Rate cut rally falls flat; emerging markets trades down with equities; active primary prices $510 million

By Aaron Hochman-Zimmerman

New York, Nov. 1 - Emerging markets quickly hit a wall during Thursday's session after the Federal Reserve's rate cut provided some tightening on Wednesday.

Low volumes, high volatility and falling prices were seen across emerging markets as bonds followed U.S. equities over the cliff.

High-betas Argentina and Venezuela, which had seen so much success earlier in the week, both saw their benchmark sovereigns lose 1 point.

In the primary market, the pipeline was running on all cylinders. A total of $510 million priced over three deals, and other issuers released talk and announced new deals.

Market sentiment was also shaken by sour headlines from the banking sector and general disappointment in the effects of the Federal Reserve Board rate cut.

"There's too much bad news floating around," said a trader who specializes in Asian credit.

"It was a waste; I was against it," a syndicate official said about Wednesday's Fed cut.

"Either lower it 50 [basis points] or leave things along, they wasted a bullet ... everything is down across the board," he said.

"We're going back to the beginning," he said.

"There's going to be volatility, people are going to be worried."

Market volatility also saw a hefty jump as the VIX index added 4.68 to close at 23.21. The VIX index is the accepted measure of market volatility.

As U.S. Treasuries were on the rise so was the yield of JP Morgan's EMBI+ index. The lift in Treasuries prevented the index from widening 11 bps to 196 bps.

The EMBI+ measures the amount of extra yield investors demand to hold emerging markets debt.

Three price $510 million

Unlike the light volumes in the secondary, plenty of volume was pushed through the primary pipeline.

There is hope for new issues, a syndicate official said.

However, "they've got to be prepared," he said for a "higher new issue premium."

Deals will most likely be able to get done but "issuers have to be prepared to pay," he said.

Deals which were able to get done Thursday included one from CII Carbon LLC and CII Carbon Corp. with its parent company, Rain Calcining, based in Hyderabad, India.

The company priced a $235 million issue of eight-year senior subordinated notes (B3/CCC+/B-) at par to yield 11 1/8% on Thursday.

The yield was printed 25 bps beneath the low end of the 11½% area price talk.

Citigroup ran the books for the deal.

Proceeds will be used to repay the bridge loan incurred to finance the acquisition of CII Carbon by Rain Calcining.

Both CII Carbon and Rain Calcining are producers of calcined petroleum coke.

CII Carbon is headquartered in Kingwood, Tex.

Banco Mercantil do Brasil SA priced a $175 million three-year bond at 99.676 with a coupon of 8½% to yield 8 5/8%.

The deal came at the rich end of talk for a yield in the 8¾% area.

UBS had the books for the Regulation S deal.

Banco Mercantil is a Sao Paulo-based retail and commercial bank.

Also, Panama Canal Railway Co. priced a $100 million 19-year senior secured bond (Baa3/BB/) at par with a coupon of 7%.

Morgan Stanley acted as bookrunner for the deal.

Proceeds from the sale will be used to repay existing debt.

Panama Canal Railway in an Ancon, Panama-based rolling stock operator.

Issuers reshuffle the calendar

China's Country Garden announced the amount of $1.5 billion or greater for its two tranche bond (Ba1/BBB-/) offering.

The tranches will have five- and 10-year maturities.

Morgan Stanley and UBS will bring the deal to market.

Proceeds from the deal will be used to refinance a loan from the Bank of China and capital expenditures needed for existing and new projects.

Country Garden is a Shunde, China-based real estate developer.

South Korea's Hyundai Capital Services announced a dollar-denominated benchmark-sized five-year senior unsecured bond (Baa2/BBB/).

Deutsche Bank, Citigroup, Goldman Sachs, JP Morgan and Merrill Lynch will share the responsibilities of the bookrunner.

Pricing is expected late in the week of Nov. 5.

A roadshow will be held in Los Angeles and Boston on Monday, in the New York area on Tuesday and calls will be placed to the U.S. midwest on Wednesday.

Hyundai Capital is a Seoul-based firm which manages financial services for Hyundai Kia Automotive Group.

"They're going to try to push this pretty hard," a trader said.

In the Dominican Republic, Cap Cana plans to offer $500 million 10-year notes (B3//B).

Deutsche Banks and Morgan Stanley will act as bookrunners.

Pricing is expected during the week of Nov. 5.

A roadshow will be held in London and Singapore on Nov. 2, in New York on Nov. 5, in Boston on Nov. 6 and on the U.S. west coast Nov. 7.

Cap Cana is a Santo Domingo, Dominican Republic-based resort.

Also in the Dominican Republic, Metro Country Club announced a $110 million private placement deal split between a $75 million six-year senior secured tranche and a $35 million seven-year subordinated payment-in-kind tranche.

