Primary still on track; EM trading strong; Edenor prices $200 million

By Aaron Hochman-Zimmerman

New York, Oct. 1 - Emerging markets had a quiet day, but the pricing streak in the primary was extended to four days.

Activity was light but positive to begin the quarter as investors returned from the commotion of last week's primary rally to see Brazil leading the winners in trading.

Argentina's power company Edenor SA took credit for pushing the run of new deals to another day with its $200 million deal.

"Last week was fun, but this week looks a lot more boring," an emerging markets analyst said.

"I think last week there were a lot of issuers who felt like they needed to strike while the iron was hot, tapping the market just in case things turn south again later this year.

"There was a lot of supply across the credit markets last week, not just in EM, and the CDX and iTraxx backed up a bit on the indigestion from that supply," he said.

It was better yields which attracted investors last week, according to EPFR Global Analyst Cameron Brandt.

"Despite all the talk of a flight to safety, the real appetite among fixed income investors this year seems to be for yield," Brandt said in a press release.

"Any time they've felt the risks were tolerable they've headed for higher yielding, higher risk debt categories," he said.

Investors are watching the headlines and anticipating the new data releases to see whether or not the success can sustain itself. U.S. non-farm payroll figures will be released on Friday.

But even with last week's deal frenzy, a market source sees a tough time ahead for emerging markets.

The U.S. housing crisis shows no sign of letting up, which will drag the United States into a recession and to a lesser extent the rest of the global markets as well, the source said.

For now, the Federal Reserve Bank rate reduction "has been mostly upside," a market source said.

Despite the slowdown in the United States, investors have taken the chance to add risk and appreciate the fundamentals of emerging market economies.

Still, a weak non-farm payrolls number will test the market's fortitude, the source added.

Another market source remained positive, although he did admit the possibility of the United States hurting emerging markets.

The Fed will likely help the market hang on with another cut late in the fourth quarter, the source predicted.

The market was quiet which gave volatility a chance to head southward again, however slightly. The VIX index, the generally accepted measure of volatility, closed down 0.16 to end at 17.84.

Emerging markets held steady with a spread of 201 bps, according JP Morgan's EMBI+ index. The index reflects how much yield investors expect in return for holding emerging markets debt.

Emerging Europe stagnant

With the notable exception of Turkey's recent $1.25 billion sale of 10-year sovereigns, emerging Europe seemed to sit out last week's rally.

Worries about banks in Russia and Kazakhstan gave investors reason to pause while they evaluated the range of the credit crisis.

According to many in the market, the Russian banks which turned up insolvent were only large enough to scare a few headline watchers, but not big enough to make any serious impact in the sector.

The central banks produced no surprises in September, a market source said as every country but Hungary left its rates unchanged. Hungary is still expected to bring a benchmark-sized samurai bond.

Without any data releases in the near future, only the general degree of risk appetite and performance around emerging markets will determine the direction of European bonds.

In trading Monday the Russian benchmark notes due 2030 closed at 112.00 bid, 112.25 offered.

Politics and progress in LatAm

For better or worse, politics pushed the markets in Ecuador and Argentina, but it was Brazil's bonds which were climbing the highest.

In Ecuador, president Rafael Correa's party celebrated a likely victory in the constituent assembly elections.

The exact results have yet to be determined, but a victory would give Correa and his party the right to retool the constitution to give the national government more control over the economy.

The Ecuadorian benchmark 10% sovereigns due 2030 were seen trading at 93 bid, 94 offered.

Meanwhile in Argentina, the province of Mendoza accused the national statistics office of cooking the books, a market source said.

The province believes its consumer price index growth was 3.1%, compared to the 1.5% the national office claims.

The controversy is hurting Argentina's inflation-linked bonds which have underperformed nominal local and dollar bonds, the source said.

Looking to the near future, one market source foresaw great potential in Argentina's agriculture industry. Due to increased usage of bio-fuels and poor production in drought-stricken China, grain prices have been soaring.

Unlike Brazil, Argentina has remained an exporter of raw materials rather than converting to manufacturing finished products. Prices are currently high, but thanks to a government lacking in vision, the lagging industry leaves Argentina at the mercy of changing commodity prices, the source said.

