Emerging markets awash in supply; KazMunayGas prices $3 billion; Russia sinks

By Aaron Hochman-Zimmerman

New York, June 24 - Emerging markets were forced lower on Tuesday as the weight of new supply combined with weak externals.

In the primary, Kazakhstan's JSC NC KazMunayGas walloped the market with a $3 billion two-tranche deal as other benchmarks from India's Vedanta Resources plc and South Korea's GS Caltex talked their deals.

Record lows for U.S. consumer confidence helped to tenderize trading. Meanwhile, Russia, which has two corporate benchmarks of its own in the pipeline, took the day's biggest loss to a benchmark sovereign as its bonds due 2030 lost 1.25 points.

Equities rode the rollercoaster on Tuesday but ended lower, also leaving volatility lower by 0.22 at 22.42, according to the VIX index. The index is a commonly used gauge of market volatility.

As a sector, emerging markets were dragged down by the U.S. side and widened by 9 basis points to a spread of 269 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to keep assets in emerging markets debt.

KazMunayGas prices $3 billion

JSC NC KazMunayGas (Baa1/BBB-/BBB) heaved supply onto the market by pricing $3 billion over two tranches through ABN Amro, Citigroup and Credit Suisse.

The $1.4 billion five-year tranche priced at 99.499 with an 8 3/8% coupon to yield 8½%.

The tranche came with a spread of Treasuries plus 496.4 bps or mid-swaps plus 402 bps.

The issue had been talked between 8¼% and 8½%.

The $1.6 billion 10-year tranche priced at 99.196 with a 9 1/8% coupon to yield 9¼%.

The tranche came with a spread of Treasuries plus 514.5 bps or mid-swaps plus 442 bps.

It had been talked between 9% and 9¼%.

The deal came from the company's $3 billion medium-term note program.

KazMunayGas is an Astana, Kazakhstan-based government-owned energy firm.

Also in the Commonwealth of Independent States, Russia's OJSC Mobile Telesystems (//BB+) priced a 10 billion ruble 10-year bond with a coupon of 8.7%.

Gazprombank, Raiffeisenbank and Troika Dialog acted as bookrunners for the registered deal.

Mobile Telesystems is a Moscow-based telecom.

The issue was 1.7 times oversubscribed, and foreign investors constituted one-third of the investor group, the filing said.

Emerging Europe 'heavy'

Emerging Europe was "trading heavy" on Tuesday as the market opened lower but stagnated into the afternoon, a trader said.

The high-yield crossover index opened 15 bps to 17 bps wider and "hasn't moved since the opening," a trader said.

The new issue from KazMunayGas was "putting some pressure on the market," he said before the deal priced. "The pipeline is huge."

Eventually, "I think the market will say this is enough," he said.

In Russia, gas sales may shift from Europe to China and India, said Marshall Goldman, professor of Russian economics at Wellesley College in Wellesley, Mass., according to the RIA Novosti News Agency.

Demand would eventually drive up prices in the new markets, but the question remained over how the gas would be transported, the report said.

China currently buys large amounts of Russian oil, but the method of transportation is crude.

"Every day, up to 10 freight trains loaded with Russian petrol leave for China," he told RIA Novosti.

The Russian sovereigns due 2030 sank 1.25 points to 112.15 bid, 113 offered.

Meanwhile, prime minister Vladimir Putin is scheduled to meet with Ukraine prime minister Yulia Timoshenko on Saturday to discuss energy prices, RIA Novosti reported.

The two will also discuss Ukraine's possible membership in NATO and the fate of the Russian Black Sea fleet in Ukrainian ports.

The Ukrainian government bonds due 2016 fell 1 point to 91 bid, 92 offered.

Also in emerging Europe, the central bank of Slovakia kept its two-week repurchase rate at 4.25%, according to a statement from the bank.

An accompanying statement suggested that rates were left unchanged to protect the growth of production by arresting the growth of wages.

Turkey prices in hikes

In Turkey, after the 50 bps rate hike on June 16, the market is anticipating further increases, according to a market source, but the market has priced in too much.

