Emerging market debt moves higher; TAM sells $300 million in new debt

By Reshmi Basu and Paul Deckelman

New York, April 20 - Emerging market debt continued to hum along Friday, as spreads tightened on investors' ongoing hunger for yield.

In the primary market, TAM Capital Inc., a wholly owned subsidiary of Brazilian air carrier TAM SA, priced an upsized $300 million issue of 7 3/8% 10-year senior notes (/BB-/BB) at 98.273 to yield 7 5/8% on Friday.

The yield came at the tight end of the 7¾% area price talk.

Citigroup and UBS were joint bookrunners for the Rule 144A with registration rights and Regulation S issue, which was upsized from $200 million. Calyon Securities was the joint lead manager.

Proceeds will be used to finance fleet renewal and expansion, and for general corporate purposes.

Also pricing, Hungarian Telephone and Cable Corp. sold a €200 million offering of six-year floating-rate notes at par to yield three-month Euribor plus 300 basis points.

The issue priced in line with revised guidance, which was lowered from initial talk of 325 basis points.

Merrill Lynch & Co., BNP Paribas and Calyon Securities were joint bookrunners for the Rule 144A transaction.

The notes, which come with 16 months of call protection, were sold via the company's wholly owned subsidiary, HTCC Holdco II BV.

Proceeds will be used to partially fund the company's acquisition of Invitel Zrt. and refinance debt of Hungarotel Zrt. and PanTel Zrt.

EM rolls along

Back to trading, emerging market debt traded with an upbeat tone Friday, as the market remained well supported. Brazil and Colombia continued to post gains, bolstered by the generous liquidity conditions existing in the market.

At current levels, it may be overly simplistic to describe the market as just expensive, but rather the pricing has become "astronomical," according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

During the week, spreads for heavyweights Brazil and Colombia tightened to record low levels.

But while prices those two credits spiked, high beta names Argentina and Venezuela slid.

Starting more than a week ago, the long end of each of their respective curves sold off on fears that ABN Amro Asset Management - a major holder of both bonds - might rebalance its portfolio following the resignation of Rafael Kassin, who had managed the company's $3.5 billion global emerging debt portfolio.

Furthermore, those suspicions of a massive liquidation were validated Thursday by EmergingPortfolio.com Fund Research, according to Alvarez.

The firm reported that ABN Amro's Luxembourg-domiciled AAF Global Emerging Markets Bond Fund posted outflows of $1.6 billion in the wake of the management change.

For the week ending April 18, emerging markets bond funds recorded whopping outflows of $1.44 billion, the worst number recorded by EPFR since the beginning of 2001.

Brazil up on tightening hopes

In secondary trading of emerging markets debt, Brazil's bonds continued to shine, as market participants speculated again that the central bank will accelerate its pattern of interest rate cuts since inflation is perceived to be under control.

Among its dollar-denominated issues, Brazil's 7 7/8% global bonds due 2015 were seen having firmed to 114.92 at the day's end, up from 114.82 the previous day, while the yield on those securities tightened to 5.47% from 5.49% previously.

The price of Brazil's dollar-denominated 7 1/8% bonds due 2037 rose more than half a point to around the 114.5 level, while their yield came in by 3 bps to 6.09%.

Brazil's local-currency bonds continued to firm, with the real-denominated zero-coupon bonds due 2008, considered a benchmark in that sector, shrinking their yield by another 5 basis points on the day, finishing at 11.64% - just 1 bp above their all-time tight of 11.63%, which they reached in intraday trading. That followed yield declines of 3 bps on Wednesday and an astonishing 23 bps on Thursday.

Those bonds closed out the week having their biggest one-week gain since late last summer, when the yield tightened by 38 bps in the week ended Sept. 1.

The catalyst behind the tightening has been investor sentiment that the country's central bank is likely to continue its recent pattern of interest-rate cuts, or even accelerate them, as inflation appears to be in check.

On Wednesday, the bank announced the latest in a series of 25 bps reductions in its benchmark lending rate, bringing it down to a record low of 12.5% - more than 7 full percentage points below the peak level of 19.75% at which that rate stood in September 2005.

But analysts and other market-watchers noted that the seven-member board of governors was split nearly down the middle at four to three - and the three dissenters were pushing for an even bigger rate cut of 50 bps.

They said that is a sign that a sizable portion of the financial community wants to see the rate cuts continue at an even faster pace given that inflation is being held down by the strength of the Brazilian currency.

Inflation, as measured by the consumer price index, fell to just 3% in March - its lowest level since 1999, and well below prior federal forecasts of a 4.5% rate this year.

The central bank governors are scheduled to next meet - and probably to again cut the key rate - on June 5-6. Some forecasters see the rate ending the year as low as the 10.75-11.25% area, and see it going down to the low 9% range by the end of next year.

Colombia up on buyback speculation

Also in Latin America, Colombia's bonds continue to rise on speculation that the Bogota government may use a portion of its record foreign reserves to buy back some of that debt.

The country's 10 3/8% bonds due 2033 were being quoted up nearly 4 points to just under the 150 mark, their biggest one-day gain since last fall. The yield tightened by nearly a quarter of a percentage point to just under 6½%, from around 6¾% on Thursday.

Helped by sharp appreciation of the Colombian peso, the government of president Alvaro Uribe has over the past few years used a series of buybacks to sharply reduce dollar-denominated foreign debt as a percentage of the country's overall debt load, going from just under half in 2002 to about one-third last year.

Asia sees steady trading

Apart from Latin debt, Asian bonds seemed to have steadied after Thursday's retreat, although investors remained cautious, concerned that some market players might be wanting to take their money off the table after the recent trend of spread tightening, which brought spreads versus U.S. Treasuries down to, or near, all-time tight levels.

During the Asian trading day Friday, five-year CDS contracts on Philippines sovereign debt were seen holding pretty much steady at 109/111 bps, while the similar contract on Indonesia's bonds underlying stood at a slightly wider 108/112 bps. Both CDS contracts were about 3 bps wider than their recent all-time tights, but about 4 bps inside of where they had been a week earlier.

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