Economic fears hit emerging markets; Argentina leads drop; Maxcom sets guidance for $25 million add on

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, Aug. 28 - Emerging market bonds staged a widespread retreat on Tuesday, pushed lower in response to the latest bad news about the U.S. economy, which revived fears of the spreading ripple effect from the U.S. subprime lending industry meltdown.

Argentina was in its usual position of leading a declining market lower. Fellow high-beta credit Venezuela was also among the large losers. Ecuador would normally also be in that category, but was helped by indications the country will service its debt in 2008. Outside of the Latin American names, Turkey's bonds were seen lower in response to the successful election as president of Foreign Minister Abdullah Gul, considered to have an Islamist orientation, which has disturbed some secularist factions of Turkish society, notably the country's military.

The primary market had little to offer investors who are still looking to the weeks ahead hoping for a fully functional pipeline.

Mexico's Maxcom Telecomunicaciones, SA de CV made good on Monday's rumors by providing a modest $25 million add on to its 11% notes due in 2014.

Spreads wider

U.S. Treasuries rallied as stocks and other relatively risky investments such as emerging markets tumbled on renewed concerns over the health of credit markets and further deterioration in the troubled housing sector. U.S. stocks saw their biggest drop in three weeks, with the bellwether Dow Jones Industrial Average down 280.28 points, or 2.1%, to 13,041.85. The Nasdaq and S&P 500 indexes were each also down more than 2% on the session.

The catalyst of this retreat from risk and flight to safety was data showing U.S. house prices suffering their worst decline in at least 20 years in the second quarter. Meanwhile, consumer sentiment took its sharpest plunge in nearly two years in August. Release of the minutes of the Federal Reserve's Aug. 7 meeting apparently yielded none of the signs the market was seeking within its oblique wording to indicate that the central bank is likely to cut its key federal funds rate anytime soon.

That pushed benchmark Treasury yields to their lowest levels since March, with the 10-year's yield dropping as low as 4.51% intraday, before finishing at 4.52%, down 5 basis points from Monday's close. Shorter government paper was up even more, with two-year yields falling 13 basis points to 4.09%, and three-month bill yields down 17 bps to 4.33%.

That, in turn, led to a widening of spreads between Treasuries and emerging markets debt, the key measure of investor tolerance of risk, or aversion to it. The widely followed EMBI+ index compiled by JP Morgan & Co. showed average spreads having widened 10 bps on the day to 237 bps.

Argentina is downside leader

"We had sort of a repeat performance, with the Dow serving as a risk-aversion gauge for the LatAm debt markets and the LatAm debt markets responding in a linear form to what occurred on the Dow - in other words, the Dow sinking" and a lot of the high-beta credits on the LatAm debt side also taking a plunge, said Enrique Alvarez, head Latin American debt strategist for IDEAGlobal, an international financial research company.

Besides those normally risky high-beta credits such as Argentina, Venezuela and Ecuador, he said "you've had some other noteworthy losers on the day such as Colombia, we think just making up some ground that they had been holding without a whole lot of reason before.

"It was a pretty negative day, wider by 10 bps, pretty much in synch with what's coming on a noise basis from the U.S. side. "

Argentina, Alvarez said, "was by far the most hit - it looks to be that in any situation where we have a lot of pressure, Argentina leads the way. It looks to be an easy short in the market place, and I think that's what people are pursuing. It was off 3.5%."

The country's benchmark dollar-denominated 8.28% bonds due 2033 were quoted down 2½ points to 83 bid. Meanwhile, the cost of hedging against a default in the bonds via credit default swap contracts was up 35 bps to 525.5 bps.

Ecuador debt service projections limit loss

Alvarez said that Ecuador "held its own somewhat better - it was only off 1.3% overall." He cited as a factor the news that the Quito government put out its projected budget for 2008, "and it included a pretty normal range amount for what would be servicing of external debt, so I think that was a positive."

Recently installed economy minister Fausto Ortiz said that the budget includes $930 million earmarked for interest payments and $1.05 billion for amortization, collectively accounting for 19.8% of the approximately $10.5 billion budget.

"I think that the interpretation is there that to a large degree, the monies are on hand to continue servicing debt. They didn't really make large mention or any type of insinuation of having to revamp their outstanding debt or coming to the market to seek some sort of restructuring," as had been the case during the tenure of Ortiz' predecessor, anti-debt hardliner Ricardo Patino, "so I think that was a positive sign."