Yet on Monday, "it didn't really affect prices," a trader said about Argentina's ongoing political drama.

Argentina's high-beta 8.28% notes due 2033 seen up almost 0.75, trading around 92.

Commodity prices have helped Brazil's agriculture as well, and the country seems to stay one step ahead of inflation problems as money has poured into the country after the Fed's rate cut.

Brazil's widely-held 11% government bonds due 2040 made the biggest gains as they were seen trading around 134.75, up a point from Friday's 133.75.

LatAm corporates trading strong

Sovereigns may have started the week off, but Latin American corporates brought up the rear of last week's primary rally.

The issues took some pressure off the primary pipeline, but were unable to inspire much of a rally in trading.

The largest corporate deal of last week came from Colombia's Transportadora de Gas del Interior SA ESP, which sold $750 million of 9½% bonds due 2017. The bonds were seen up almost 0.90 at around 101.50 bid, 102.00 offered.

The new bonds from Mexico's Corporacion Durango SAB de CV were unchanged, the 10.5% notes due 2017 being quoted at 99.75 bid, 100.25 offered during Monday's session.

Other recent issuers were trading close to their sale prices.

Mexico's Grupo Senda 10.5% notes were seen just slightly over where they priced at par on Sept. 26, at 100.20 bid, 100.70 offered.

Brazil's GP Investments 10% bonds were seen Monday at 102.25 bid, 102.75 offered after pricing on Sept. 27 at 102.125.

In China, less rain but more inflation

Emerging markets may be battling against high food and energy prices, but conditions in Asia have made it a tougher fight.

In China, inland agriculture has dealt with drought conditions in recent months, and water is in short supply.

The government has decided to steer water away from agriculture and towards its other uses in industry and personal consumption, a market source said.

China's growing industry and population has stretched its water resources to the point of sacrificing agriculture which is driving up prices and inflation along with it, the source said.

Also in Asia, the Philippine's benchmark bonds due 2030 closed the day at 131.00 bid, 131.65 offered.

Edenor prices, new offers in primary

The primary ball kept rolling Monday. Smaller deals were announced, but Edenor priced as expected, leaving the pipeline a bit less backlogged.

"With those issuers already having come to market, there's not nearly the pent-up pipeline pressure that there was two weeks ago," an emerging markets analyst said.

"I think this week will probably be a bit of a breather," he added.

"Assuming no surprises though, I think we'll see some opportunistic deals creep back into the market next week and over the rest of the month."

Argentina's Edenor SA was able to price a $200 million 10-year senior unsecured bond at par with a coupon of 10½%.

The deal priced on top of talk, which put the deal coming in the 10½% area.

Citigroup and Deutsche Bank had the books for the deal, which features five years of call protection.

The sale comes from comes from a $600 million bond program.

Edenor is a Buenos Aires, Argentina-based energy distribution company.

Adding to the pipeline, Argentina's Industrias Metalúrgicas Pescarmona SAIC&F plans to sell $250 million eight-year amortizing senior unsecured bonds (//B).

Merrill Lynch has been mandated as the bookrunner for the deal expected to price on Oct. 10.

Impsa is a Mendoza, Argentina-based wind and hydropower producer.

Mexico's Grupo KUO SAB de CV intends to sell $200 million 10-year senior unsecured bonds (BB-/BB-).

Credit Suisse and Citigroup will take the books for the deal.

The bonds carry five years of call protection.

A roadshow will be held Oct. 2 on the U.S. west coast, Oct. 3 in New York, Oct. 4 in Boston, Oct. 5 in London, and Oct. 8 in London and Europe.

Grupo Kuo is a Bosques de las Lomas, Mexico-based holding company engaged in the manufacturing of auto parts, chemicals and food products.

China's Hang Fung Gold Technology Ltd. announced plans to offer $150 million of seven-year senior bonds.

The deal will be on the road beginning on Thursday.

Proceeds will be used to repay existing debt and to expand the number of retail outlets in China.

The jewelry manufacturer and retailer is based in Hong Kong.

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