The source feels that investors have already anticipated more than 200 bps in hikes and now is not the time to put money into Turkey, the source said.

The lira was seen trading at 1.226 to the dollar.

The Turkish government bonds due 2030 lost 0.625 point to 143.625 bid, 143.75 offered.

Asian benchmark talk

Elsewhere in the primary, Vedanta Resources (Ba1/BB/BB+) widened the talk for is $1 billion two-tranche senior unsecured notes.

The 51/2-year issue, which was talked in the 8¼% area, is now expected in the 8¾% area.

The 10-year issue, which was talked in the 9% area, is now expected in the 9½% area.

Pricing is expected Wednesday.

Barclays, Citigroup, Deutsche Bank, JPMorgan and Morgan Stanley are bookrunners for the deal.

Proceeds will be used for general corporate purposes and the refinancing of debt.

Vedanta is a London-based mining firm with most of its operations in India.

Meanwhile, GS Caltex (Baa1/BBB+/) issued talk of Treasuries plus 375 bps to 390 bps for its benchmark-sized five-year senior unsecured bonds.

Barclays, Citigroup, Goldman Sachs and Merrill Lynch are bookrunners for the offering.

GS Caltex is a Seoul-based oil refiner.

Asia weak on headlines

"It's definitely wider, softer," a trader said. "It's a response to economic data."

Still Indonesia is narrowing the gap between itself and the Philippines as the market digests the supply from the recent Indonesian issue, sources said.

Indonesia was hurt more than most by the recent spike in inflation and commodity prices, the trader said.

All the supply has brought the market from "being very well-supported to being unsupported," he said.

In Indonesia, the government has already paid €3 million to Germany as part of a €25 million debt swap program to prevent disease in Indonesia.

Germany forgave half of this year's €50 million planned debt payment in order for the remainder to be used to fight AIDS, tuberculosis and malaria, the Jakarta Post reported. Indonesia owes Germany a total of $3.9 billion as of May.

Italy plans to contribute $24.2 million and €5.7 million to health care and education projects, while the United States will forgive $19.6 million in order to prevent deforestation.

Jakarta plans to make 48.1 trillion rupiah in debt payments in 2008.

The Indonesian bonds due 2017 were lower by 0.5 point to 97.25 bid, 97.75 offered.

The Philippine bonds due 2030 were also lower by 0.5 point to 124.125 bid, 124.625 offered.

Elsewhere in Asia, Pakistan's bonds due 2017 were worse by 1.5 points to 74 bid, 78 offered.

LatAm drops

Latin America did not fight the trend and stretched wider on Tuesday.

"On a CDS basis you are seeing issues widen considerably," a syndicate official said. "On a cash basis we are seeing prices have fallen across the board."

"It's just not a good day," he said.

In Venezuela, finance minister Ali Rodriguez committed himself to fighting the 31.4% inflation during a television interview, a market source said.

He pledged to work slowly and to steer clear of policies that will hurt the larger public.

As expected, Rodriguez did not go beyond the earlier statements made by president Hugo Chavez about bolstering production and cutting the financial intermediation tax, the source said.

The program will not likely include any interest rate changes, the source added.

The bolivar was seen trading at 3,343.50 to the dollar.

The 9¼% Venezuelan government bonds due 2027 added on just 0.05 point to 94 bid.

In Brazil, a market source expects the recent rate hike to push upcoming inflation numbers back within target parameters.

The central bank is likely to remain on its 50 bps hike schedule, the source said.

The 7 1/8% Brazilian sovereigns due 2037 lost 0.55 point to 112.2 bid.

Argentina slips farther

In Argentina, president Cristina Kirchner described her meeting with farmer leaders as "positive," according to the Buenos Aires Herald.

The representatives of the farmers' groups were less enthusiastic but were still encouraged that a dialogue was reopened.

Meanwhile, the tax bill at the heart of the controversy was debated for the first time in the lower house of congress on Monday.

The 8.28% Argentine discount bonds due 2033 gave up 0.5 point to 77.5 bid.

A market source said that spending on public welfare programs will see significant cuts in the second half of the year due to fallout from the farm crisis.

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