Emerging markets pulled wider; Gerdau, others combine to price $1.35 billion; Argentina sees buying

By Aaron Hochman-Zimmerman

New York, May 8 - During a slow session, emerging markets were stretched wider on Treasury action, but the primary kept investors awake as $1.35 billion was priced in major currency deals.

Brazil's Gerdau SA had the big issue of Thursday's session with a $500 million retap of its bonds due 2017.

Korea Railroad Corp. and Brazil's Independencia International Ltd. each priced $300 million deals while Brazil rounded out the dollar-denominated issues with another $25 million added on to its sovereigns due 2017.

"It looks like issuers are trying to take advantage of the window," a buysider said, expecting the "window" to remain open for another few weeks.

"Certainly things are happening," a trader said, "There's a sense that the worst is behind us, rightly or wrongly ... I'm not sure in my own mind, but that seems to be the general shift of opinion."

In trading, most of the market was quiet and watching inflation numbers, the buysider said.

In Argentina, investors took on risk by covering shorts in the face of further protests and hostility between the farmers and the government negotiators.

The Argentine discount bonds due 2033 added 2 points.

"It's going to be a bit choppier this summer," the trader said, with "high highs and low lows."

On Thursday, volatility bounced through the session but ended lower by 0.33 at 19.40, according to the VIX index. The index is a common yardstick of market volatility.

As Treasuries gained momentum, emerging markets were pulled wider by 9 basis points to a spread of 263 bps. The EMBI+ calculates the amount of extra yield investors will require to keep assets in emerging markets debt.

Brazil moves primary again

The primary was less hectic than on Wednesday, but it was still the source of the day's excitement as Gerdau (BBB-/BBB-) priced a $500 million reopening of its 7¼% bonds due 2017 at 102.5654 to yield 6 7/8%.

The deal came with a spread of Treasuries plus 309 bps.

ABN Amro, HSBC and JPMorgan had the books for the deal.

There is a change-of-control put at 101.

The total issue now stands at $1.5 billion.

Gerdau is a Porto Alegre, Brazil-based steel manufacturer.

Brazil's Independencia International (B2/B) priced $300 million seven-year senior unsecured bonds at 98.768 to yield 10 1/8% with a coupon of 9 7/8%.

The deal was talked in the 10¼% area.

Banco Santander brought the deal to market.

Proceeds will be used to refinance existing debt.

Independencia is a Jordanesia, Brazil-based and Cayman incorporated beef producer.

The bonds were up by 1 point in gray market trading, a market source said.

Also, the Federative Republic of Brazil (Ba1/BBB-/BB+) added $25 million to its 6% sovereigns due 2017 at a price of 104.816 and a yield of 5.299%.

The deal came at a spread of Treasuries plus 140 bps.

Deutsche Bank and HSBC were the bookrunners for the registered deal.

The bonds have a make-whole call at Treasuries plus 25 bps.

The total issue is now more than $2.5 billion.

Asia takes second in new issues

In Asia, Korea Railroad Corp. (Korail) (A2/A) priced $300 million five-year senior unsecured bonds at 99.637 with a coupon of 5 3/8% to yield 5.459%.

The deal priced with a spread of mid-swaps plus 160 bps or Treasuries plus 237.7 bps.

The deal had been talked at mid-swaps plus 160 bps to 170 bps.

Citigroup, HSBC and Morgan Stanley were asked to be the bookrunners for the deal.

There is a change-of-control put at par if the government ceases to own and control more than 51% of Korail stock.

Korail is a Daejong, South Korea-based government railroad operator.

In local currency offerings, Singapore's CapitaMall Trust Management Ltd. priced S$80 million one-year bonds with a coupon of 2.8%.

Oversea-China Banking Co. acted as the bookrunner for the deal.

The bonds come from a S$1 billion medium-term note program.

Proceeds will be invested in asset enhancement projects and will be used as general working capital.

CapitaMall is a Singapore-based real estate investment trust.

Elsewhere in Singapore, ARA Trust Management Ltd. (Baa2) priced S$85 million one-year bonds with a coupon of 2.74%.

The issue was upsized from S$75 million.

Citigroup had the books for the deal.

Proceeds will be lent to Suntec REIT and used for general working capital.

Suntec is a Singapore-based real estate investment trust.

Emerging Europe loses steam

"We opened up weak today," a trader said about emerging European credits. "Yesterday was strong across the board."

Trading was also calmer than on Wednesday as "the Russians have all gone on holiday," he said about Russia's bank holiday on Friday marking the victory in World War II.

Wednesday's equity drop caught up to emerging Europe during early trading as spreads were wider by nearly 5 bps, the trader said, but later "we've seen a little more stability, it's not wild."

Meanwhile in Russia, Vladimir Putin was confirmed by the Duma as the new prime minister.

