Emerging market debt nudges lower on technicals; Southern Peru Copper sells $800 million in two parts

By Reshmi Basu and Paul A. Harris

New York, July 20 - Emerging market debt showed little reaction Wednesday after Federal Reserve chairman Alan Greenspan said there would be no break in the current monetary tightening campaign.

Meanwhile, Brazilian politics and too much supply continue to dampen market sentiment.

And even more issuers tapped the primary market Wednesday to take advantage of investor's quest for yield.

Southern Peru Copper Corp. sold an upsized offering of $800 million in senior notes (Ba1/BBB-/BB+) in a two-tranche deal.

The issue consisted of $200 million in 10-year notes and an upsized offering of $600 million in 30-year notes. The size of the 30-year notes was increased from $400 million.

The 10-year notes priced at 99.475 to yield 225 basis points more than Treasuries. That tranche came in tighter than price guidance. Guidance had been set at 240 basis points more than Treasuries.

The 30-year notes priced at 99.116 at a yield spread of 315 basis points more than Treasuries. That portion priced at the tighter end of price guidance of Treasuries plus 325 basis points area.

Citigroup and UBS Investment Bank were the joint lead managers for the Rule 144A/Regulation S with registration rights offering.

The company said the deal saw $4.2 billion of demand and was placed with 230 investors in the United States, Latin America, Europe and Asia.

Among deals being marketed, Jamaica's wireless operator Digicel Ltd. revised price talk for an upsized offering of $300 million in seven-year senior notes (B3//B) to 9¼% from 9½% area.

The notes, increased from $250 million, will be non-callable for four years. The issue will also carry senior subordinated guarantees.

Proceeds from the sale will be used to repay a shareholder loan, for capital expenditures and to prepay mezzanine debt.

JP Morgan and Citigroup are running the Rule 144A/Regulation S deal.

Chilean sugar producer Iansa Overseas (Cayman) talked its $100 million offering of seven-year senior unsecured notes (/BB/BB) at 7 1/8% to 7 3/8%.

ABN Amro has the books for the Rule 144A/Regulation S offering.

Out of Asia, Sarawak International Inc., a special purpose entity of the Malaysian state of Sarawak, talked its benchmark-sized offering of dollar-denominated 10-year bullet notes (Baa1/A-) at mid-swaps plus 95 basis points on Wednesday.

Deutsche Bank Securities is the bookrunner for the Regulation S offering.

And PT International Nickel Indonesia is headed to the international bond market with a $300 million offering of notes.

The notes, which are expected to come with a tenor of between five and 10 years, will likely launch in the late summer or early fall.

Morgan Stanley and JP Morgan have the bookrunning mandate.

Issuers are taking advantage of the liquidity conditions in the market. For instance, the government of Uruguay said it took advantage of favorable market conditions to price €300 million of 11-year bonds (B3/B/B+) at par to yield 6 7/8% on Tuesday.

A market source said this was the country's first issuance in euros in five years.

The 6 7/8% coupon was quite an improvement over the country's most recent issue. In May, Uruguay priced an offering of $300 million of 12-year bonds at par to yield 9¼%.

The new coupon is even better than the 7% coupon paid by its last euro-denominated bond, which totaled €225 million and was issued in 2000.

Some 70% of the new issue was allocated to European investors, 15% to U.S. investors, 10% to Uruguayan investors and the remaining 5% to investors in other countries.

The success of the bond issue has prompted the administration of Tabaré Vázquez to hint that should positive market conditions continue, it would likely issue more debt this year.

Uruguay is now firmly trading through Brazil, added the market source.

Deutsche Bank and UBS managed the euro-denominated transaction.

EM slips, Greenspan packs no punches

The U.S. Treasury market bounced back Wednesday after coming close to the two-month high on yield.

In his testimony, Greenspan signaled that more rate hikes lie ahead, but he did not unleash any surprises. Much of what he said had been priced into the market, remarked sources.

"Our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures," Greenspan said before the House Financial Services Committee.

"In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation," he added.

At first the Treasury market was rattled by Greenspan's comments but then skepticism appeared after the market chewed over his statements.

"I think the market believes that his actions will be different," said a Latin America debt strategist for Refco EM.

"Otherwise it would not be acting like this."

The yield on the 10-year note made a stab at 4.25% before settling down to 4.16%.

Even as the yield on the 10-year note marks a new range above 4.15%, emerging market debt will continue to look attractive by comparison, said an emerging market analyst.

"Significantly higher interest rates would definitely be a drag on EM, but I think we're a ways from getting there," he said.

"Even at 4.20%, rates are still very low by nearly any standard, so at these rates we can expect the market to remain well bid as the reach for yield continues.

"I think you need to see 10Y USTs above 4.50% before the stimulus from U.S. rates really starts to wear off," he added.

Sources said that the emerging markets brushed off Greenspan's comments, as the market concentrated on trying to absorb new issues.

During the session, the Brazil bond due 2040 added 0.45 to 118¼ bid. The Russia bond due 2030 added 0.062 to 110 5/8 bid. The Turkey bond due 2030 gained a quarter of a point to 141 5/8 bid. The Venezuela bond due 2027 slipped 0.30 to 104.60 bid.

Brazil weighs on market

As each day passes, more allegations of political corruption surface in Brazil, which in turn is weighing down the asset class.

In what is the worst scandal to hit the administration of president Luiz Inácio Lula da Silva, four senior members have resigned from the governing Workers' party (PT) in the on-going "bribes for votes" scandal.

"The scandal has been very negative," said the Refco strategist.

"We thought it was going to be a minor issue of corruption, but it has since escalated to the top levels of his government and to his close group of politicians," he said.

Moreover, there are more developments in the story as it refuses to die down.

"I think this is going to damage his [Lula's] reputation over the long run," remarked the strategist.

In a poll released Wednesday by Ibope, the government's approval rating fell to its lowest level this year, signaling that Lula is no longer insulated from the fallout.

The government's approval fell to 54% July from 55% in June.

"Whether he can be able to do the proper damage control and send the right signal remains to be seen," said the strategist.

C bond swap confusion

Since the extent of scandal is still unknown, investors were forced to act quickly when it came to the C bond swap, said the strategist, who said that analysis varied as to what the value of the exchange should be.

Brazilian Treasury said Monday that it would swap up to $5.6 billion of C bonds for new global bonds. In addition, Brazil said it may offer new global bonds in an underwritten offering for cash.

"There was a confusion in the exchange and not a lot of time for investors to think or let the market explain a little more about it."

The C bond was spotted down in the afternoon at 101 handle.

"And now it's close to 102. I think there has been some confusion. On the other hand, the possibility of keeping a bond that could be called at par... has also influenced investor's choice here.

"Instead of staying in a position that could be called, you could just do the exchange, really without any serious analysis," he added.

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