Emerging market debt a tad lower; Venezuela declines on Chavez comments

By Reshmi Basu, Paul Deckelman, and Paul A. Harris

New York, Jan. 8 - Emerging market debt was a tad softer Monday while Venezuela saw a late-afternoon sell-off on "socialist" declarations made by president Hugo Chavez.

In the primary market, price talk surfaced from two Asian corporates.

South Korea's National Agricultural Cooperative Federation (NACF) is marketing its $250 million offering of five-year floating-rate notes (A3) at Libor plus 25 to 27 basis points.

Pricing is expected on Tuesday.

Although the issue is oversubscribed, the deal size will not grow.

JP Morgan and Daiwa Securities are leading the Regulation S deal, which is being priced off the company's $2.5 billion medium-term note program.

NACF is an umbrella organization for Korea's regional cooperatives, headquartered in Seoul.

Moving to the subcontinent, Mumbai-based ICICI Bank, the second largest commercial bank in India, set price guidance for a three-part offering of dollar-denominated bonds.

Price guidance for the tranche of three-year floating-rate senior notes (expected ratings Baa2/BB+) was set at Libor plus 55 to 60 basis points.

Meanwhile the tranche of five-year fixed-rate senior notes (expected ratings Baa2/BB+) was talked at 75 to 80 basis points over mid-swaps.

And guidance for the tranche of 15-year upper tier 2 subordinated notes was set in the area of 130 basis points over mid-swaps.

The latter tranche will bear 10 years of call protection. Additionally, if the notes are not called before April 2017, the coupon will step up by 100 basis points.

Tranche sizes are yet to be determined, but the size of the issue is expected to be around $300 million.

Pricing is expected to take place Tuesday.

Citigroup, Deutsche Bank Securities and Merrill Lynch & Co. are joint bookrunners for the Rule 144A/Regulation S transaction.

In the secondary, ICICI's 7.55% bonds due 2007was spotted at 101.04 bid, 101.07 offered, down 0.02.

EM spreads unchanged, slips on dollar basis

Emerging market debt was a tad softer Monday, triggered by slightly lower U.S. Treasuries, which were still stinging from Friday's surprisingly robust U.S. job numbers.

With the probability of Fed rate cuts diminishing, market participants are re-evaluating the story, which means that the market is somewhat in a directional standstill, noted market sources.

Additionally, the market is "overstretched," observed Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Spreads were unchanged while on a dollar basis the market was a little lower.

During the session, the bellwether Brazilian bond due 2040 was unchanged at 132.80 bid, 132.90 offered.

Venezuela down on socialist push

The headlining story of the session came from Venezuela. In late afternoon, president Chavez rattled the markets with his calls to revamp the South American nation in what he describes as his push for a "socialist revolution."

On Monday, the president asked congress to grant him special powers and called for the central bank to be stripped of its powers.

"We're moving toward a socialist republic of Venezuela, and that requires a deep reform of our national constitution," he proclaimed.

And the agenda did not stop there.

He vowed to nationalize the nation's electric power and telecommunications networks.

"All of those sectors that in an area so important and strategic for all of us as is electricity - all of that which was privatized, let it be nationalized," Chavez declared in a televised speech after swearing in a new Cabinet.

"C.A. Nacional Telefonos de Venezuela (CANTV), let it be nationalized,"

Chavez said.

Furthermore, Chavez said that crude projects in the Orinoco Belt would become "state property."

The country's bonds widened as soon as the headlines hit the screens in late afternoon, remarked a market source.

Venezuela's debt "had a good morning, but then had a rough afternoon," a trader in New York said, "so it's probably the underperformer at the end of the day."

He saw the country's bonds "wider by eight to 10 basis points, so that's the underperformer."

In trading, the Venezuelan bond due 2027 slid one point to 124.70 bid, 125.20 offered.

Meanwhile the credit derivatives market's insurance contracts on Venezuela's risk of a default widened to 149 basis points from 139 basis points previously.

Split on spillover

There is disagreement as to how much impact Venezuela had on the overall state of the market.

Alvarez said that the story did not have an overall spillover effect for the region as the market isolated the event.

Nonetheless, one trader did note that Latin America did see some malaise and a little selling pressure as a few headlines created "a little bit of collateral damage to the rest of EM - not so much in Asia, certainly not yet in Asia, but [overall] there's been a bit of a pullback."

Another trader said that after some morning firmness, the market "kind of gave back those gains later in the day."

Yet another trader said that the Venezuelan situation was probably the main factor in emerging market debt trading in the afternoon.

Mexico up on swap

In other news, Mexico posted gains on the country's announcement that it would swap $8.8 billion of dollar-denominated bonds, with maturities between 2019 and 2033, for a reopened bond due 2034.

Alvarez said the exchange would extend the country's external debt curve while eliminating shorter-dated debt, an obvious positive for the market.

As a result of the news, Mexico traded up. The country's bond due 2026 was up 2.13 to 161.75 bid, 164.50 offered.

Asia better bid

Moving to Asia, the trader said that "it was actually fairly quiet," but the region saw a better tone, following the market's recent consolidative sessions.

"Client flows have been a bit more constructive today as well. We've seen better buying in Indonesia and the Philippines, which probably helped the overall [market] tone.

"There's reasonable two-way flow on the CDS [credit default swaps] side, but generally skewed towards better selling. So it seems like things have stabilized after a couple of consolidative sessions," he noted.

EDC seen facing pressure

Chavez's intentions of nationalizing the electricity system will likely have considerable impact on Electricidad de Caracas, (EDC) owned by AES Corp.

However, U.S. junk market traders said they saw little movement Monday in the high yield bonds of the Arlington, Va.-based global power producer.

AES' 9 3/8% notes due 2010 were actually quoted ¼ point higher at 109.25 in thin trade, while its 9½% notes due 2009 were down perhaps ¼ to ½ point, also on thin dealings. AES' 7¾% notes due 2014 were about ½ point firmer at 106.5, again on light trading.

Another market participant noted that Venezuelan corporates, including Electricidad de Caracas, were unchanged on a dollar basis.

In trading, EDC's 10¼% bonds due 2014 were unchanged at 103.75 bid, 104.75 offered.

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