In his acceptance speech, prime minister Putin focused on his plans for greater transparency and rule of law, especially for the economy.

The country should fight to reduce inflation rates to single digits, he said.

The ruble was seen trading at 23.822 to the dollar.

On the diplomatic front, two U.S. military attaches were asked to leave Russia. The United States said it would comply, but under protest.

The Russian government bonds due 2030 added 0.125 point to 115.25 bid, 115.375 offered.

In Georgia, defense minister David Kezerashvili said "Georgia did not build up anything and does not build up anything near the conflict zones. All our soldiers are staying at their bases. Scheduled exercises are underway," according to the Itar-Tass News Agency.

Georgia and Russia have traded accusations of provoking war over the breakaway region of Abkhazia.

In Ukraine, the government said it is prepared to sign a 15-year agreement with Russia's OAO Gazprom that would include a five-year transition to a European price scale, Itar-Tass reported.

Elsewhere in Europe, the European Central Bank left its interest rates at 4% over concerns of inflation based on high food and energy prices.

The inflation of the euro hit a record of 3.6% in March but settled back in April.

The euro was seen trading at 0.649 to the dollar.

AK Party fights for its life

In Turkey, the ruling AK Party, on trial for unconstitutional and anti-secular activities, submitted a defense to the constitutional court which argues that the judiciary does not have the authority to close a political party.

"It is a contradiction to accuse a party that has done all that's necessary for Turkey to progress toward its European Union membership goal in line with the vision of Turkey's founder Ataturk of being the focal point of anti-secularist activities," the 98-page document said, according to the Turkish Daily News.

The Turkish sovereign bonds due 2030 slipped 0.125 point to 153.375 bid, 153.625 offered.

LatAm slides wider

Latin American trading was quietly wider on Thursday with light price action outside of Argentina.

On the day after Brazil's added $500 million to its sovereigns due 2017, its corporate issuers continued to be the day's major primary players.

Yet in sovereign trading, the retapped 6% bonds due 2017 were up just 0.05 point at 104.85 bid, 105.1 offered at it added another $25 million.

The 7 1/8% bonds due 2037 added 0.65 point to 114.9 bid, 115 offered and the highly traded 11% bonds due 2040 were quoted at 136.5 bid, 136.75 offered.

In corporates, the 6¼% Companhia Vale do Rio Doce (CVRD) bonds due 2017 were quoted at 100.85 bid, 101.5 offered.

Elsewhere, as oil inched closer to $125 per barrel, Venezuela's benchmark 9¼% government bonds due 2027 were up just 0.05 to 89.8 bid, 90.25 offered after taking nearly a 2-point beating on Wednesday.

Short covering with farmers off the job

In Argentina, the farmers continued their strikes and protests accusing the government of instigating further conflict.

The strikes did not include roadblocks and were less severe than those seen during the original walk out in order to prevent more food shortages.

"This is a new protest stage we're launching," said Mario Llambias, head of the Argentine Rural Confederations, according to the Buenos Aires Herald.

"Argentina is a little better than where we closed yesterday, although it's probably more covering short than anything else," a strategist said.

Also, investors had cause to speculate about the government's plans to debut a new measure of the consumer price index. Argentina has historically reported suspicious economic data.

"Otherwise it's still problematic out there," the strategist said.

The 8.28% Argentine discount bonds due 2033 bounced back 2 points to 80.8 bid, 81.25 offered.

Asia battles inflation

Asian credits were lower as both the Philippines and Indonesia wrangled with the prospect of higher inflation going forward.

The central bank of the Philippines released its quarterly inflation report, which noted a jump in inflation to 5.6% from 3.3% during the fourth quarter of 2007.

"Rising inflation pressures stemmed mainly from the higher international prices of oil and non-oil commodity products. Higher food prices, particularly of rice, continued to drive the trend of headline inflation," the report said.

Also, GDP grew by 7.4% in the fourth quarter of 2007, compared to 5.5% during the fourth quarter of 2006.

The peso was seen trading at 42.5 to the dollar.

The Philippine sovereign bonds due 2030 slipped 0.35 point to 130.65 bid, 131.35 offered.

Meanwhile in Indonesia, the central bank said the expected 30% rise in fuel prices would lead to inflation rates above 9% by the end of the year, according to the Jakarta Post.

Other inflation estimates were higher.

"Assuming the government will raise fuel prices in June, inflation will reach between 10% and 11% by the end of the year," said Standard Chartered's chief economist, Fauzi Ichsan, in the report.

The rise in fuel costs has been expected since president Susilo Bambang Yudhoyono announced an eventual cut in government energy subsidies.

The rupiah was seen trading at 9,212.52 to the dollar.

The Indonesian government bonds due 2017 gave up 0.25 point to 101 bid, 102 offered.

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