Venezuela, Colombia head downward

Also among the larger losers, Alvarez said, "you had Venezuela, as normal in these situations under pressure, and again, Colombia was a surprise in that it absorbed a lot of selling pressure today. I think that was more of a catch-up selling rally than anything else."

Venezuela's benchmark 9¼% notes due 2027 lost nearly 2 points on the day to 98, its yield quoted higher more than 20 bps to 9.47%.

Colombia's 11% peso-denominated bonds due 2020 fell, as their yield was seen jumping nearly 15 bps on the day to 10.63%.

Also in the region, Brazil's benchmark 11% dollar-denominated bonds due 2040 were quoted off 3/8 point at 131.75.

Credit crunch catches up with EM

The strategist acknowledged that the latest rout comes just several days after the Latin American market had shown considerable strength; the Venezuelan bonds, for instance, had been on the rise since late last week.

"There are waves of sentiment changes involved in all of this, but I think the underlying events are not much different from what they were at the start. I think that the U.S. credit market pressure is something that the emerging markets will not be able to avoid over time, because what you're having is a reassessment and repricing of risk; being that we're a riskier category, we'll be involved over time in the same type of event."

LatAm tracking Dow up and down

He said that "the market finds it satisfactory to trail the prevailing risk gauge, which in this case is the Dow. On days where you see new developments, which was the case today - and I'm not referring to the economic data or the Fed minutes - I think there are more profound events that are occurring behind the scene, and they are not catching a lot of media attention in the U.S. - I think that's what's causing additional anxiety in the market.

"You have additional names coming out of Europe taking losses, speculation about additional names being involved in losses. This element called conduits to asset-backed commercial paper and how that is stressing the finances of the banking world, and I think this is becoming an important element. I think people are very much in focus with this, and it's causing additional pressures on the market - not only emerging markets, I think it's causing pressure as far as any risky financial market."

Turkey lower on Gul election

Outside of the Latin sphere, Turkey's bonds were seen lower in apparent response to the election of Abdullah Gul as the country's president - the first time a candidate with a background in political Islam has won the prestigious and symbolically important post.

That has raised the hackles of secularist factions in Turkey's society, including the military, which issued a strongly-worded statement ahead of Gul's easy parliamentary victory, indicating that the armed forces would be vigilant against any perceived threat to the traditionally secularist nature of the Turkish state.

That veiled threat against Gul's new government was reflected in drops in Turkish stocks, bonds and its lira currency Tuesday. The lira-denominated 2009 bonds' yield rose to 18.38% from 18.26% at the close on Monday.

Its dollar-denominated 2030 benchmark bond was also seen lower on the day.

Reading the primary runes

Far from leading the way to a rash of new issues, Maxcom's small deal will likely face market scrutiny alone.

"It adds more clarity to pricing risk," said a portfolio manager who specializes in emerging markets, who added: "Any inklings will be followed pretty closely."

The portfolio manager expressed long-term optimism, but did not exaggerate the add on's importance although he conceded that "the reopening is a good thing."

Overall, "it's going to be choppy for a while based on the lack of resolution based on subprime implications for the global economy," the manager said.

"We will be subject to some pretty volatile conditions for another month," the manager added.

Tuesday was yet another example of volatility as the VIX index continued to rise, reaching 26.35 at the market's close.

After what a market source called "a volatile two months," the market will likely go through a stabilization phase rather than a more violent instant correction, the source said.

Movement in Mexico

Maxcom announced guidance in the 103 area for a $25 million add on to its 11% senior notes (B3/B) due 2014.

Morgan Stanley will have the books for the deal which is expected to price in the near term.

The notes will not be fungible for 40 days after pricing or until liens are perfected. If the liens are not perfected by Nov. 1, 2007 the coupon steps up 25 basis points.

Maxcom also has plans to sell $175 million of common stock in an initial public offering, with proceeds being used to exercise the claw-back for 35% of its 11% notes.

Morgan Stanley will also underwrite the stock issue, which is scheduled for sometime in 2007.

Combined proceeds from the add on and the IPO will be used for capital expenditures and general corporate purposes as well as the refinancing of debt.

The "last-mile" telecommunications firm is based in Mexico City.

Elsewhere, Morgan Stanley priced a self-led Mexican Ps. 1.5 billion 20-year eurobond deal at par to yield 8.47%.

The price came on Monday at a spread of 65 basis points over the sovereign peso curve.

New York-based Morgan Stanley sold the issue to both local and foreign investors.

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