Emerging market debt weaker on lower commodities: Ecuador down on fears of Argentina-style default

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

New York, Jan. 18 - Emerging market debt was softer Thursday amid lower commodity prices while Ecuador's bonds plunged on news that the country was contemplating a 60% haircut on its external debt.

In the primary market, Brazilian private equity firm GP Investments, Ltd. sold a $150 million offering of perpetual notes (/B+/B) at par to yield 10%.

The notes, which come with five years of call protection, came in line with price guidance for the 10% area.

The issue will be secured by a first-priority pledge representing 100% of GP Private Equity's issued and outstanding shares.

Credit Suisse was the bookrunner for the Rule 144A and Regulation S offering.

In other primary news, China's GITI Tire Pte. Ltd. set the final price talk for its $200 million offering of five-year senior secured notes (B3/B-) at the 12 3/8% area.

Earlier in the week the Shanghai-based tire manufacturer and supplier was circulating guidance in the 12½% area.

The offering, which will not grow in size, is expected to price on Friday.

Credit Suisse and Lehman Brothers are leading the Regulation S offering.

Adding to the corporate pipeline, Brazilian insurance company Sul America SA plans to start a roadshow for a $150 million offering of five-year bullet bonds (/B/B) next week.

Investor presentations will run from Jan. 22-Jan. 30, making stops in Asia, Europe and the United States.

Credit Suisse is the bookrunner for the Rule 144A and Regulation S transaction.

Moving to Russia, Nomos Bank has scheduled roadshow meetings next week in Asia and Europe for its dollar-denominated eurobond offering.

JP Morgan and UBS are leading the offering.

Moody's Investors Service assigns its Ba3 issuer rating Nomos, a commercial bank headquartered in Moscow. The Fitch issuer rating for Nomos is B+.

There have also been rumors that another Russian bank will tap the market in the coming week. Probusiness Bank plans to issue dollar-denominated bonds.

Ecuador dives on default worries

In trading Thursday, Ecuador's bonds nosedived on news reports that the country's economics minister, Ricardo Patino, had said the country wants debt relief of at least 60%, and perhaps more, from its international creditors.

A trader in Latin American issues declared that "clearly, people do not like the rhetoric out of Mr. Correa," referring to Ecuador's newly installed president, who has caused jitters in the emerging debt markets with his pronouncements on what he has called Ecuador's "unjust" and "corrupt" debt burden.

The trader added that the likelihood of the Correa government "screwing investors is pretty high."

On Thursday, Ecuadorian issues were off by as much as 10 points.

The country's benchmark 2030 bonds were down about 6 or 7 points at 72 bid, 74 offered.

Its 2015 bonds - which might not be included in the threatened debt restructuring - were likewise down 6 or 7 points to 80 bid, 83 offered.

At another desk, the 2012 bonds were seen down as much as 10 1/8 points during the session, at 74.125.

The trader also noted that "it doesn't help when Correa called the debt illegitimate, as he did on Thursday."

The new president has said he wants an impartial international tribunal to examine the legitimacy and lawfulness of at least some of the approximately $11 billion of foreign debt entered into by his predecessors.

The trader said there was a fair amount of activity in the Ecuador paper, which he described as "very volatile."

EM sees pressure from lower oil prices

Apart from Ecuador, the market traded "very well" in the morning, though with weaker U.S. equities "and especially the Nasdaq getting smoked" and commodities down, the debt of oil-based economies like Venezuela, Mexico and Ecuador suffered harm later in the day.

"It closed a little weaker - wider on spreads, a little lower in dollar prices," according to the trader.

Overall, spreads on the JP Morgan EMBI+ Index kicked out by 5 basis points versus U.S. Treasuries while returns were down 0.2%.

During the session, Mexico's bonds due 2033 eased 0.10 to 117 bid, 117.50 offered. The Venezuelan bond due 2027 shed 0.95 to 123.85 bid, 124.50 offered.

Flight to Ecuador

The trader speculated that there had been perhaps a little flight out of Ecuador - whose bonds have fallen more than 20 points since Correa's election in November - and into other regional bonds, but acknowledged that "it wasn't one specific thing" driving price movements across the region.

"Corporates have been hot, and people are looking for ideas there," and the bonds of such countries as Chile and Argentina "continue to trade well."

In trading, the Argentine discount bond due 2033 added 0.75 to 114.75 bid, 115 offered. And the Chilean bond due 2013 gained 0.43 to 100.855 bid, 101.263 offered.

Asia slightly wider

In the Asian markets, another trader said, "it was kind of quiet."

He added that there had been "a little bit of selling after the [U.S.] PPI number came out, which took prices lower, but as Treasuries continued to rally for the rest of the afternoon, finishing up ½ point, cash spreads in the Philippines and Indonesia didn't really follow suit. So spreads widened a few basis points across the board."

He saw the Philippine benchmark 2032 bonds at 97.375 bid, 97.75 offered after having opened at 97.5 bid, 97.75 offered, "off a little bit, and Treasuries were higher, so spreads widened out a few basis points."

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