Gazprom prices upsized $1.25 billion notes; other deals expected; existing bonds higher, led by Argentina

By Aaron Hochman-Zimmerman

New York, Aug. 8 - Russia's OAO Gazprom finally priced its offering of notes, after weeks of anticipation - and actually succeeded in upsized the sale to $1.25 billion from the planned $1 billion amount.

Sellsiders said the new issue, the first since the recent subprime induced turbulence, may have opened doors for other issuers.

Meanwhile in trading, emerging market debt had one of its best sessions in years on Wednesday - according to some reports, in as many as almost six years - taking its cue from U.S. and other global stock markets. Equities were rising in relief that the Federal Reserve Board did not sound an overly "hawkish" note when it said Tuesday that it would guard against a resurgence of inflation - but did not think that the recently tightened credit conditions would endanger the U.S. economy's "moderate" growth prospects.

Argentina's bonds once again led the way, with strength seen in such other Latin American names as Ecuador, Mexico, Brazil and Colombia. Outside of Latin America, such names as Turkey, South Africa and the Philippines were higher, although Indian bonds were actually lower on the day.

From the primary, an emerging markets syndicate desk official said about the after-effects of Gazprom's $1.25 billion deal: "We might see some other issues come if this works well."

We "continue to see emergence of real money buying, though cautious," a trader specializing in Latin America said, adding that there was "no major gap-up in [the corporate market], but certainly better bid.

"No word of new issuance, at least that I've heard," the trader said.

Because of its size and market prominence, Gazprom's ability to price is not necessarily a sign that overall conditions have improved considerably, said a syndicate official. But the deal does provide some hope.

"[Gazprom] is pretty much in a class by itself, [but] in general terms, credit markets seem to be reopening to new supply, specifically in the high-grade sector," a syndicate desk official said.

"Despite the fact that levels are wider, and that we are talking about high-grade names, it is certainly encouraging to see new supply being cleared by the market, even on new 30-year paper which is most of the times the last tenor to be available after a volatility period," the syndicate official said.

"I would expect seeing other high-rated U.S. names come out in the short-term, which would give comfort to the market to seriously look at new supply from emerging market and high-yield names, although this might happen only after the summer holiday season," the official added.

Gazprom finally prices

Gazprom priced its celebrity $1.25 billion 30-year senior unsecured notes (A3/BBB/BBB-) at par with a coupon of 7.288% and a spread of 225 basis points over 30-year U.S. Treasuries.

The deal managed to price at the tight end of the initial guidance of 30-year Treasuries plus 225 to 230 bps and was increased from the originally expected $1 billion. The guidance was widened earlier in the day from 30-year Treasuries plus 220 to 225 bps.

ABN Amro and Morgan Stanley had the books for the deal.

The government controlled oil giant is based in Moscow.

"It's an expensive credit," said an emerging markets syndicate official said adding that under a different market the deal may have carried a spread of 140 bps.

"It's quite a premium they have to pay," the official said.

"They really need the money to finance all the pipelines," the official said about Gazprom. "So timing is not very good."

Strong Fed boost for EM bonds

With stocks continuing to rise on diminishing concerns among investors that mortgage losses arising from the problems of the subprime loan sector will have any long-term effect on banks and homebuilders - causing the investors to be willing to take on more risk in their portfolios - U.S. Treasury issues had their biggest loss in more than a month, with the yield on the benchmark 10-year notes fattening by 8 basis points to 4.86%.

With Treasury yields rising and EM yields at the same time falling as investors snapped up the bonds, the spread between the two - considered the key measure of investor risk tolerance or risk aversion - tightened significantly. The widely followed JP Morgan & Co. EMBI+ index showed the spread narrowing by a whopping 20 basis points to 192 bps as trading wound down for the day - the biggest one-day drop since late in 2001.

"It was a good day," a buyside source exclaimed with no small degree of understatement. Noting that stocks initially pushed upward, then appeared to pull back, before again surging upward later on - the bellwether Dow Jones Industrial Average gained 53.56 (1.1%) to end at 13,657.86 while the Nasdaq Composite Index scored its biggest advance since October, up 51.38 (2%), to 2612.98 - he said that "the crazy dip and recovery in the stock market in the late day was so quick that the debt markets didn't even have a chance to react to that."

He pointed out that interestingly, "the indices were for a while trading above their fair value this [Wednesday] morning, which is unusual, because they normally are hedging tools, and tend to trade below their fair value - so it was a sign that there was a short squeeze, that people who'd shorted that index in the last week of July were now covering their short positions."

Argentina again the leader

As has been the case over the two previous days of the EM rally, high-beta credit Argentina - whose volatile bonds consistently got walloped more than any other name when the EM market was in the throes of its downturn in late July and at the beginning of August - notched the biggest gains.

That country's benchmark dollar-denominated 8.28% bonds due 2033 at one point had jumped nearly 3 points to just above 88, although at the end of the day its gains were a more moderate but still-respectable 1¾ points, and the bonds were quoted having closed at 87. The yield on those bonds, which earlier in the session had plunged by more than 30 bps, ended up coming in a still-substantial 20 bps to just over 9.5%.

Overall, Argentine debt spreads versus Treasuries, as measured by the EMBI + index, tightened by over 50 bps on the session, ending at around 405 bps. Pricewise, Argentine bonds rose 2.7% on the day on average, with the country's dollar-denominated Discount bonds the biggest winner, up 4.3% in over-the-counter dealings.

While Argentina's bonds were heading back upward, the cost of hedging against a possible default by Buenos Aires via a credit default swaps contract was falling to about 360 bps from nearly 400 bps on Tuesday - a sign of greater investor confidence in the bonds.

