Emerging markets debt quiet but strong; corporate deal flow continues

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Dec. 6 - Emerging market debt turned in a quiet session Wednesday, as many market participants attended the annual Emerging Markets Traders Association meeting in New York.

Wednesday saw overall spreads tighten by 5 basis points versus Treasuries amid low liquidity, noted market sources.

Latin American sovereign spreads were in slightly on the day, maybe a couple of basis points or so, according to a market source.

Prices in the region were probably within 10 or 15 cents of Tuesday night's levels.

"But still our trend seems to be somewhat to a tightening bias," he said, adding that there were no standout performers.

Additionally, most credits saw moves within a couple of basis points of each other.

"It doesn't look like there was anything outstanding [one] country versus another," he added.

In trading, the bellwether Brazilian bond due 2040 eased 0.40 to 133.15 bid, 133.25 offered. Elsewhere, the Venezuelan bond due 2027 shed 0.65 to 124.50 bid, 124.85 offered.

Inside Asia

A trader who focuses on Asian debt said that things were "relatively quiet" given that many players were out due to the annual meeting of the EMTA.

He observed that a "lot of the market is already out, at seminars and presentations, and that does tend to suck out liquidity at this time of the year."

He noted that the market has been very strong, and that "liquidity is already displaying year-end-like tendencies - very thin."

Additionally he added that with the recent strong performance, the propensity for everything to trade higher is strong.

"So we are seeing some erratic price movements, but for the most part the movements have all been upward in price and lower yield."

Additionally, there is trickle of new issues coming into the market, mainly high yield corporates.

And those have met with pretty good demand, he commented.

Corporates set talk

In the primary market, several corporates set price talk. Out of Brazil, Banco Fibra SA set price talk for a dollar-denominated offering of three-year senior unsecured notes (/B+) at a yield in the 7½% area.

The roadshow is scheduled to end on Thursday, Dec. 7 in London. Pricing is expected to take place afterwards.

BNP Paribas is the bookrunner for the Regulation S issue, which will issued through the bank's Cayman Islands branch.

Indonesian coal producer PT Berau Coal set price guidance for a $350 million two-part offering of senior notes (B1//B+).

Both tranches will each carry a tenor of five-years.

Guidance for the tranche of fixed rate notes was set at the 9¾% area.

Meanwhile the portion of amortizing floating-rate notes was talked at the three-month Libor plus 400 basis points area.

Merrill Lynch is the bookrunner for the Rule 144A/Regulation S issue.

Pricing is expected to take place on Friday, following completion of investor presentations in the United States.

Moving to Ukraine, JSC Innovation Bank (Ukrsibbank) set price talk for a dollar-denominated offering of five-year fixed-rate notes (Ba2//BB-) at the 8% area.

BNP Paribas, HSBC and UBS are lead managers for the Regulation S deal of senior unsecured loan participation notes.

Ecuador continues to underperform

And mimicking recent sessions, Ecuador's bonds were in the red once again on continued investor worries surrounding what the country might propose for its debt.

In particular, its restructured bond due 2012 witnessed a volatile session Wednesday, noted a source.

President-elect Rafael Correa has spooked Wall Street with his hard-line stance regarding debt negotiations, even suggesting that an Argentina-style was a possibility.

And he has proposed an audit of the country's foreign bonds to determine "illegal" debt.

Market players had hoped for a more pragmatic approach by Correa once he was in office. Instead he has not backed away from his hard-nosed stance, although many contend that with oil revenues spilling in, a default is unlikely.

"There appears to be an overwhelming sensation that they are going to change something in the way that they deal with debt," such as limiting interest payments, remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

And whereas before, the market was willing to give Correa the benefit of the doubt, it is now beginning to grasp that there may be some substantial changes to how the country deals with debt.

"That's why you've seen the prices continue to drift off," explained Alvarez.

Furthermore, there is another potential strike looming against the Andean credit.

Bill Thomas, chairman of the Ways and Means Commission of Congress, has introduced a resolution to extend the Andean Trade Promotion and Drug Eradication Act (ATPDEA) to Colombia and Peru, but not to Ecuador or Bolivia.

The act, which provides U.S. tariff preferences for those Andean countries considered to be cooperating in the war against drugs, is set to expire on Dec. 31.

If the resolution passes, Ecuador's exports to the United States will suffer a great loss, starting from Jan. 1, observed Alvarez.

In trading, the Ecuadorian bond due 2012 gave up 0.75 to 95 bid, 96.25 offered

Colombia worries could create profits

In the last few weeks, headline risk in Colombia has picked up. President Alvaro Uribe's party has been rocked by allegations of links between party members and paramilitaries.

Investors have expressed a fear that as the investigation unfolds; the scandal may eventually reach the president, which in turn could jeopardize his efforts to push through structural reforms.

"They need a number of reforms to consolidate or solidify their overall financial and business standing domestically," Alvarez commented.

As the crisis becomes louder, Uribe's ability to push through reforms will be impeded. Furthermore negative headlines will generate lower bond prices - although some investors will likely see that as an opportunity to buy on dips.

However, that strategy should depend on the overall performance of the market at that moment, recommended Alvarez.

"Right now, it would seem like we're laying the foundation for a year-end rally, so it may be the case that if Colombia is a laggard - which it was in November - you may want to add into positions," he noted.

But along with that, investors will have to tolerate volatility coming from the internal sphere of Colombia's local markets.

Corporate news

In corporate news, trading was also described as quiet.

The trader quoted above said that reports that South Korean steelmaker Posco is purchasing a 15% stake in Thailand Thainox Stainless plc had "very little" impact on Posco's corporate bonds.

Additionally, he said that there are fears that there will be some form of private equity going into the company, such as a buyout scenario.

While that has not occurred yet, it is certainly on people's minds, particularly considering the consolidation that has been taking place in the international steel industry, which would suggest that there is a risk that such an event could occur.

"It hasn't transpired yet, and especially in this [strong] environment, the market is shrugging off potentially negative news in terms of higher leverage for companies with incredible ability - so no, there's not really too much action there," explained the trader.

He also added that the new ICICI Bank deal is "like most of that sector, trading pretty nicely."

The bank priced a $150 million issue of 6 3/8% perpetual bonds (expected Baa3) at mid-swaps plus 152 basis points or 198 basis points over Treasuries.

It has tightened "7 or 8 basis points" since it priced.

"It's pretty firm. Basically, it's part of a broader story of good demand for higher-beta instruments in Asia; anything with any spread to it at all is encountering pretty good demand," concluded the trader.

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