Emerging market debt tighter again; Uruguay reopens 2022 bonds to add $500 million

By Reshmi Basu and Paul A. Harris

New York, Jan. 24 - Emerging market debt continued to grind tighter Tuesday as investors continued to put cash to work.

In the primary market, the Republic of Uruguay reopened its 8% bonds due 2022 (B3/B/B+) to add $500 million in a drive-by Tuesday via Deutsche Bank and UBS Investment Bank.

The reopening, increased from $300 million, priced at 104½ to yield 7.52%.

This brings the total size of the issue to $700 million.

The original deal priced at 98.237 on Nov. 15, 2005.

Meanwhile Uruguay's bond due 2033 shed a quarter of a point in trading to 103¾ bid, 104¾ offered.

Next, Brazil's sugar and ethanol producer Cosan Industria e Comercio SA sold an upsized offering of $300 million in perpetual bonds (Ba2/BB) at par to yield 8½% via Credit Suisse and Morgan Stanley.

In the secondary, the issue traded up to 100.40 bid.

In other developments, the new issue from South Korean cable television company C&M

Finance Ltd. moved higher in the secondary. On Monday the company issued an upsized $650 million issue of senior unsecured notes (Ba2/BB+) in two par-pricing tranches.

One buyside source said he bought the company's paper after market because C&M was a "stable business" and that the 8½% yield was pretty good for a BB rated issuer.

Furthermore, he said he believed that there would be strong secondary demand.

Indeed, the issue had a strong start in the secondary with both tranches initially hovering around the 102 handle. By the end of the day, the two pieces were seen settling at 100¾ bid, 101¼ offered, up from the par issue price. Citigroup and Goldman Sachs & Co. were bookrunners.

Cash flows prop market

Emerging market debt moved higher yet again Tuesday as the rapid pace of inflows has shored up the asset class.

On-going jitters in core markets and high oil prices have not derailed investors' appetite for risk. And on Tuesday, emerging markets debt ratcheted in to another record low spread even as yields on U.S. government bonds shot up.

Treasuries slipped on the back of poor demand seen for the Treasury Department's auction of $10 billion in 20-year inflation-protected securities.

At session's end, the 10-year Treasury note stood at 4.39%, up from 4.37% on Monday.

"Today's [Tuesday's] move seems to be more that EM has basically not moved and it's been more of a [U.S.] Treasury sell-off," observed the buyside source.

"But spreads keeping tightening in," he added.

During the session, the JP Morgan EMBI+ Index tightened five basis points to 221 basis points more than Treasuries.

The Brazilian bond due 2040 slipped 0.10 to 130.80 bid, 130.85 offered. The Ecuadorian bond due 2030 was unchanged at 95 bid, 96 offered. The Russian bond due 2030 was unchanged at 113¼ bid, 113½ offered. The Venezuelan bond due 2027 lost 0.10 to 124.20 bid, 124.65 offered.

With valuations so tight, some sort of profit taking is bound to happen, noted a source. But the pace of inflows should provide a cushion from a heavy correction, he noted.

"I think some profit taking will occur, and it will probably occur soon," said an emerging market analyst.

"The demand for yield isn't going to go away any time soon, especially if the market continues to believe that the Fed is very close to finished, and that the equity market won't take off and drain the bid for credit product.

"So yes, spreads will widen in the next 2-3 months, but I think we're talking about a 50-100 bps correction, not a 300 bps-plus correction," he added.

On a global scale, a lot of people need more yield, remarked the buyside source.

"If you look at bond rates in the U.S., we're at low 4s. Europe, it's low 3s. And Japan, it's single digits."

And European investors have been much more comfortable in increasing their risk in emerging markets, he added.

Meanwhile, the buyside source said his strategy is to continue to reduce his exposure.

"I just don't think you are getting paid for your overall risk," he added.

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