Emerging market debt weighed down by technicals; Brazil and Indonesia issue new debt

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Feb. 7 - Emerging market debt slipped Wednesday, weighed down by fresh supply from Brazil and Indonesia.

In the primary market, the Federative Republic of Brazil sold R$1.5 billion or $715 million equivalent of 21-year global bonds (Ba2/BB/BB) at 96.451 to yield 10.68%.

The deal is intended to construct the long-end of the country's local-denominated global debt curve, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

To date, this is the longest dated local-denominated global bond issue from Brazil. Since 2005, the country has sold 2016 and 2022 bonds.

Brazil is taking advantage of investors' hunger for yield, given that the pipeline has slim pickings among both hard currency or local-denominated issues. And the market is also flush with cash, observed Alvarez.

JP Morgan and UBS were bookrunners for the offering, which was registered with the Securities and Exchange Commission. Banco Itaś Europa SA and BB Securities Ltd. were co-managers.

Elsewhere, the Republic of Indonesia sold a $1.5 billion offering of 30-year benchmark bonds (B1/BB-/BB-) at 98.40 to yield 6¾%.

The deal came in line with price guidance for a yield in the area of 6¾%, lowered from the initial 6 7/8%.

Citigroup, Deutsche Bank and UBS managed the Rule 144A and Regulation S transaction.

This is the first time Indonesia has tapped the market since last spring. On March 2, 2006 the country sold $2 billion of sovereign bonds in a dual-tranche offering, which included $1 billion of notes due 2017 and $1 billion in a retap of bonds due 2035.

State Bank of India sets talk

On the corporate pipeline front, State Bank of India (Baa2/BBB-/BBB-) cut price guidance on its dollar-denominated two-part notes offering.

Price guidance on the tranche of five-year senior notes was lowered to Libor plus 38 to 40 basis points from the initial talk of 40 to 43 basis points.

Meanwhile the tranche of hybrid tier I perpetual notes was talked at mid-swaps plus 120 to 125 basis points, lowered from 125 to 135 basis points.

Barclays Capital, Citigroup, Deutsche Bank and HSBC have been mandated to lead the Regulation S deal, which will be priced off the bank's euro medium-term note program.

In the secondary, the expected new supply has weighed on the issuer's corporate bonds.

EM ends four-day rally

Emerging market debt ran out of steam Thursday, as new supply from Brazil and Indonesia weighed on the market, thus ending a four-day rally.

At the close of the session, the JP Morgan Global index was down by 0.1% while spreads widened by 4 basis points.

With the pricing of large new sovereign mega-deals in Indonesia and Brazil, and Tuesday's late-afternoon pricing of Mexican cement producer Cemex SAB de CV, which began aftermarket trading Wednesday, new issues were the dominant feature in the emerging market secondary sphere on Wednesday.

A trader saw the new Cemex 6.64% perpetual hybrid bonds trading "about 2 to 3 points tighter" from the 187 basis points over U.S. Treasuries at which the $750 million of bonds had priced on Tuesday afternoon.

The trader also saw Brazil's new 10.68% bonds due 2028 move up by about 0.50 to 0.60 from their 96.451 issue price earlier in the session, ending the day at 97.05.

He said that after the deal priced during the afternoon in New York, "we saw some buyers in the secondary."

Those two new issues pretty much dominated the day's dealings in Latin American paper. Brazil's benchmark global bonds due 2040 meantime held steady around 132.75 bid.

"Apart from Brazil today [Wednesday], I think [the sovereign debt market] is going to be quiet for a while," he said.

But not for too long, as out of Venezuela came the news - attributed to the chairman of the National Assembly's financial committee, Ricardo Sanguino - that the state-owned oil company, Petroleos de Venezuela SA, will soon sell $3.5 billion of bolivar-dominated debt, broken up into several issues. Sanguino also said that the government itself will sell about $1.5 billion of 10-year bolivar bonds, whose coupon payments would be made either in dollars, or in bolivars at an exchange rate above the official rate of 2,150 per dollar. The debt sales are seen as a move to support the local currency as a way of trying to blunt rising inflation.

Investors will approach the new deal with caution, given the escalating showdown between Caracas and Washington, according to Alvarez, who added that the deal is not a "novelty item" anymore.

Latam corps rally

On the Latin American corporate side, another trader noted those credits have been witnessing a "nice rally beginning Friday after the economic releases had passed with no damage," which helped bolster hopes that the Goldilocks scenario is still intact.

"Everybody is bold again. Risk aversion must be at all time lows... Everything better, even the Venz corps," he added.

Asia sees profit-taking

Turning to Asia, a market source noted credits were firmer during Asian trading hours Wednesday, capitalizing on the positive performance of U.S. Treasuries as well as strength in regional stock markets.

There was some profit-taking, but buyers exceeded sellers as the search for yield went on.

For the session, Indian banks continued to grind tighter, with the exception of State Bank of India, which was pressured by technicals on expected new supply.

Another source noted that the Philippines, Mexico and Indonesia were rallying, particularly in credit derivative swaps as compared to cash.

Returning to the New York session, Indonesia's $1.5 billion issue of 30-year bonds was the big news - but while the much-anticipated issue priced to yield 6¾%, at the tight end of initial market price talk, the bonds drew only lukewarm interest when they were freed for aftermarket dealings, a trader said.

"They did not trade particularly well on the break," he asserted, with the high print around the 98.40 re-offer level, and the low at 98.15, before stabilizing at around 98.30.

"It was a big deal," he said - right in the middle of an anticipated size range of $1 billion to $2 billion - "and they did bring it in at the tight end of talk, so it looks like there's going to be a period when the bonds get digested."

Another market source observed that the new issue weighed on the country's external debt curve. Indonesia's portion of the EMBI Global index lost 1.5% while spreads widened by 10 basis points.

The second trader also noted that the market was seeing "a bit of selling around other issues in the secondary, as guys have rotated out of the old bonds, and into the new one." There was also, he said, "a fair amount of flows in CDS [contracts] as well today [Wednesday]. So it's been active around the [new bond] issue."

Apart from Indonesia, he said that prices of bonds in the Philippines "have come off a bit in line with Indonesia softening up - we have seen a little bit of selling in the Philippines' curve."

He said this latter movement, though, was "nothing too extreme," with prices down perhaps ¼ to 3/8 point at the most from their highs earlier in the day in local trading in Asia, but "not a great deal of volume," with most attention being paid to Indonesia.

EM debt grows tired

Overall, the market saw trading exhaust its momentum as the asset class continued to push up against historical tights, unable to pierce them, noted IDEAglobal's Alvarez.

"The market ran out of energy at these levels," remarked Alvarez, who added that the market needs to see some profit-taking.

With the exception of Wednesday's performance, February has seen a good start, erasing the declines seen in the EMBI index last month.

"I think for the market to be doing as well as it's done since the beginning of the year is a testament to how much cash is out there looking to buy anything with a little bit of yield on it," according to an emerging market analyst.

"New issuance has been heavy, with a lot of questionable deals coming to market, but even after all the new issuance spreads have managed to tighten because of excess demand for paper," he added.

But it is difficult to say whether this is a healthy market.

"In the short term, it's tough to see any signs of trouble, given the imbalances in the market.

"In the long term, though, those imbalances are driving investors to extend down the credit curve into more exotic, more questionable EM corporates, and that raises the question of investors taking on too much risk too fast," he added.

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