Emerging market debt sees red on technicals; Brazil reopens 2037 global bonds

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Jan. 23 - Emerging market debt posted losses Tuesday despite a rally in oil prices and higher U.S. equities as new external debt weighed on technicals.

Tuesday's primary market saw several issuers' tap the dollar market for a total of $1.15 billion while the euro market saw €1.170 billion in fresh external debt.

On the sovereign side, there was new supply from Brazil and Hungary.

Brazil sold an additional $500 million of its 7 1/8% global bonds due 2037 (Ba2/BB/BB).

The issue priced at 106.338 to yield 6.635%, or a spread of 173 basis points more than Treasuries.

The deal came slightly wider than price guidance of 172 basis points.

Bear Stearns and Merrill Lynch were bookrunners for the offering of Securities and Exchange Commission-registered bonds.

The additional securities bring the total size of the deal to $2.5 billion.

Meanwhile in the secondary, the 2037 bonds were spotted lower from the previous close at 107 bid, 107.10 offered, down 0.70.

The Republic of Hungary sold a €1 billion offering of long 10-year bonds (A2/BBB+/BBB+) at 99.384 to yield a spread of mid-swaps plus 21 basis point.

The deal was lead managed by BNP Paribas, Dresdner Kleinwort and ING.

Latin American corporates tap

Moving to corporate primary news from Latin America, Corporacion Andina de Fomento (CAF) reopened its 5¾% bonds due 2017 (A1/A/A+) to add $250 million.

The deal priced at 99.503 to yield 5.815%, or a spread of 102 basis points more than Treasuries.

Merrill Lynch was the lead manager for the sale of Securities and Exchange Commission-registered bonds.

Corporacion Andina de Fomento, which has headquarters in Caracas, Venezuela, is a multilateral regional bank for Andean development and integration.

The reopening brings the total size of the deal to $500 million.

Argentine Banco Macro SA placed a $150 million offering of 10-year senior notes (B2//B+) at par to yield 8½%.

The deal came inside of price guidance for a yield of 8 5/8%.

Credit Suisse was the bookrunner for the Rule 144A (with registration rights) and Regulation S transaction.

UTI Bank issues $250 million

Moving to the subcontinent, India's UTI Bank Ltd. placed a $250 million offering of three-year floating-rate notes (Baa3/BB-) at 99.809 to bear a coupon of three-month Libor plus 40 basis points.

Citigroup and Deutsche Bank were bookrunners for the Regulation S transaction, which was issued via the Singapore branch of UTI Bank.

The deal comes off the issuer's euro medium-term note program

Elsewhere, Polish steel producer Zlomrex International Finance SA priced a €170 million issue of seven-year senior secured notes (Caa1/B) at par to yield 8½% on Tuesday.

The yield came at the tight end of the 8½% to 8¾% price talk.

Deutsche Bank Securities ran the books for the Rule 144A for life and Regulation S notes.

Vitro ups deal size

In pipeline developments, Mexican glass-manufacturer Vitro SAB de CV upsized to $750 million from $500 million its two-part offering of senior unsecured notes (B2/B) on Tuesday.

Vitro has talked a $250 million minimum tranche of five-year bullet notes at 9%.

Meanwhile the company has talked a $250 million minimum tranche of 10-year notes at 9½%. The 10-year notes come with five years of call protection.

The Rule 144A with registration rights/Regulation S deal, which is being led by Morgan Stanley, Credit Suisse and Lehman Brothers, is expected to price on Thursday.

Also issuing price guidance, JSC Tsesnabank (/B-/B-) talked its dollar-denominated offering of three-year eurobonds in the area of 10 1/8%.

The issuer, which is incorporated in Kazakhstan, has mandated Citigroup and Dresdner Kleinwort to run the Regulation S transaction.

And JSC Alliance Bank of Kazakhstan is talking its euro-denominated benchmark-sized offering of five-year fixed rate notes (Ba2//BB-) in the area of mid-swaps plus 400 basis points, which is equivalent to a yield in the 8.16% area.

HSBC and UBS are managing the Regulation S sale, which will be issued via ALB Finance BV, a Netherlands-based special-purpose vehicle.

EM slips on technicals

Overall, emerging market debt ticked lower amid fresh supply from Brazil as well as other issuers. At the end of the session, the JP Morgan EMBI Global index lost 0.08% while spreads narrowed by four basis points versus U.S. Treasuries as the asset class outperformed the aggressive sell-off of U.S. government bonds.

Ecuador's bonds continued to retreat Tuesday as market players feared a possible debt default by the newly installed government of president Rafael Correa.

The South American country's benchmark 10% notes due 2030 - down sharply ever since last week, when Correa and his economics minister, Ricardo Patino, indicated that they envision forcing creditors to accept at least a 60% haircut on their holdings - were seen down another 2 points Tuesday, to 67, the lowest those bonds have been in 2½ years.

Since Correa's election in November, Ecuador's bonds have retreated some 30 points as the new president has repeatedly attacked the country's $11 billion foreign debt burden as "illegal", "corrupt," "unfair and illegitimate," and has said that Ecuador will seek advice from Argentina - which defaulted on nearly $100 billion of debt in 2001-2002 and forced its creditors to accept longer maturities and sharply reduced principal amounts of new debt in exchange for the old defaulted issues.

Fitch Ratings cut Ecuador's foreign debt rating two notches to CCC from B- previously. That follows last week's one-notch cut to CCC- by Standard & Poor's, with the ratings agencies citing the heightened prospect of a default.

By the end of the session, the country had seen its spreads widen by 59 basis points.

Among other issues, the Ecuadorian bond due 2012 gave up 3 points to 73 bid, 75 offered while the bonds due 2015 lost 2.50 to 72.50 bid, 74.50 offered.

Venezuela up with oil

Meanwhile Venezuela emerged as the session's out-performer on the back of a rebound in crude oil prices and short covering.

In trading, the Venezuelan bond due 2027 added 0.55 to 123.75 bid, 124.15 offered.

Asia steady

A trader in Asia meantime - noting the market there was overshadowed by the volatile developments in Latin America - said that "clients again were incredibly quiet for a second day in a row," with price action "almost non-existent, which was more or less the case for the better part of the day" - that is, until Treasuries sold off by 5 basis points in the long end.

He said the Asian market "held in fairly well during the morning because equities were up, but as Treasuries touched the lows of the day, the market across the board traded lower and spreads finished one to two basis points wider."

He said the market "more or less felt like it wanted to go tighter for most of the morning, tracking the move higher in equities, especially after the pullback in the S&P [equity index] yesterday [Monday], but the sell-off in Treasuries pretty much overwhelmed that desire, and the market got hit pretty hard."

He said that "everything - corporates and sovereigns, high yield and high grade - moved in tandem. If anything [stood out], ICICI [the recently issued bonds of the Indian bank] remains pretty well bid, while Philippines [sovereign debt] at the margin remains a little weaker."

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