Emerging market debt shakes off Japanese rate hike, CPI numbers; two corporates set talk

By Reshmi Basu, Paul Deckelman and Paul Harris

New York, Feb. 21- Emerging market debt was relatively firm Wednesday as a host of negative headlines did little to drain sentiment that remained positive after the recent rally in U.S. Treasuries - even as those gains came decisively to an end Wednesday.

The emerging markets asset class continued to tighten, despite an interest rate increase by the Bank of Japan, higher-than-expected inflation numbers in the United States, and hawkish minutes from the Federal Open Market Committee's latest monetary policy meeting.

In the primary market, Russian oil pipeline company OJSC AK Transneft set price talk for a seven-year offering of loan participation notes (A2/BBB+) at mid-swaps plus 55 basis points.

The size of the deal is expected to be $1.3 billion.

Credit Suisse and Goldman Sachs are joint bookrunners for the Rule 144A and Regulation S notes offering, which will be issued via TransCapitalInvest Ltd.

Pricing is expected to take place on Thursday.

Also, Digicel Group Ltd. set price talk for its $1.4 billion two-part offering of eight-year senior notes (Caa2//CCC+) on Wednesday.

The Caribbean wireless telecommunications network operator talked a $1 billion tranche of cash-pay notes at 9% to 9¼%.

Meanwhile Digicel talked a $400 million tranche of PIK toggle notes to price 25 basis points behind the cash-pay notes. Should the issuer elect to make an in-kind interest payment, as opposed to a cash payment, the coupon steps up by 75 basis points.

Pricing is expected Thursday afternoon.

Citigroup and JP Morgan are joint bookrunners for the Rule 144A for life notes.

Bakrie Sumatra to hit road

In other pipeline news, Indonesian rubber and palm oil producer, PT Bakrie Sumatra Plantations Tbk, will host investor presentations on Thursday and Friday in London for a $49 million tap of its 10¾% senior secured notes due Nov. 1, 2011 (B2/B).

Presentations are also scheduled for Monday and Tuesday in Hong Kong.

Jefferies International Ltd. and PT Danatama Makmur are joint bookrunners for the Regulation S only with no registration rights offering of notes to be issued by the Jakarta-based company's wholly owned subsidiary BSP Finance BV.

The notes become callable on Nov. 1, 2009 at 105.375. They also feature an equity clawback until Nov. 1, 2009 for 35% at 110.75

Proceeds will be used for acquisitions of businesses or assets and capital expenditures.

The original $110 million issue priced at 98.00 in October 2006, resulting in an 11.278% yield to maturity.

EM ignores Japan rate hike

In trading Wednesday the market shrugged off the Bank of Japan's decision to tighten the benchmark rate, despite recent nervousness ahead of the decision surrounding the potential unwinding of the carry trade.

Seeing signs of improved growth, the Bank of Japan raised its benchmark interest rate by 25 basis points to 0.5%, the first increase since last July. Prior to that move, the central bank had kept rates at virtually zero for six years.

Overall the Asian trading session got off to a slow start Wednesday as market participants filed back to work from their Lunar New Year festivities.

Moving to the high yield front, Asian sovereigns saw a soft opening but then there was a more local buying, especially on the long end of Indonesia and the Philippines. At the close of the Asian trading session, there was no change on a dollar basis for both sovereigns.

In other developments in Asia, Standard & Poor's Ratings Services raised its long term credit rating on Korean steelmaker Posco to A from A-, citing improved financial stability.

The company's credit derivative swaps were unchanged on the news.

EM shrugs off headlines

Returning to the New York session, investors continued to shrug off the news from the Bank of Japan as well as some alarming headlines such as higher than expected U.S. consumer price index figures, remarked market sources.

Adding more consternation to the market, minutes from the Federal Reserve's last meeting on Jan. 30-31 revealed that the central bank was unsure as to whether inflation was backing down

"I think the [BOJ] news today [Wednesday] was actually slightly positive for EM given the BOJ's dovish comments following its decision," noted an emerging market analyst.

"10Y Japanese rates are actually down a little today [Wednesday] on the comments, so I doubt that this hike in rates will do much to drain liquidity out of the system and hurt EM. More BOJ hikes could eventually begin to pinch, but for now the move shouldn't have much of a negative impact," he added.

Instead he noted that the release of the CPI data was the more disturbing of the two events, but that emerging markets was able to hold up fairly well, given the drop in U.S. Treasuries.

The Labor Department reported that the core consumer price index rose 0.2% in January, triggered by large gains in food and medical care. Core inflation, which excludes food and energy prices, rose 0.3% last month, the highest jump since June.

"The Brazilian real is actually a little stronger, and some EM spreads are a little tighter," noted the analyst.

"Nobody wants to sell anything in EM, so the drop in USTs has helped spreads tighten a little. I think most investors are going to stay put for now and wait for all the U.S. data flow next week," he added.

