Emerging market debt well bid on repricing of U.S. growth story; Brazil brings $1 billion reopening

By Reshmi Basu and Paul A. Harris

New York, Sept. 6 - Emerging market debt outperformed U.S. Treasuries Tuesday as investors responded favorably to signs of strength in the U.S. economy while Brazil reopened its bond due 2025 to add $1 billion.

There "definitely seems to be a better bid," observed a buyside source. He added that investors appeared to be more comfortable with the growth story in the United States, given the retreat seen in Treasuries and in oil prices.

U.S. crude closed down $1.61 to $65.96 a barrel, falling below last week's high of $70.85. Meanwhile the yield on the 10-year note closed at 4.09%, up from Friday's 4.04%.

During the session, Treasuries repriced the effects of the devastating Hurricane Katrina.

"There has not been a lot of movement in Treasuries," said a sellside source.

"There was also the oil factor which is a very large concern for many countries and many issuers."

During the session, the Brazil bond due 2040 was up 0.20 to 119.80 bid. The Venezuela bond due 2027 lost 0.55 to 111.10 bid. The Russia bond due 2030 lost a quarter of a point to 114½ bid.

"Spread product in general is doing a little bit better," the buyside source remarked.

Brazil reopens bond due 2025

In the primary market, the Federative Republic of Brazil reopened its bonds due 2025 to add $1 billion (B1/BB-) in a drive-by on Tuesday. This brings the total size of the deal to $2.25 billion.

The oversubscribed bonds priced at 102 1/8 to yield 8.52% or a spread of 417 basis points over Treasuries.

The retap was increased from the original $750 million.

Part of Brazil's goal was to set an amount to promote trading in the bonds, according to the sellside source. Hence the sovereign has been retapping outstanding debt instead of issuing new bonds in the last few transactions.

"They wanted a certain amount outstanding, so they wanted to complete this issue because it only had $1.25 billion."

The retap will add more liquidity, the source commented, who added that according to EMTA's trading statistics, the 2025 bond was not very liquid.

"We saw a lot of demand," added the source. "We saw a lot of demand from Europe, more than we normally see."

Furthermore, political noise did not dampen demand, which bodes well for the credit, said the source. The book size was heavily oversubscribed at $3 billion, he observed.

And new supply did not impact the Brazilian curve. On the long end, the curve was between five and eight basis points tighter. And on the short end, the curve was between 10 and 15 basis points tighter.

Proceeds from the sale may used for funding for next year, said the sellside source. But it may also be used towards the C-bond buyback, he added.

The retap was well received, which denotes a good start for the market after Labor Day, commented the sellside source. This is the first emerging markets issue to price after the holiday weekend, marking the end of the summer lull.

Bear Stearns and Morgan Stanley were lead managers for the transaction.

Large pipeline

Looking ahead, the buyside source said he expects to see the pipeline increase substantially.

"And you've really seen it as far as high yield, with a couple of deals being announced today [Tuesday]," he noted.

"I expect to see more out of EM. The only thing is that most of the sovereign stuff is done, so we're talking about pre-funding for next year."

The buyside source added that corporates would be tapping capital markets. And four corporates did indeed announce deals on Tuesday.

Copper producer Corporacion Nacional de Cobre de Chile (Codelco) plans to start a roadshow for a $500 million offering of bonds (Aa3/A) this Thursday in Hong Kong.

The roadshow will next move to Singapore on Friday and then off to London on Monday. The U.S. leg of the roadshow will run from the following Tuesday to Thursday.

These bonds are expected to carry intermediate to long-term maturities.

Deutsche Bank and JP Morgan are lead managers for the Rule 144A/Regulation S transaction.

Also in the primary market, Brazilian engineering and construction firm Construtora Norberto Odebrecht SA (CNO) will begin a roadshow on Monday in Singapore for a $150 million offering of perpetual notes (BB-).

The notes, which will be issued by subsidiary Odebrecht Overseas Ltd., will subsequently be presented to investors on Tuesday, Sept. 13, in Hong Kong and on Wednesday, Sept. 14 in Zurich.

Credit Suisse First Boston has the books for the Regulation S offering. Deutsche Bank Securities will be a joint lead manager.

The notes, which will be guaranteed by CNO, come with five years of call protection, after which they will be callable quarterly at par. The notes will contain no dividend step-up.

Next, Russia's Gazprombank will begin a roadshow Thursday in Hong Kong for its benchmark-sized dollar-denominated offering of senior unsecured fixed-rate loan participation notes (Baa2/B+).

The roadshow moves to Singapore on Friday, then on to London on Monday, Switzerland on Tuesday and to Germany on Wednesday, Sept. 14.

Citigroup and Dresdner Kleinwort Wasserstein are managing the Regulation S offering.

The notes will have a seven-year or 10-year tenor.

And United Bulgarian Bank set initial price guidance for a €100 million offering of three-year bonds (BBB-/BBB) in the area of mid-swaps plus 45 basis points area.

Deutsche Bank and the National Bank of Greece are joint leads for the Regulation S transaction.

On the sovereign side, the Republic of Poland will start a roadshow for a dollar-denominated offering of 10-year global bonds (A2/BBB+) on Thursday in London.

The roadshow will then move to New York and New Jersey on Monday, then stop in Boston and Philadelphia on Tuesday.

JP Morgan and Lehman are running the Securities and Exchange Commission-registered offering of global bonds.

The transaction may also include a long-dated tranche.

Spreads so tight

Emerging market debt continued to grind tighter Tuesday. The JP Morgan EMBI+ Index tightened by four basis points to 283 basis points more than Treasuries.

The buyside source said there is no good explanation as to why the market continues to trade so tight. He said it does so "because it can." But there is still good growth underlying the market.

"And in emerging markets, there's definitely money flowing in," he commented.

"I think the people who are holders tend to be pretty good holders, so it's a pretty clean market.

"The right macros, the right monetary policy and the right market positioning - it's all combined for tight levels."

Derailment may come from the Treasuries side or a change in monetary policy or a big economic or political story.

"The one thing that the EM market has going for it is that oil helps more people than it hurts. So in a lot of markets, high oil is something that would puncture it. That's not necessarily bad for emerging markets."

Moving ahead, the buyside source is not adjusting his position heading into September.

"Same strategy. I'm just positioned more defensively in general. And while three months ago, I was defensive in EM and aggressive in high-yield, which turned out to be a pretty good trade, [now] I'm just being defensive in general."

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