Emerging market debt up on dollar basis; Turkey taps market for third time in 2007

By Reshmi Basu and Paul Deckelman

New York, Feb. 15 - Emerging market debt extended gains amid a lackluster session Thursday but was unable to keep up with the strong rally in U.S. Treasuries.

Meanwhile in the primary market, issuers took advantage of investors' appetite for risk as the market continued to see a steady flow of deals.

The Republic of Turkey reopened its 7% global notes due 2020 (Ba3/BB-/BB-) to add $750 million via HSBC and UBS Investment Bank.

The reopening priced at 100.95 to yield a spread of 218 basis points more than Treasuries. Due to substantial demand, the deal priced tighter than initial guidance, which was set at a spread of 220 basis points. The book size was around $1.5 billion.

On June 7, 2005, the country printed $1.25 billion of the 2020 global notes. Thursday's additional issue brings the total size of the deal to $2 billion.

"Obviously, it did better than the reopening it [Turkey] did in the beginning of the year," remarked a sellside source, referring to the much maligned Jan. 9 deal, in which the sovereign reopened its global notes due 2016 and 2036 to add $1 billion, which fell far short of size expectations. Historically in January, the country taps the market with $1.5 billion of bond deals.

"They reopened a single issue and got $750 [million]," he added.

Turkey also sold €1.25 billion of 12.25 year global bonds on Jan. 24.

In the secondary market, the new supply weighed on the 2020 note. In trading, the issue was spotted down 0.25 from 100.875 bid, 101 offered the previous session.

But overall, the country saw its spreads narrow by one basis point versus Treasuries, unhampered by fresh supply, remarked a source.

In trading, the benchmark note due 2030 gained 0.19 to 153.75 bid, 154 offered.

Indian banks heat up

Turning to the subcontinent, the U.K. subsidiary of ICICI Bank sold a $500 million offering of five-year senior unsecured notes (Baa1) at par to yield three-month Libor plus 62 basis points.

The deal priced inside of guidance, which was set in the area of Libor plus 65 basis points. Furthermore, the size of the deal came at the top of the $300 million to $500 million range that was being shopped around by the issuer.

The book was 3½ times covered with 87 accounts from 25 countries.

Barclays Capital and Deutsche Bank were lead managers for the Regulation S deal, issued through ICICI Bank UK plc.

Indian banks have been in demand in recent weeks, bolstered by last month's decision by Standard & Poor's to raise India's debt ratings to investment grade.

That has put Indian banks on the map as the sector has outperformed the Asian high-grade subsector, sources have noted.

Thursday's deal from ICICI follows on the heels of several new issues from Indian banks over the last month, including debt from the State Bank of India.

Furthermore, the wave of new supply from the sector is to be expected, explained the sellside source.

"The local market is pretty big and there was no supply at all on the outside, so as a proxy to the government, which has not yet tapped the markets, everyone is trying to get to India this way," he observed.

On Thursday, a market source noted that five-year credit default swap protection in ICICI names had tightened by one basis point, keeping pace with most senior Indian bank debt, boosted by the "non-deliverable nature" of the new 2012 note.

In other primary news, Russia's Sibacademfinance plc sold RUB5 billion in three-year fixed-rate loan participation notes at par to yield 9 1/8%.

Citigroup and Standard Bank plc acted as joint bookrunners for the Regulation S transaction.

Ursa Bank, formerly known as Sibakadembank, will borrow the proceeds from the sale. Ursa is a leading regional bank in Russia.

And the National Bank of Abu Dhabi placed a CHF 150 million offering of three-year floating-rate notes (Aa3/A/A+) at 100.05 with a coupon of three-month Libor plus 10 basis points.

UBS Investment Bank was the bookrunner for the deal, which was issued under the bank's euro medium-term note program.

EM rides higher amid quiet market

Emerging market debt took a step back Thursday but remained firm as Federal Reserve chairman Ben Bernanke tempered his economic forecast from the previous session.

On Wednesday, financial markets blazed ahead, propelled by Bernanke's bullish outlook in which he said U.S. growth was still intact while inflation was expected to gradually moderate.

On Thursday, he toned down his outlook during his second appearance in front of congress, emphasizing that price pressures remained a concern for the central bank.

"The main concern is that people may think the inflation bubble is over. And as Bernanke was saying today [Thursday], people might be underestimating the growth cycle," noted the sellside source.

Bernanke's muted forecast somewhat dampened the momentum from the prior session, but the asset class remained firm Thursday. At the close, the JP Morgan EMBI Global index was flat on a spread basis while returns rose by 0.17%.

With Friday being an abbreviated trading day, the full impact of his testimony will not be understood until after the holiday break in the United States where both the primary and secondary market will be tested, noted the sellside source

"If next week, we see a curtailed issuance or something like that, we will be able to see the full reaction. But up until today [Thursday], it [the market] has been in a pretty good mood," he said, describing Thursday's performance as neutral, following Wednesday's bullish run.

Ecuador says it made coupon payment

A trader in the Latin American debt market said that there had been little movement seen Thursday on Ecuador's 10% notes due 2030, even with that country's announcement that it had paid the $135 million of interest due Thursday on those bonds - this after having said earlier in the week that the payment would be made, but not until the 30-day grace period following Feb. 15.

The bonds were seen hanging in at 84 bid, 85 offered, the level up to which they had moved on that earlier announcement.

"I think it was a case of buy the rumor, sell the news," the trader said, "The market had already anticipated that the payment would be made sometime during the interest grace period.

"The investors had already gotten comfortable with the idea that this coupon was going to be paid, and [the uncertainty] was more a question of what happens going forward.

Ecuador's other notes were also not much moved on the news, with its 2012 bonds at 87 bid, and offered levels as high as 98, and its 2015 bonds at 89 bid, 92 offered.

"You have an inverted curve, which isn't surprising when people are questioning whether something will be in default," the trader said.

On a spread versus Treasuries basis, the '12s are close to 1100 basis points over on the bid side, "but there's a huge bid-offer [spread] there. But the '15s and the '30s are trading on either side of 700, on the bid side."

Meanwhile another source noted that Ecuador was the worst performer of the day as its spreads kicked out by 24 basis points.

Peru gains on tender

Elsewhere, Peruvian sovereigns saw better bids in response to the government's announcement that it would buy back as much as $3.6 billion of bonds coming due in 2012, 2017 and 2027.

In trading, the Peruvian bond due 2012 added 1.65 to 116.50 bid, 116.90 offered.

Asia slows down ahead of holiday

In general the trader said, "the market was getting quieter, as we get into the long weekend, with Chinese New Year [stilling the Asian markets], Carnival causing a wind-down in Brazil and the half-day Friday before Presidents' Day.

"I think we only had half our sales people in," the trader said, "and it was just getting quieter."

Brazil will be closed Monday and Tuesday, and "a lot of its local investors and traders and whoever will use that as an excuse to just take a longer weekend on Friday," especially with the abbreviated U.S. session.

Ask a trader or someone from the syndicate side, and they will tell you the market appears to be overbought as spreads grind near historical tight, noted the sellside source.

"Pricings at these levels are crazy. But there's a lot of liquidity and that's what people are arguing about - how can there be a decrease in inflation if all the liquidity is out there," he told Prospect News.

Unless something huge happens, the market is expected to grind tighter, he added.

"There's too much money outside."

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