign exchange markets largely due to the sharp decline in crude prices seen on Monday. Oil exports account for a large chunk of the Mexican economy and government revenues.

The 8% bonds due 2015 were seen down 0.13 to 101.64, as the yield widened 2 basis points to 7.74%.

In other news, sliding crude oil prices failed to unnerve Venezuela's external debt as spreads for the country tightened by 3 basis points.

Finally in other developments Monday, high-yielding carry currencies did not post a relief rally, despite the failure of the G-7 to explicitly note the weakness in the Japanese yen during its weekend meeting, noted an analyst.

Members of the G-7 fear that any harsh words against the carry trade may create a sudden unwinding of such trades, resulting in increased risk aversion that not only would harm FX markets, but would spill into other asset classes such as emerging market debt, added the analyst.

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