Pricing streak hits six days; TNK-BP brings $1.7 billion; trading flattens out

By Aaron Hochman-Zimmerman

New York, Oct. 3 - Emerging markets saw another strong day in the primary market but secondary trading continued to grind along slowly.

The stretch of new deals extended to six days Wednesday as $1.85 billion gushed out of the pipeline.

Russia's TNK-BP was responsible for $1.7 billion; a sovereign add-on from Jamaica brought the rest.

Trading was mostly flat, although among the high-betas Argentina slipped the most from Tuesday's close. Investors seem to have reached their maximum level of risk ahead of the U.S. non-farm payroll numbers this Friday.

There is no desire to expand high-beta positions, said Enrique Alvarez a Latin America debt strategist at think tank IDEAglobal.

"People have lost their sense for additional risk tolerance," he said, although "there's money out there to be put to work," he added.

Friday's data release may leave over a lot of questions regarding a future Federal Reserve Bank rate cut.

"There are elements of both sides that can be taken as a negative," Alvarez said.

If a positive number is released, the Fed's motivation to cut rates may fade; yet if a negative number is released, the severity of the effects will be left up to the market, he said.

Without causing much grief, volatility crept higher again as the VIX index gained 0.31 to end the day at 18.80. The index is the widely recognized standard measure of market volatility.

As a sector, emerging markets was flat as evidenced by JP Morgan's EMBI+ index. It was seen holding steady at a spread of 199 basis points. The EMBI+ index gauges how much additional yield investors demand to hold emerging markets debt.

Europe quietly waits for jobs data

Europe, like many market sectors, is pacing itself as it waits for Friday's non-farm payroll numbers from the United States

The sentiment is optimistic, although "there is some widening going on," said a syndicate desk official specializing in emerging Europe.

Europe is doing quite well "if you look away from the banks in Kazakhstan and some of the smaller banks in Russia," he said.

Even Russia's threats to cut off oil to Ukraine have not yet caused any heartburn for investors.

"It's a returning story ... it came about because of the election," the syndicate official said.

Russia's aim to ensure its influence and $1.3 billion dollars are secure as Ukraine goes through elections. President Viktor Yushchenko's Orange bloc narrowly held onto control in the parliament.

Yushchenko has promised to repay the $1.3 billion owed by the Ukraine by Nov. 1, according to the Russian Itar-Tass news agency.

The Russian benchmark bonds due 2030 were seen trading unchanged Wednesday at around 112.50.

In Kazakhstan, the government continued to rail against foreign investors, according to a BBC report. Fines of $609 million were levied against Chevron for breaking environmental regulations.

Elsewhere in Europe, Turkey's new draft constitution was opposed by women's groups which were outraged over the constitution's implication that women need to be protected, rather than have their rights guaranteed, as in the former constitution. Many have expressed concerns over creeping Islamic fundamentalism in president Abdullah Gul's new government.

Turkish sovereign bonds due 2030 were seen trading at approximately 156.00.

After Turkey's sovereign deal of Sept. 27 and beyond the TNK-BP deal which priced Wednesday, the syndicate official does not see any more new deal announcements from Europe for the foreseeable future. Trading looks to remain light as well.

"Everybody is expecting the numbers on Friday ... it will calm down until then," the official said.

LatAm mostly flat, Argentina hurting

Latin America has enjoyed its recent success by remaining isolated from economic woes in the United States.

"We're divorced from spill-through effects on the U.S. side," Alvarez said.

A "highlight" in the sovereign world has been Brazil's government bonds due 2034. The issues gained 0.50 to 0.75 over the course of the week, although they were flat on the session Wednesday, seen trading at 125.75 bid, 126.50 offered.

Also in Brazil, the world's largest sugar cane processor, Cosan, was granted R$1.38 billion in tax incentives, according to a market source.

The breaks are to compensate the renewable energy producer for the building of three ethanol production facilities.

A surplus crop in India has dropped global prices of sugar, the source added.

Brazil's celebrity 11% sovereigns due 2040 were seen up 0.10 at 134.35 bid, 134.45 offered Wednesday's trading.

Latin American deal calendar

In corporates, even though it was Russia's TNK-BP which made the big splash in the primary, the Latin American corporates still make up the bulk of the deals yet to price.

