Very oversubscribed Aries prices; PDVSA asks for filing extension; emerging market paper trades higher

By Reshmi Basu and Paul A. Harris

New York, July 1- Emerging market debt edged higher Thursday even as Germany's repackaging of Paris Club debt from Russia fetched more than $20 billion in demand.

Aries Vermogensverwaltungs GmbH, a special purpose entity for securitizing the Russian Federation's Paris Club debt, priced three tranches of securities (Ba2/BB+) in a massively upsized transaction.

The issuer sold €2 billion of floating-rate notes due Oct. 25, 2007 at par to yield six-month Euribor plus 325 basis points. Price talk was six-month Euribor plus 300-325 basis points.

Aries also sold €1 billion of 7¾% fixed-rate notes due Oct. 25, 2009 at par to yield 7.764%. Price talk was 7¾%-8%.

In addition, Aries sold $2.4355 billion of 9.6% fixed-rate notes due Oct. 25, 2014 at par to yield 9.604%. The 9.6% area price talk had been revised from 9¾%-10%.

Deutsche Bank Securities and Goldman Sachs & Co. ran the books for the Rule 144A/Regulation S issues.

The deal was increased more than 10 times from the originally announced size of $250 million and €250 million.

"The market was pretty strong, especially seeing as how Russia came with its $6 billion worth of paper," said a trader.

"There is always money for cheap deals," the trader added. "And it looks like a lot of hedge funds participated on a huge amount of leverage. The hedge funds always have dry powder.

"It's something we're watching because we haven't seen this much supply in a long time.

"But so far things are holding firm," noted the trader.

The deal was very well received because it trades like a Russian bond, which is a strong credit, said a buy-side source, also adding that the deal was cheap.

Russian paper tightened about 10 basis points on a yield basis, according to the buy-side source. "And pricing is not quite at 101. They did better in the morning at the break, since then nothing."

The Russian benchmark bond due 2030 was down 0.126 to 91.187 bid at 5 p.m. ET. Its bond due 2018 was down half a point to 125½ bid, the bond due 2005 was bid at 104.3, down 0.85. Both the bonds due 2007 and 2010 were quoted unchanged

Russia was down. Its component of the JP Morgan Global index fell 0.17%. Its spread to Treasuries widened three basis points to 307 basis points during Thursday's trading.

Copycat deals to come?

Orders for the deal were put at $20 billion. With that level of demand, the deal has been on everyone's radar because it may herald similar offerings. When Germany announced that it would repackage bilateral debt, Russian paper immediately slid as unexpected securities were dumped on the market.

"This is a very large size deal for our market," said the trader.

"If it takes gunpowder from a lot of people who would otherwise be buying other emerging markets debt it will hurt the technicals of EM.

"And of course if they have to sell existing bonds against this, it hurts."

However, some investors have been noting that fear over other copycat deals is unwarranted, given that it may be too expensive for a creditor country to issue such a deal.

"They have to have needs. Germany had a need because it was not meeting its other revenue requirements," said the buy-side source.

"And they thought this was a good way to meet it without issuing debt."

PDVSA seeks SEC extension

Elsewhere, state-owned Petroleos de Venezuela (PDVSA) is seeking an extension from the Securities & Exchange Commission for filing its 2003 financial results. The deadline was Wednesday, June 30.

The company attributed the delay to the continuing fallout from the work stoppage in December 2002 and January 2003.

Since then, PDVSA said, it has been working to re-establish its Venezuelan operations and internal controls.

"Nevertheless, PDVSA's financial reporting systems continue to suffer delays in the generation and preparation of financial statements," the company said in its Thursday SEC filing.

"In particular, there were delays in closing the year-end accounting records and in the analysis of accounts.

"As a result, PDVSA's external auditors have not been able to complete their fieldwork and are not yet in a position to issue an opinion on PDVSA's financial statements."

However, market sources told Prospect News on Thursday that the news has not impacted the prices of its existing debt, particularly in light of the tender offer announced earlier in the week.

"The price they're willing to buy it back is 10 points above where it was a week and a half ago," said the trader.

The news will not impact the paper. In fact, it may be more incentive for people to tender.

"Basically, the price moved a week before the tender was announced, probably seven or eight points on related buying.

"And when the tender came out they moved up another two points and then got stuck about a point below the tender price, reflecting some deal risk.

"They're already at pretty lofty levels," said the trader.

The PDVSA bonds due 2012 were quoted at 102.75 bid, 103.75 offered Thursday.

"They might be up a quarter of point today," the trader added.

Tender prices on offer range from $880.00 per $1,000 principal amount plus a $30.00 consent payment to $1,087.50 plus a $20.00 consent payment or €1,007.50 plus a €20.00 consent payment, depending on the particular issue involved. The 8½% notes due 2012 have a tender price of $1,040.00 per $1,000, including the consent payment.

PDVSA Finance Ltd. is seeking to buy back any and all of nine series of notes for a total of up to $2.5 billion and €88.4 million.

Fed caught off guard?

Meanwhile more concerns were expressed about the Federal Reserve moved aggressively enough on Wednesday when it raised the federal funds target rate by 25 basis points - a move that was widely expected. In its written statement, the Fed reiterated its language that it will increase rates at a "measured" pace.

While the market reacted favorably, some investors are wondering if the Fed is doing enough to contain inflation.

The market did have some anxiety prior to the hike, according to the buy-side source.

"At the same time, they [the Fed] will continue hiking. And probably as time goes by, they will find out that their hiking needs will be higher or the pace will have to be accelerated," he added.

The concern that the Fed is behind the curve was priced mildly in before the hike.

"It was taken off after the hike. I think that will resurface," noted the buy-side source.

Market mixed

Emerging market paper performance was mixed with quiet movements Thursday as Brazil and Mexico performed relatively well compared to other major players in Latin America.

Brazil and Mexico's paper firmed up from Wednesday's response to the Fed hike and perhaps, from more position adjustment, according to Enrique Alvarez, Latin American strategist for think tank IDEAglobal.

"All of the others have seen a very slight drift to the downside," he said. "Uruguay in a delayed movement has been on the upside.

Treasuries' strong performance in the United States has been a catalyst for Mexico to continue to rise.

"It's all off the same old news as far as Latam is concerned, the market is partially satisfied with what we saw with the Fed.

"And I think it's basically catching its bearings now to see what the next price driver is going to be," said Alvarez.

"In the interim, you've seen some interest in Brazil which has driven the market up."

The Brazilian benchmark bond due 2040 was up 2.35 to 93¾ bid.

Its component of the EMBI Index rose 0.63%. Its spread to Treasuries tightened eight basis points to 638 basis points.

Mexico's bond due 2008 was up 0.350 to 113¼ bid while the bond due 2016 was up one point at 141 bid. Its component of the EMBI jumped 0.30%. Its spread to Treasuries tightened 11 basis points to 207 basis points.

Overall the JP Morgan EMBI Global index was up 0.25%. Its spread to Treasuries tightened four basis points to 478 basis points.

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