Emerging market debt tightens on firm Treasuries, stocks; Ukraine sells $500 million in bonds

By Reshmi Basu and Paul Deckelman

New York, June 18 - Emerging market debt regained momentum as the sector continued to consolidate its recovery Monday, supported by a pick up in appetite for riskier assets.

Overall, the market saw support on firmer U.S. Treasuries, a solid equities performance and a jump in crude oil prices.

Ukraine issues new debt

In the primary market Monday, Ukraine sold a $500 million offering of five-year bonds (B1/BB-/BB-) at par to yield Treasuries plus 130 basis points, a deal that came after nearly a week of sitting in idle in the pipeline.

The offering came outside of price talk, which was set at Treasuries plus 120 basis points.

Deutsche Bank, Citigroup and Credit Suisse were lead managers for the Rule 144A and Regulation S transaction.

Coming out of Russia, Alfa Bank sold a $500 million offering of five-year bonds (Ba1/BB) at par to yield mid-swaps plus 311 basis points.

The issue came wider than price talk, which was set at the mid-swaps plus 260 basis points area.

Credit Suisse and UBS were joint bookrunners for the Rule 144A and Regulation S transaction, which priced off the bank's euro medium-term note program.

Corporates issue talk

Meanwhile several corporates issued price guidance. From Korea, Hynix Semiconductor set price guidance for a $500 million offering of senior unsecured 10-year notes (Ba3/BB-/BB) in the area of 8 1/8%.

Proceeds will be used to redeem $500 million of the company's 9 7/8% senior notes due 2012.

Citigroup, Credit Suisse, Goldman Sachs & Co., Korea Development Bank and Merrill Lynch & Co. are joint bookrunners for the Rule 144A and Regulation S note offering.

From Argentina, Banco Comafi SA set price guidance on a $75 million equivalent offering of class 1 fixed-rate Argentine peso-linked notes due 2012 at 12½% to 12¾%.

Pricing is expected to take place on Wednesday. Citigroup Global Markets Ltd. is the principal agent.

The notes received an international rating of Ba2 from Moody's Latin America Calificadora de Riesgo SA and Aa2.ar on the local scale. Fitch Argentina rated the notes A+(arg).

Elsewhere, Russia's OJSC AK Transneft set price guidance of mid-swaps plus 60 basis points for both tranches of its planned sale of euro- and dollar-denominated notes.

Each tranche of loan participation notes will carry a tenor of five years. The issue will be benchmark-sized.

Citigroup, Goldman Sachs and UBS will run the books for the Rule 144A and Regulation S deal.

The Moscow-based pipeline operator transports approximately 93% of the oil produced in Russia.

More deals added to calendar

Finally adding to the pipeline, state-run State Bank of India plans to sell a maximum $225 million offering of perpetual hybrid tier 1 bonds (Baa2/BBB-).

The issue will be non-callable for 10 years. If the bonds are not called, the coupon steps up by 100 basis points.

Citigroup and JP Morgan were the lead managers for the Regulation S deal.

The issue is expected to price later this week.

And from Indonesia, Majapahit Holding BV, a financing subsidiary of Indonesia's state-owned electric utility PT Perusahaan Listrik Negara (PLN), is currently marketing a $1 billion offering of 10-year and 30-year senior unsecured notes (B1/BB-).

An investor roadshow took place in London on Monday. Marketing will next move to New York on Tuesday and then Boston on Wednesday.

UBS and Danareska are lead managers for the Rule 144A and Regulation S deal.

Jakarta-based PLN and its subsidiaries will guarantee the offering.

EM firmer on Treasuries

Returning back to trading, secondary dealings in emerging market debt on Monday for the most part continued the same firm tone which had been seen at the tail end of last week, when the market was heartened by the solid recovery in U.S. Treasury issues from the sell off seen earlier in the week, when yields on the U.S. bonds had reached five-year highs on renewed inflation concerns.

That sell-off, in turn, had dragged stock and bond prices lower on exchanges around the world.

But on Monday, Treasuries continued the late-week firming trend seen on Friday, with the yield on the benchmark 10-year bonds shrinking by 2 basis points to 5.14%. That is well below the 5.32% peak it had hit in intraday trading during last week's slide. Treasuries were bolstered Monday by the news that a housing industry index measuring sentiment among home builders unexpectedly fell to its lowest level since February 1991 - an indicator that the American economy is not likely to heat up to inflationary levels requiring further rate hikes by the Federal Reserve board any time soon.

Encouraged by that good news - since higher U.S. rates would undermine the attractiveness of higher-yielding, but more risky investments such as EM debt - the latter rose pretty much across the board, with the widely followed EMBI+ index compiled by JP Morgan & Co. showing the average spread of emerging debt versus Treasuries as having fallen 2 bps on the session to finish around 151 bps - not far from all-time tight levels in the upper 140s, and well below the bloated spreads above 160 bps seen during last week's debt market downturn.

Brazil higher, Argentina outperforms

Brazil's 11% dollar-denominated global bonds due 2040 - considered the most liquid and widely traded EM issue - rose nearly ½ point on the day, quoted at 131.938.

A big winner in Latin American dealings was Argentina's bonds - which have started finally bouncing back after taking a drubbing over the first half of 2007 and losing 14% of the value they had had at the end of 2006, the worst year-to-date loss in the EM universe.

The country's 8.28% dollar bonds due 2033 were seen having gained nearly a point on the day to 101.75, while the bonds' yield came in by 8 bps to 8.12%.

Asian issues seen firm

The Treasury-influenced rally was also seen in Asian issues; a New York-based trader in Asian bonds said that the market "actually was fairly quiet, but firm."

He said it largely reflected moves that had happened overnight - during the Asian trading day, some hours ahead of New York - which saw the five-year credit default swaps contracts linked to both Indonesian and Philippine sovereign bonds reach new lows - a sign of increasing investor confidence in the market in general and in the unlikeliness of a default or other negative credit event in those underlying bonds in particular.

The move to those new lows brought them down to about the 92 bps level - well down from recent levels as high as the 110-111 bps range, when the CDS spreads reflected market turmoil amid the sell-off in Treasuries and other bonds.

With the CDS gains comprising the bulk of the action in the trading day in Asia, the trader said, "in our [session], the main action was in the sovereign cash paper, which also traded up pretty strongly."

He saw the benchmark Philippines 2032 bonds at 96.75 bid, 97.25 offered, up about 1½ points from their opening Friday. "And from Friday's close, the long end of the Philippine curve is approximately 10 [bps] tighter.

Apart from those sovereign dealings, "there hasn't been a great deal going on," other than announcements connected with upcoming new deals.

One such new deal is the planned $225 million offering from State Bank of India, which has had the effect of putting a damper on existing Indian bank paper.

That deal, he said "has probably put a little bit of weight on that sector. There's been a lot of supply [recently] in that sector anyway, so adding some more supply does tend to weigh [the sector down] a little bit."

ICICI Bank's existing bonds, for instance, were seen about 2 bps to 3 bps wider, the trader said, "and that probably covers it."

Hungary may cut rates

In Eastern European action, speculation that Hungary's central bank might cut interest rates to spur growth pushed that country's bonds higher for a third consecutive session, with the yield on its 6¾% bonds due 2017 quoted just under the 6.75% level, in about 2 bps on the session. The central bank governors meet on June 26 in Budapest, and are expected to cut the current 8% key lending rate by 25 bps to 7.75%.

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