The $75 million tranche has been talked in the 12% area and the $35 million tranche in the 13½% area.

Stephens will act as the bookrunner.

Fitch rates the senior tranche B-.

Metro Country Club is Juan Dolio, Dominican Republic-based real estate developer.

The United Arab Emirates' Newland International Properties announced a $220 million seven-year senior secured bond (Ba3) offering.

Bear Stearns will act as the bookrunner for the deal.

A roadshow will be held in the United States and London. Pricing is expected on Nov. 8.

Proceeds from the sale will be used for new construction and the refinancing of existing debt.

Newland International Properties is a property developer based in the United Arab Emirates.

Elsewhere, Argentina's Banco Macro SA extended the subscription period for its offering of up to $100 million of seven-year class 4 notes (B2//B+) to Feb. 1 from Nov. 1, according to a company news release.

Citigroup Global Markets and UBS Securities LLC will be the placement agents outside of Argentina, and Citicorp Capital Markets SA and Raymond James Argentina Sociedad de Bolsa SA will be the local placement agents.

The issuer is a Buenos Aires-based retail and commercial bank.

"I think that's a bit dramatic," a syndicate official said about the postponement.

They did not wait to fully test the market's reaction, he said.

"I think it's a bad sign for Argentina," a syndicate source said.

"The demand wasn't there," the syndicate source said about Argentina's corporate sector, adding that the move to February may be because "that's when they'll have year end [data]."

LatAm lives and dies with high betas

The weakening in Latin American trading was led by the high-beta credits which had rallied earlier in the week.

Even after the Fed rate reduction, equities dropped significantly as the Dow Jones Industrial average lost 362.14 to close at 13,567.87, and "our market backs up in sympathy," a syndicate official said about emerging markets.

Brazil's bonds due 2037, which have been on the more stable side of the Latin American benchmark bonds, fell 0.55 to trade at 115.15.

The high-betas were able to keep some of the gains from earlier in the week, but their upward trend was forced to turn around.

The 8.28% Argentine discount bonds due 2033 lost 1 point and were quoted at 100.25.

In Venezuela, the sovereigns due 2027 also fell 1 point to 109.55.

Europe watching Fed fallout

In trading, emerging Europe showed light volumes and a sentiment that is hesitant to commit to investments while many major financial institutions are suffering.

"Everyone's watching," a syndicate official said about the sector's lack of motivation to put money to work.

He particularly noted the poor performance of banking names: "Citibank is down huge."

In Turkey the clock may be ticking toward an incursion into Iraq as prime minister Recep Tayyip Erdogan may not be able to hold back the pressure to act past a meeting with U.S. president George Bush on Monday, according to a market source.

Currently the United States is providing the Turkish military with "actionable intelligence" about the Kurdistan Workers Party (PKK).

As oil prices fell towards $93 per barrel, Turkey's cabinet met, but did not make any final decisions about the nature of the sanctions which will be leveled against Iraq.

Meanwhile, the European Commission has asked Turkey to show more determination to enact political reforms in order for it to move closer to membership in the European Union, according to the BBC.

A report will be issued next Tuesday, which is expected to demand more from Turkey to protect the freedom of expression, civilian control of the military and the rights of non-Muslims and Kurds.

The report is also intended to serve as a warning to Balkan countries also campaigning for membership in the European Union.

Turkey's benchmark bonds due 2030 were quoted with a drop off of 0.75 to 158.50 bid, 158.75 offered.

In Russia, the Kremlin rebuffed criticism from the west over its attempts to limit election oversight by the Organization for Security and Co-operation in Europe (OSCE).

The Russian central elections commission head Vladimir Churov said that 70 observers from the OSCE are sufficient to monitor the Dec. 2 elections.

The OSCE and the United States have voiced objections over what are seen as Russian attempts to limit democracy.

The Russian government bonds due 2030 were up 0.125 to trade at 112.75 bid, 113 offered.

Prices could be worse in Asia

Prices were dropping in Asia during Thursday's trading, but considering the surrounding financial environment with banking trouble in Japan and India as well as the major western markets, things could have been worse in the region's markets, according to a trader.

Still, the bright spots of the day came in comparison to the summer hardships.

"Compared to the severity of the moves we saw in July and August, EM and Asia did actually behave very very well today," the trader said.

"Markets were focused much more on where the real problems are," he said.

The Philippines' government bonds fell a point to close at 133.25 bid, 133.75 offered.

In Indonesia, the benchmark bond due 2017 had spent over a week hovering around a bid of 105.50, but that issue continued the drop from Wednesday as it lost 0.375 to finish at 104.875 bid, 105.50 offered.

Pakistan's fickle sovereign due 2017 was seen at 90 bid, 92 offered.

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