The rise in the bonds came in tandem with gains in Argentina's stock market and its peso.

Ecuador up on Chavez debt-buy offer

Along with Argentina, fellow high-beta credit Ecuador's bonds were up solidly, with the benchmark dollar-denominated 10% bonds due 2030 seen up nearly 3 points to finish at 89.5.

Besides benefiting from the general rally in EM bonds, and in the previously hard-hit high-beta credits, the bonds were probably also benefiting from Tuesday's declaration by Venezuelan president Hugo Chavez that his country was planning to buy Ecuadoran bonds.

However, Quito's recently installed economy minister, Fausto Ortiz, said late Wednesday that right now there are no negotiations in the works for such a transaction between the two countries, which are considered ideological allies because of Ecuadorian president Rafael Correa's close relationship with Chavez, who previously had publicly offered to spend some of his plentiful oil revenues to buy anywhere from $500 million to $1 billion of Ecuador's bonds.

Ortiz said that while it is encouraging to know that such an offer has been made, and while his country might take Chavez up on his offer at some point down the line, Ecuador right now is not looking for such financing.

While much has been made of the ideological bond between the left-wing populist presidents of the two countries, Goldman Sachs & Co. suggested in a research note that Caracas may have a more practical motivation for such an offer to Ecuador, since, given Venezuela's reported substantial exposure to the possibility of an Ecuadorian default on debt that Venezuela's national development fund already owns, "the Venezuelan government might have a vested interest in reducing the probability of an interruption of payments by Ecuador by making sure the Ecuador government does not run into liquidity problems."

Brazil, Mexico, Colombia locals gain

In other Latin American debt dealings, Brazil's real-denominated debt was seen higher in the wake of benign inflation data, which spurred speculation that the country could continue its recent pattern of interest rate cuts. The yield on the benchmark zero-coupon bonds due 2008 was quoted having declined by 4 bps to around the 11.10% level.

Mexico's local-denominated bonds were seen having rallied, along with that country's stock market, on the prospect - encouraged by the Fed statement Tuesday - that economic growth will continue in the United States, Mexico's largest single export customer and trading partner.

The benchmark 10-year peso bonds were quoted having risen about ¼ point on the day to just above 101.5.

Colombia's peso-denominated bonds were also seen having gotten a boost from the favorable U.S. news, since America is also Colombia's largest export customer. Its 11% bonds due 2020 were seen up almost ¼ point to around the 107.5 level.

Asian debt mostly better

Outside of Latin America, Asian credits were seen mostly firmer, in line with Wall Street's rebound and the news coming out of the Fed.

During the local trading day in Asia Wednesday, ahead of the opening of the markets in North America, Philippines government debt was seen up about ¼ point, with Manila's 2031 benchmark bonds at 108.625 bid, 109 offered, and its 2032 bonds quoted at 96 bid, 96.375 offered.

The cost of a five-year CDS contract linked to Philippine sovereigns fell by another 15 bps to around the 174 bps level - well down from the levels over 250 bps seen for those contracts when the debt market were roiled with investor fear just about two weeks ago. Similar CDS contracts covering Indonesia's debt, which generally move in tandem with the Philippines', also came in by about that same amount, to around the 175 bps level.

Among Far Eastern corporate names, conglomerate Hutchison Whampoa's bonds moved up, and their yields came in by about 5 bps to levels around 178/173 bps over Treasuries, while CDS contracts linked to the company's debt fell in price by 5 bps to 32 bps.

South Korean computer chip manufacturer MagnaChip Semiconductor Ltd's bonds were seen having firmed smartly in line with the overall better high-yield market. Its 8% notes due 2014 firmed to 63 bid, 64 offered, a trader said, from prior levels at 57 bid, 60 offered. The company's 6 7/8% notes due 2011 were also seen up 3 points on the day at 78 bid, 80 offered, while its floating-rate notes due 2011 were 4 points better at 83 bid, 84 offered.

Turkey, South Africa move up

Turkish bonds were better during Wednesday's session, with the yield on the benchmark 2009 issue coming down to 17.30% from 17.37% the session before, investors mollified by the Fed's statements and the generally better tone in emerging markets.

The same dynamics were seen in the South African bond market, observers said, quoting the yield on the government's R153 bonds due 2010 as having fallen to 9.205% from Tuesday's levels at 9.300. The yield on the short-term R196 bonds declined to 9.455% from 9.565%, while the yield on its R157 bonds due 2015 dropped to 8.5% from 8.605% previously.

India bonds off on new overseas rules

However, India's bonds bucked the broad emerging markets trend, falling in response to new edicts from the government curbing overseas borrowing - orders which were seen by the market as having the potential of reducing overall liquidity.

The benchmark rupee-denominated 7.49% notes due 2017 were seen down more than ½ point to around the 97.19 level, breaking a four-session winning streak.

On Tuesday, the Finance Ministry decreed that companies borrowing more than $20 million abroad can no longer bring those proceeds into India. It also said that central bank approval would be needed to repatriate funds up to $20 million.

Elsewhere on the Indian subcontinent, the yield on Pakistan's benchmark 10-year Pakistan Investment Bond stood at 10.34%, unchanged from Tuesday's close. Early in the day Thursday, the government of embattled president general Pervez Musharraf said it may impose a state of emergency due to "external and internal threats" and a deteriorating security situation in the volatile northwestern region of the country, near the Afghan border.

Kazakhstan banks seen week

In Kazakhstan, the leading banks are significantly underperforming, according to a market source.

The disappointment comes from over-demand for borrowing from the banks which have created excess supply, the market source said.

As in other sectors, the market will be ready to receive new issues once conditions show more consistency, the source added.

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