Emerging market debt wider on U.S. stock plunge; TNK-BP sells $1.3 billion in two tranches

By Reshmi Basu

New York, March 13 - Emerging market debt nudged lower Tuesday as U.S. stocks came under pressure on the back of worries about the sub-prime mortgage sector.

Meanwhile in the primary market, Moscow-based integrated oil company TNK-BP International Ltd. sold $1.3 billion in a two-part offering of global bonds (Baa2/BB+/BBB-).

The issuer sold a $500 million tranche of five-year bonds, which priced at 99.876 to yield a spread of Treasuries plus 173 basis points. That came inside of talk, which was set in the area of 175 basis points.

Meanwhile the $800 million tranche of 10-year bonds priced at 99.201 to yield a spread of Treasuries plus 223 basis points. That also came inside of talk, which was set at Treasuries plus 225 basis points area.

ABN Amro, Barclays Capital and Citigroup were joint bookrunners for the Rule 144A and Regulation S deal, which was sold via TNK-BP Finance SA.

EM eases with U.S. stocks

Emerging market debt was softer Tuesday, trading in sympathy with lower U.S. equities. U.S. stocks dove more than 240 points, recording the second biggest decline this year.

The already deflated sub-prime mortgage sector delivered more negative headlines Tuesday, which elevated fears that the sector's woes would have a contagion effect on the U.S. economy.

Lender Accredited Home Lenders Holding Co. said it is seeking alternatives to raise cash as it faces a cash squeeze due to margin calls and New Century Financial Corp. disclosed that it is being investigated by both federal prosecutors and the Securities and Exchange Commission.

Adding more worries, the Mortgage Bankers Association said new foreclosures hit an all-time high in the fourth quarter of last year while the percentage of sub-prime borrowers making late payments jumped to 13.33% from 12.56% in the third quarter.

That weakness was compounded by the release of disappointing U.S. retail numbers for February, which bolstered the "flight to safety trade," observed a market source, who added that trading volumes remained light within the emerging market asset class.

High beta credits saw the blunt of the pressure as the spread on the JP Morgan EMBI+ index kicked out by 8 basis points to 189 basis points versus Treasuries.

During the session, the bellwether Brazilian bond due 2040 gave up 0.15 to 133.80 bid, 133.85 offered. The Indonesian bond due 2035 eased 0.60 to 122 bid, 122.50 offered. And the Turkish bond due 2030 fell 0.50 to 152.25 bid, 152.75 offered.

Nonetheless, while the meltdown in the sub-prime mortgage sector is proving to be an Achilles' heel for equities, the impact on emerging markets has been contained.

"Surprisingly the Latin American debt market continues to be free of hiccups for the most part," according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Within the Latin American regions, spreads were wider by 4 to 10 basis points, depending on the credit. High beta credits such as Argentina, Ecuador and Venezuela underperformed the market. But the downward price movements did not show the same intensity seen on the U.S. side.

"It's been able to maintain a high degree of differentiation," Alvarez added.

Even as overall spreads were wider Tuesday, the asset class demonstrated resilience. And the primary reason behind the market's Teflon exterior is the scarcity of fresh supply, which is making investors reluctant to unload dollar-denominated holdings unless there is more bleakness seen from the U.S. economic side or from the emerging market local front.

"The market is more in a reactionary mode, which means that it is not going to move unless it is forced to," Alvarez added.

Argentina close to Paris Club agreement

In other developments, Argentine cabinet chief Alberto Fernandez said the country is close to reaching an agreement with Paris Club over repayment of its debt. But the news had a negligible impact on the country's external debt.

During the session, the Argentine discount bond due 2033 eased 0.60 to 114.40 bid, 115 offered.

Elsewhere, the Colombian finance ministry said it would issue less local debt in 2007 on the back of higher than expected tax collection, according to a market source. The government will issue $8.2 billion equivalent or 18 trillion pesos of TES bonds, down from the earlier announced target amount of 20.5 trillion pesos.

Ecuador's political stand-off

Moving to Ecuador, the political crisis continues to escalate over the removal of 57 opposition leaders from their posts by the Electoral Court. The dismissed legislators fought with riot police Tuesday as they tried without success to enter the capitol building.

The lawmakers have refused to accept last week's court decision to remove them.

The president of the congress had asked the nation's highest court, the Constitutional Tribunal, to rule on the legality of the dismissal, but the court refused his request.

The ouster of the legislators followed a congressional vote on March 6, in which members voted to replace Supreme Electoral Tribunal president Jorge Acosta after the court supported president Rafael Correa's plan to hold a referendum on whether the constitution should be rewritten.

The congressional session Tuesday was canceled as congress failed to reach quorum. The question now becomes whether the alternates of the ousted deputies could replace them as Correa most likely will push for a pro-government bloc, noted an analyst.

The standoff has added more tension to an already disharmonious relationship between the president and congress. And if political crisis continues to escalate, the fundamental story will deteriorate, added the source.

In trading, the Ecuadorian bond due 2030 lost 0.50 to 85.50 bid. 85.50 offered.

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