Emerging market debt stung by risk aversion; Bakrie Sumatra taps 2011 notes

By Reshmi Basu, Paul Harris and Paul Deckelman

New York, Feb. 27 - Emerging market debt was grounded Tuesday, as a sharp decline in China's stock market triggered an unwinding of positions across global financial markets.

In the primary market, Indonesia's BSP Finance BV priced a $50 million add-on to its 10¾% senior secured notes due Nov. 1, 2011 at 101 for a 10.463% yield.

The price was set at the tight end of the 100.50 to 101.00 price talk.

Jefferies International Ltd. and PT Danatama Makmur were joint bookrunners for the notes, which were issued via Regulation S.

The original $110 million issue priced at 98 in October 2006, resulting in an 11.278% yield to maturity.

The issuer is a financing unit of PT Bakrie Sumatra Plantations Tbk., a Jakarta-based rubber and palm oil producer.

Risk aversion hits EM

Meanwhile a confluence of factors worked against emerging markets Tuesday, including a plunge in China's stock market as well as worries over the health of the U.S. economy.

The Shanghai Composite Index declined 9% amid speculation that the government would implement tightening measures to avoid a speculative bubble. That set a bearish tone for world markets on fears of a potential unwinding of the carry trade.

On the U.S. side, economic data fueled fears of an economic slowdown. Orders for durable goods in January came in less than expected, which also helped the Dow Jones Industrial Average index to post its worst performance since September 2001. At session's end, the index had slumped 415 points to close at 12,216.

Against that unsupportive global backdrop, emerging markets witnessed an unpleasant session as spreads on the JP Morgan EMBI+ Index widened by 20 basis points.

"So far, the market has been very resilient against any negative headlines, but now we're being tested," said a market source.

"At levels this tight, a sell-off would be welcomed, but a prolonged one would not. But I think this is temporary and could provide us with a much needed point of entry," he noted.

Flight to safety foils EM

In recent sessions, the emerging market asset class has trailed the aggressive rally in U.S. Treasuries, but the market remained largely range bound as investors remained content to sit on historically low spread levels.

But Tuesday, global markets witnessed a flight to safety amid worries over Iran's nuclear ambitions as well nervousness surrounding a potential global slowdown.

Previously, spread widening in emerging markets was not so much a "sign of weakness," but "was more a function of the Treasuries rally," noted a market source.

"Today [Tuesday] was about weakness in the market."

While on Monday, high beta credits bore the brunt of selling pressure, risk aversion spared no one Tuesday, including local markets.

External debt flows were dominated by sellers, particularly in the long-end of corporates, noted a market source. Furthermore, the Street provided little support.

In trading, the bellwether Brazilian bond due 2040 edged down 0.65 to 133 bid, 133.40, a day after piercing a record high on a dollar basis.

Among other benchmark names, the Argentinean discount bond due 2033 slid 1.25 to 113.65 bid, 114.40 offered. The Colombian bond due 2033 lost 0.60 to 143 bid, 144 offered. The Philippines bond due 2025 gave up 0.87 to 141.25 bid, 142.25 offered.

EM session not that bad, says trader

The sharp sell-off in Chinese equities had a ripple effect on financial markets around the world, particularly those of the emerging markets. But all told, it was nowhere as bad as it could have been, traders said.

"Everything got hit pretty hard," said a trader in Asian debt. "Looking across the damage that's been done to the various markets, I don't think that Asia particularly underperformed," relative to other fixed-income markets, but he did allow that "it's been a very weak session."

He saw a 20-plus basis point widening in five-year CDS contracts on both Philippine and Indonesian debt, with the former ballooning out to about 131-136 bps from Monday's levels around 110 bps, while the latter went out to 129-134 bps from prior levels - although it didn't trade Monday - around 106-110 bps.

"There was a similar magnitude of a move on sovereign cash bonds," he added, with "a reasonable amount of selling" in the sovereign issues of both countries.

Selling of new supply

Elsewhere, he said, the retrenchment was "a bit more muted. Where there's been recent supply, such as the Indian bank sector [where ICICI Bank brought a big deal to market just a couple of weeks ago], we've seen a reasonable amount of selling, which is pretty much what you'd expect. The pressure points will be where there has been supply and where there probably still some bonds around."

The flip side of that, he continued, "is that areas such as the Japanese bank capital market, which has been very, very firm on the back of expected upgrades from Moody's [Investors' Service] have continued to hold up pretty well, and certainly through most of the day was holding onto the gains they made yesterday."

Hong Kong-based conglomerate Hutchison Whampoa's debt was seen to have widened out about 5 bps in New York trading from the earlier close in Asia, making it close to 10 bps of widening over the past 24 hours on the company's 2033 issue, although the trader said its shorter bonds, like the 2014 issue, were "no more than 4 or 5 [bps] wider."

Also on the corporate front, MagnaChip Semiconductor Ltd.'s 8% notes due 2014 continued to hold to a 72 bid, 74 offered level, while its 6 7/8% notes due 2011 were at 86 bid, 87 offered, in perhaps ½ point on the bid side, but a trader said there had not been as many quotes in the South Korean computer chip manufacturer's bonds Tuesday as there had been on Monday.

Wider spreads in Latin America

In Latin American debt dealings, a trader said, spreads widened, "but nothing really stood out. The higher beta stuff was probably 15-20 bps on a CDS basis, but I don't think that anybody would see the sell-off as surprising, considering what was happening in equities.

"The real drop happened when U.S. equities really took the last leg down later in the afternoon."

The trader maintained that "I don't think that anybody felt like there was a standout panic - local markets were very volatile, both in terms of foreign exchange rates and local rates, but again, it was just sort of a flight-to-quality, risk-reduction mode, globally."

The trader noted that "corporate bonds in our market did not trade off any more than the U.S. high yield market - if anything. It was a maybe little less. Overall, people felt that it was orderly."

In other developments, Ecuador's congress could vote to approve its 2007 budget, which would reallocate some $200 million to $250 million from debt service, which has already been slashed from prior-year levels by the new government there.

During the session, the Ecuadorian bond due 2030 eased 2.50 to 84 bid, 85 offered. Ecuador's bonds were reported to have widened by 42 bps over the comparable U.S. Treasury issue, to a spread of 728 bps.

Buenos Aires sets talk

In other developments in the new issue pipeline, the Province of Buenos Aires (B3/B+) set initial price guidance for its $425 million offering of fixed-rate senior notes in the area of 9½%.

The amortizing notes are expected to mature in March 2028 and will be non-callable for life.

Barclays Capital and Deutsche Bank will manage the Rule 144A and Regulation S sale.

Pricing is expected to take place on Wednesday.

Also adding to the pipeline, private commercial bank Promsvyazbank (Russia) plans to reopen its 8¾% senior bonds due 2011 (Ba3/B+/B+) to add $100 million.

Citigroup is the lead manager for the Regulation S transaction.

On Oct. 13, 2006, the issuer sold $125 million of the original bonds at par to yield 8¾%.

Pricing is expected to take place this week, pending market conditions.

Finally, Lithuania-based wireless communications operator Bite Lietuva is marketing a €300 million two-part offering of notes.

Issuing via special purpose vehicle Bite Finance International BV, the Vilnius-based company is offering €185 million of senior secured notes (/B/B) and €115 million of subordinated floating-rate notes (/CCC+/CCC+).

Deutsche Bank is managing the sale.

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