Light trading in secondary

Meanwhile it was back to work in New York - sort of - in the emerging markets secondary arena, with the Chinese New Year holiday concluded in Asia and Carnival season finished in Brazil, a key part of the Latin American bond world.

But traders in each of those markets said that despite what the calendar said, activity was pretty light, with not everyone yet back even physically, let alone mentally, from their respective merry-making.

"Carnival is just over," a trader in Latin issues said, "and literally, they came in for a half-day today [Wednesday], so it still feels like the market is going to be reasonably quiet the rest of the week."

"The markets have re-opened," after the two-day Lunar New Year holiday, a trader in Asian issues said, "but not in all centers. It normally takes a little while for the markets to open up in full [after the holiday] - but it was definitely more active than it had been earlier in the week."

He said that overall, "things are trading pretty well." He said that Wednesday's session saw "quite a lot of buying and activity" in below-investment-grade sovereign debt, Indonesia's in particular. He said there was "good buying through the curve in Indonesia, and also some buying in Philippines [sovereign bonds] also."

Generally speaking, he said, "the market feels pretty buoyant. Spreads outperformed [U.S. Treasuries] by about a basis point or two, on the back of that buying," as the U.S. bond market retreated Wednesday - its first setback in five sessions - after the January inflation report came in higher-than-expected, and minutes of the Jan. 31 Federal Reserve meeting showed that policy-makers had rejected the option of loosening interest rates, instead choosing to maintain vigilance on inflationary trends.

"The overall market was firm - though activity wasn't particularly heavy today [Wednesday]."

He said that with the generally firm tone, "we're seeing and we're hearing from accounts that continue to receive inflows of cash - and that continues to find its way into the market."

Latin America sees restrained trading

In the Latin American market, meantime, secondary dealings were seen as restrained, with market participants first straggling back to their desks after several days off; although Carnival is chiefly celebrated in Brazil, the run-up to the holiday had largely quieted activity elsewhere in the region over the previous few sessions.

There was little trading in the Brazilian 2040 benchmark issue, whose yield was seen continuing to hover around record low levels at 5.885%.

"Brazil's benchmark never moves any more," the Latin American trader opined. "It used to be the big benchmark in the market - but it's trading range in terms of dollar prices is probably no different that the trading range of the 30-year Treasury over the last six months or so, it's become that stable. It's very boring," with few trades in the normally active issue seen.

The trader said that what focus there was seemed to be on the new-deal arena, where Caribbean wireless telecom provider Digicel's $1.4 billion issue of eight-year notes is expected to price on Thursday.

Venezuela, Argentina to sell joint bonds

Over in the sovereign sphere, the news that Venezuela and Argentina plan to launch a joint $1.5 billion bond issue on Monday was not too terribly exciting, the trader said, being something of a case of been there, done that.

"They've done it before," so the market is by now used to the gambit.

"They issue a joint bond, but then it splits into two pieces. The local investors typically buy the Venezuelan piece, and international investors buy the Argentine piece, or local Argentine investors."

The trader also said that a news report that Argentine president Nestor Kirchner may now follow the advice of the International Monetary Fund and repay the holders of the nation's defaulted bonds - this after having railed against the multilateral agency two years ago, calling the IMF "pathetic" - would likely have little or no real impact on the market.

"Those kinds of articles have all kinds of different opinions in them. Argentines would tell you that Kirchner is pretty religious [about not wanting to give in to the IMF and go along with its advice to pay off on defaulted bonds which were not taken out in a debt exchange in 2005] about it. Maybe the economy will be doing so well at some point that he'll think he should do it - but he's not going to just go and pay them."

Argentina defaulted on nearly $100 billion of debt in 2001-2002; after several years of wrangling with its various international creditors, it mounted an exchange offer in 2005 under which it gave participating bondholders new bonds with longer maturities in exchange for their old, defaulted notes - but they were only paid 30 cents on the dollar. Holders of about a quarter of the $82 billion principal amount of the bonds opted not to accept the offer, and still hold those notes. The IMF urged Argentina in 2005 to be "respectful" of its creditors, and pay off the bonds, but Kirchner rejected that advice.

The trader said "the question is whether he will offer an exchange to the holdouts, that's the same or similar to the original debt restructuring - and so far, he's even refused to do that.

"It's such a big personal and political decision for Kirchner that I don't think that anyone can look at it and predict what will happen."

Looking ahead

Emerging markets shrugged off the composite of bad news, remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal, referring to Wednesday's spate of negative headlines from a more hawkish Fed minutes to higher commodity prices such as some metals, which in turn will impact inflation.

And one reason why the negative headlines are not sticking is "the scarcity of new supply," explained Alvarez, adding that was why "everyone is content on holding to their positions."

Next week, investors will see a heavy dose of U.S. economic data. Alvarez noted that the data may do little to change the course of emerging markets, given that investors "know the weak spots in the [U.S.] economy," such as manufacturing and housing.

And fundamentals are in place. Instead it is the unknowns on the external side, such as commodity prices and the brewing confrontation between the United States and Iran, which may rub some of the luster off the asset class.

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