Brazil beef sector eases by ¼ to 1/2; Argentina CDS 5 bps tighter as 'exchange' expectations increase

By Paul A. Harris

St. Louis, Aug. 28 - Emerging markets were a bit firmer on Thursday, with credit default swaps better by 3 basis points on the day and the cash market ¼ point higher, according to a trader who focuses on Asian fixed income.

"It was a strong day in equities, and credit was playing catch-up," the trader said, adding that with zero liquidity in the market it is very difficult to quantify where everything is.

"There are no players around," the trader said.

The source spotted the Philippines' five-year CDS at 237 bps bid, 243 bps offered, and Indonesia at 257 bps bid, 263 bps offered.

The trader expects an Asian pipeline in September, and suggested that Korea could be first out of the chute, possibly with a $500 million five-year sovereign deal as early as next week.

Brazil beef sector

Elsewhere Thursday sources spotted Brazil's benchmark 11% bonds maturing in August 2040 unchanged on the day at a spread of 132 bps bid, as U.S. Treasuries were flat on the session.

The 10-year U.S. governments were yielding 3.78% at the New York close, a source said.

A trader in Latin American corporates noted that market participants were "already slipping into the holiday mode," with nothing much going on Thursday.

Having said it, however, the trader noted that Brazil beef names had been trading around, and were off ¼ to ½ point.

The source spotted the Bertin Ltda. 10¼% notes due 2016 at 102¾ bid, 103¼ offered.

The Independência SA 9 7/8% notes due 2015 were at 98¼ bid, 98¾ offered.

Marfrig Overseas Ltd.'s 9 5/8% senior notes due 2016 were at 98¾ bid, 99¼ offered.

And the Grupo Friboi 10½% notes due 2016 were at 95½ bid, 96½ offered.

"They're all off a little, but nothing crazy," the trader said.

Argentina tightens

Although it was still possible to hear the story both ways, a consensus seems to be developing among investors that Argentina will reopen the 2005 restructuring of its defaulted debt to creditors who held out from the original exchange.

That was the explanation of sources who saw Argentina's five-year CDS at 790 bps bid, 800 offered, 5 bps tighter on the day.

Argentina's CDS got as low as 785 bps bid at one point Thursday, said one source, who spoke after the close.

"The accounts seem to believe that [Argentina] will reopen it," the official said of the exchange.

Other market sources who spoke earlier said that rumors have been flying both ways.

"It really doesn't make any difference," one emerging markets syndicate official said.

"There is zero liquidity and zero activity."

Expecting a pipeline

This official believes that the Latin American new issue calendar will be relatively active in September, but not during the first week of the month.

And the source specified that new deals will cluster toward the higher reaches of the credit spectrum.

"There is no market for the lower quality stuff right now," the sell-sider said.

Asked what premium a higher quality Latin American issuer might expect to pay as a concession to the presently rocky leveraged markets, the source said: "In the investment-grade space we are seeing the market extract new issue premiums of between 35 and 50 basis points.

"There really hasn't been any activity in the emerging markets or high-yield," the official said, adding that those premiums are therefore more challenging to reckon.

"Actually the emerging markets have been much more stable than investment grade over the past year. From that perspective it would not be too surprising to see concessions be a little less.

"But it will be a price discovery process," the syndicate source added.

"The first deal will be a bit of a canary in the coal mine."

Taking advantage

Investors have been putting cash to work in emerging markets over the past couple of weeks, according to a money manager from an emerging markets mutual fund.

Asked if the secondary market has become cheap, the investor said "Some things definitely have cheapened, and it seems as though people have taken advantage of that."

For example, the investor said, high grade Latin American sovereigns seem cheaper, particularly Mexico, which has become more correlated to U.S. Treasuries.

"Weakness in the Treasury will impact Mexico," the investor asserted.

"A lot of people who invest in Mexico are more crossover accounts than dedicated emerging markets accounts, because Mexico is already investment grade.

"They compare Mexico to high grade corporates in the U.S. And it seems as though lately they've been seeing better opportunities in the similarly rated U.S. high-grade market."

The investor spotted the Mexico five-year CDS at 116 bps bid, 120 bps offered early in the New York morning, 3 or 4 bps tighter.

The EMBI Global Mexico sub-index was at a spread of 206 bps, 6 bps tighter, the source said, adding that the EMBI Global index itself was trading at a spread of 326 bps.

Aruba talks $50 million

Aruba has set talk for its $50 million offering of five-year non-callable notes (/A-/BBB) at Treasuries plus 295 basis points area, according to a market source.

The deal, which will not grow, could price as early as Friday.

RBTT Financial Group is the bookrunner.

The notes will be non-callable.

A trader said that Aruba does not have a large following among investors because of the relatively small sizes of its issues. It has six outstanding issues, all $50 million to $60 million in size.

The trader said that real-money accounts in New York tend not to look at these deals which are all taken down by the locals.

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