Before Oct. 12, $810 million is expected to price between four Latin American deals.

Among recently priced deals, Mexico's Corporacion Durango has suffered in trading. It was seen down around 99.25 on Wednesday.

The Durango, Mexico-based bag and box manufacturer priced $520 million of 10-year 10½% senior notes on Sept. 28 at par.

Colombia's Transportadora de Gas del Interior "continues to find robust support," said a Latin American trader. TGI was seen up at approximately 102.50.

The Bogota-based gas pipeline operator sold $750 million of 10-year 9½% senior notes on Sept. 25 at par.

Other high-beta Latin American names were subject to investors' waning risk appetite.

Venezuela's 9.25% notes due 2027 were seen unchanged at 104.00 bid, 104.80 offered.

A notably weak performer was Argentina's 8.28% sovereigns due 2033, which were seen off as much as 1.15, around 91.15 bid, 91.70 offered.

Pakistan leads in Asia

Asia has been quietly doing well in recent sessions as its bonds, particularly those from Pakistan, are looking better than the headlines streaming out of Myanmar.

"Pakistani side headlines have in a way been driving the market," a syndicate official said.

Pakistan's political situation looks improved even though former prime minister Benazir Bhutto claimed that talks with current president Pervez Musharraf have not been productive. Bhutto intends to return to Pakistan on Oct. 18.

Her return along with the likely take over of the army by Lt. Gen. Ashfaq Pervez Kiani has inspired confidence in Pakistan's political future.

"We say some buyers of the '16s," the syndicate official said.

The Pakistani sovereign issue due 2016 was up 1.50 from Tuesday to finish trading at 93.5.

Elsewhere, after a Tuesday, yesterday the benchmark Phillipine bonds due 2030 gained just 0.12 to close at 131.625.

Indonesia's government bonds due 2017 were flat at 104.75

"There have been inflows on the sovereign side," the syndicate official said.

Primary prices another $1.85 billion

The primary pricing streak reached its sixth day as $1.85 billion burst through the pipeline.

"Everybody's lining up to come out with new deals," a syndicate official said.

Corporate TNK-BP brought the bulk of the total with its $1.7 billion deal. Jamaica's sovereign issue made up the other $150 million.

Russia's TNK-BP priced two tranches (Baa2/BB+/BBB-) totaling $1.7 billion, with both parts coming at the rich end of talk.

The $600 million five-year bond sold at 99.166 with a coupon of 7.5% and a spread of Treasuries plus 345 basis points. It had been talked at Treasuries plus 345 bps to 360 bps.

The $1.1 billion 10-year bond sold at 98.728 with a coupon of 7.875% and a spread of Treasuries plus 350 bps. It had been talked at Treasuries plus 350 bps to 365 bps.

UBS and Credit Suisse were the bookrunners for five-year and 10-year tranche respectively.

TNK-BP is a privately owned oil company based in Moscow.

Jamaica adds $150 million

The government of Jamaica announced the pricing of a $150 million add-on to its 8% amortizing notes (B1/B/B+) due 2039.

The issue sold at 97.50 to yield 8.224% with a spread of Treasuries plus 341.2 basis points.

Deutsche Bank brought the deal to market.

The original $350 million offering was sold on March 8 at 98.592 to yield 8 1/8%.

The bonds will amortize in equal installments over their final three years.

Proceeds will be used for general budgetary purposes.

Gerdau, Odebrecht planning deals

Brazil's Gerdau SA announced plans to offer a 10-year bond (Ba2//BBB-) worth between $500 million and $1 billion.

JP Morgan will act as the bookrunner.

The issue will not likely price the week of Oct. 8 while the company works to fund a loan facility.

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

Also in Brazil, Odebrecht Finance SA plans to sell $200 million in 10-year senior unsecured notes (BB/BB+).

Deutsche Bank and Credit Suisse have the books for the deal.

Proceeds will be used to fund further investment in the company's subsidiaries.

Odebrecht is a Bahia, Brazil-based engineering and construction company.

A roadshow will be held between Oct. 8 and Oct. 10 in London, Boston, New York, the New York area, and Los Angeles.

"Odebrecht should be an easy trade," said a syndicate official who specializes in Latin America.

"It is a good credit with strong growth potential," he said.

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