Emerging markets debt slight softer; Ecuador outperforms; Axtel issues talk

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Jan. 29 - Emerging market debt turned in a sluggish session Monday as investors stood on the sidelines ahead of this week's heavy slate of economic data in the United States.

Ecuador, on the other hand, roared ahead as it outperformed the market, triggered by conciliatory language by the economic minister regarding debt negotiations.

On the primary front, Mexican telecommunications firm Axtel, SAB de CV set price talk for a $250 million offering of 10-year senior unsecured notes (Ba3/BB-) in the area of 7¾%.

The notes will be non-callable for five years.

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

Pricing is expected to take place on Tuesday.

Meanwhile the hugely upsized new deal from Mexican glass-manufacturer Vitro SAB de CV continued to perform relatively well, settling down in a range around 1½ to 2 points higher than its issue price, according to a market source,

Last week the issuer priced an upsized $1 billion two-part offering of senior notes (B2/B) of five-year and 10-year notes.

At the start of the New York session, the deal was seen softer after a weaker Asian close. Both tranches were spotted in the 100 1/8 to 100¾ range. There were also a lot of flippers coming out of London.

But as Latin American corporates gained some traction, the bonds moved up to the 1011/2-100¾ range.

Ecuador outperforms

Overall emerging market debt saw a quiet session Monday, while Ecuador's bonds jumped to their highest levels in several weeks after the country's economics minister took a more conciliatory tone towards the holders of its $11 billion of debt, saying he would prefer a friendly restructuring rather than a confrontation.

"The bonds were a lot higher today [Monday]," a trader in Latin American issues said, "probably up about 7 or 8 points on average."

He saw the nation's benchmark notes due 2030, which had traded at around 69 on Friday, get as good as 76 on Monday.

At another desk, the bonds were seen up around 6 points on the day to the 74 level.

A third source spotted the notes due 2012 at 79 bid, 81 offered, up 6 points while the notes due 2012 were seen at 81.50 bid, 82.40 offered, up 6.65 points.

The trader said it was the highest the 2030 notes had been "in maybe a couple of weeks."

The bonds - which were trading in the mid-90s before Ecuador's mid-November presidential election - have fallen between 20 and 30 points since the vote, which was won by left-leaning economist Rafael Correa, who was inaugurated as the country's president on Jan. 15.

They fell particularly sharply just days after he took office when Correa and economics minister Ricardo Patino said that they were planning a debt restructuring that could reduce the value of the creditors' stakes by at least 60%, a figure which both men called "reasonable."

Correa and Patino have labeled a large part of the country's debt load "illegitimate," "illegal" and "corrupt," and indicated they might follow the lead of Argentina, which defaulted on nearly $100 billion of debt in 2001-2002 and then forced investors to accept new debt with longer maturities and a sharply reduced face value. Correa even said that members of his government would consult with their Argentine counterparts to determine what action to take. The Argentineans arrived in Quito on Friday.

But on Monday Patino was singing a different, softer tune, saying the government might seek what he called a "friendly" restructuring, pushing the bonds up from their recent lows. Still to be seen, however, is what the government considers a "friendly" restructuring - and whether people in the market will see it that way as well.

Even with the tough talk about the debt's alleged illegitimacy and the possibility of a severe restructuring, friendly or otherwise, not all international lenders necessarily have written Ecuador off as a lost cause.

The head of Corporacion Andina de Fomento, Enrique Garcia, said that Ecuador - which borrowed $3 billion from the development bank between 2001 and 2006 - may get as much as $3 billion in new loans over the next five years from CAF. Garcia said that he is willing to continue lending to Ecuador despite Correa's rhetoric about the debt and threats of a default on its foreign debt, saying that the new president has expressed to him a willingness to continue working with the lender. Garcia said that he expects an agreement on the new loan package by next month.

Latin America softer

Elsewhere in Latin America, a trader said that "most of the other credits [apart from Ecuador] were softer on the day," probably wider by anywhere from 3 to 8 basis points.

In Mexico, the yield on its benchmark 10-year peso bond widened out by 7 basis points to 8.07%, while prices fell to their lowest level since October, when the 10-year was yielding 8.10%. Observers cited market fears about inflation, and concern that the Banco de Mexico, the nation's central bank, did not address the inflation issue forcefully when it last met, deciding Friday to instead leave the country's key lending rate unchanged at 7%

During the session, the Mexico bond due 2033 lost 0.60 to 115.75 bid, 116.25 offered.

The bellwether Brazilian bond due 2040 shed 0.60 to 130.90 bid, 131 offered.

Argentina's discount bond due 2033 gave up 0.35 to 114.55 bid, 1145.90 offered.

Asia sees uninspired session

In Asian activity, "not a great deal was going on," a trader said. "We've had a similar market tone for at least a couple of sessions, where investment-grade paper continues to be relatively firmer, to be stable, depending on which sector you look at. "

He said that there had been "ongoing better buying of Japanese bank capital over the last few sessions, so that's keeping that part of the market pretty well supported." Other high-grade names, he said were "largely unchanged," or perhaps a basis point or two wider in Korean issues.

However, on the below-investment-grade side of the market, particularly in sovereign debt, "there's been a lot of selling by clients on sub-investment-grade sovereigns like the Philippines and Indonesia, and that's beginning to wear on the market."

Another source noted that there were a few down-trades in the Philippines and Indonesian credits Monday.

In trading, the Indonesian bond due 2017 added 0.15 to 105 bid, 105.75 offered. The Philippines' bond due 2025 eased 0.12 to 141 bid, 141.50 offered.

The second trader observed, for instance that five-year credit default swaps (CDS) contracts on the two nations' debt have pulled back "5 or 6 basis points off the tights [recent tight levels] and there's definitely been some erosion of the technical strength that we've seen in the sovereign markets in the first part of the year."

He did point out that "there's been nothing particularly dramatic" in the pullback, and the market was still only 6 or 7 basis points off its all-time tight spread levels, especially given that the five-year Treasury paper against which the CDS contracts are pegged has sold off as well.

However, added that "in the first part of the Treasury sell-off, we were outperforming and tightening on a spread basis, now you're starting to see us giving back a fair amount of those gains.

"Certainly in the last couple of sessions, we've underperformed [U.S.] Treasuries on the way down," he continued.

"It's just symptomatic of the erosion in market technicals."

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