Emerging markets wider despite U.S. stock rally; Argentina CDS gains on exchange reopening hopes

By Paul A. Harris

St. Louis, Aug. 27 - Emerging markets was slightly wider Wednesday in "another dead late-August day,", according to a trader in New York who focuses on Asian credits.

"The market had a decent tone," the source remarked, but added that credit widened out in the New York morning - continuing the sell off from overnight - and then came back slightly.

"Everything finished flat to a little wider, despite rallying equities," the trader remarked, noting that the Dow Jones Industrial Average was up just under 90 points.

"Credit seems to be ignoring the relative strength in stocks over the past couple of days," the source remarked.

Asian sovereign CDS wider

Turning to high-beta Asian sovereigns, the trader said that both Philippines and Indonesia five-year credit default swaps were around 4 basis points wider on the day.

Philippines CDS were trading at 241 bps bid, 246 bps offered, while Indonesia was at 261 bps bid, 266 bps offered.

Turning to the quality end of the Asian spectrum, the trader did see some action among U.S. accounts in the newly minted Korea Railroad Corp. add-on notes which tapped the 5 3/8% paper maturing May 15, 2013 (A2/A).

The $200 million deal priced at a 284.76 bps spread to Treasuries on Tuesday.

"It came pretty cheap to secondaries," the trader commented, specifying that the tap was a good 15 bps wide of where the existing 5 3/8% paper due 2013 was trading before the add-on deal was announced.

"Naturally everything widened out in accordance to where the tap came," the source added.

"But it was well supported inside the re-tap level. It was tapped around 285 bps over Treasuries, and traded overnight in the mid-270s.

The trader had the Korail add-on paper going out at 278 bps bid, 273 bps offered.

Brazil steady, Ecuador weaker

Elsewhere a market source who focuses on Latin American names said that with respect to the quality, Brazil's 11% bonds maturing in August 2040 were going out flat at a spread of 132 bps bid on Wednesday.

At the higher beta end of the Latin America credit spectrum Ecuador's 10% bonds maturing in August 2030 finished the session at 86 bid, down ½ point on the day.

However Venezuela's 9¼% notes due September 2027 were up a point on the day, heading out at 92 bid.

Argentina gains on exchange hope

The source also had Argentina's five-year CDS 5 bps stronger on the session on word that Argentina will reopen the 2005 restructuring of its defaulted debt to creditors who held out from the original exchange.

Market sources had various color on the "exchange" news, however.

Earlier in the day an official from an emerging markets syndicate desk in New York said that Argentina had come out saying it has no intention of reopening the exchange.

"From a political standpoint the Kirchners are struggling," the official said.

"Reopening the exchange would be a very politically charged thing to do because they made all kinds of promises when they did the original exchange that they were never going to reopen it."

The syndicate source said that the Argentine government would only be likely to reopen the exchange when it was relatively stronger politically and could withstand the repercussions.

Georgia at better levels

As it has done throughout the week with sources who have an interest in the region, Prospect News quizzed this syndicate official on the credit impact of the conflict surrounding the breakaway Georgia republics of South Ossetia and Abkhazia.

Early this month the armed forces of the Russian Federation made an incursion into Georgia on behalf of those republics, and has since recognized their independence, a move excoriated by Georgia, as well as a raft of Western governments who fear that Russia may reassert some of the territorial claims of the now-defunct Soviet Union.

On Wednesday the syndicate official said that spreads in the region are not ridiculously wider.

"Obviously the Georgia bonds traded down when this first started," the official said.

"But they are trading in the low 90s now [90½ bid, 92 offered], after having traded as low as the mid-80s when all of this first happened.

"They were mid-90s before it all started," the official specified.

The syndicate source also asserted that the price erosion took place against an overall weaker global market backdrop.

"Georgia bonds are doing okay, all things considered," the source said.

"Being down 5 points is not a great thing, but they haven't gone into freefall."

The official also added that Russian CDS were wider on Wednesday morning, but specified that the whole region has widened out.

Mid-Wednesday morning the official said that Russia five-year CDS were 133 bps bid, 135 bps offered, unchanged, but added that earlier in the morning they had been 2 or 3 bps wider.

Asked how much Russia had widened since the conflict began in early August, the syndicate source said that on Aug. 1 Russia and Mexico CDSs were pretty much flat to each other: Russia's CDS was at 102 bps bid, 104 bps offered. Mexico's was at 105 bps bid, 108 bps offered.

"Now you have Russia in the low 130s, while Mexico is 120, 122," the source said.

"So while Mexico itself is a fair amount wider than it was at the beginning of August, it has widened out much less than Russia."

Eastern European deals seen lining up

This syndicate official looks for a big Eastern Europe pipeline post-Labor Day, but added that credits from that region might face an uphill battle.

"Overall there has been such a big supply out of Russia and Eastern Europe that investors have reached the point where they have less capacity to buy it, no matter how cheap it is," the official said.

"As attractively as it might be priced I think the Eastern European issuers are fighting amongst themselves for a smaller and smaller piece of the remaining cash that is available."

The source said that there is lately a buzz about Russian Railways JSC wanting to do a big deal in the fall, maybe $2 billion or even $3 billion.

"A number of the Russian banks still want to get things done, as do some of the Russian and Kazakh state-owned entities, in the oil and gas, and mining sectors," the sell-sider added.

"They won't necessarily all try to come in September, but over the next few weeks and months.

"You probably don't have to scratch very hard to find $10 billion or $15 billion out of Russia and Eastern Europe that would like to get done."

Latam pipeline

The syndicate source said that there is probably a bigger pipeline in Latin America than has been true in a while.

However, the official added, good Latin American issuers tend to recognize that the market is very difficult.

When the new issue premiums are 25 to 40 basis points the quality names in Latin America tend to step back.

"They really don't need to issue at those levels," the syndicate source said.

"The Latin issuers, for example Brazil and Peru, are the ones now being steadily upgraded, and so maybe they would benefit from waiting."

In general, the source said, there will probably be opportunities to own some higher quality names out of Latin America than has been the case over the past six months.

"But those issuers will probably be very price sensitive," the official warned.

"Meanwhile the low double-B and single-B Latin issuers are going to continue to struggle."

Cash positions high

Lately sources from both the buy-side and the sell-side have been telling Prospect News that accounts are sitting on a lot of cash.

The syndicate official thought there could be some merit to that perception.

"There is some cash, but I don't think it's burning holes in anyone's pocket," the official said.

"The big challenge right now is locating the leadership among the investor base that is required to get the deal done.

"The question is, 'Who is going to anchor a deal?'"

Meanwhile a trader who spoke later in the day also said that there is a lot of cash on the sidelines right now.

"But there is also a handful of guys which have never sold," the trader specified.

"Despite the fact that there are accounts that are waiting to buy, there are others that are nervous holders, and haven't sold. Until that situation rights itself - either the guys who are already out of the market come in, or the guys who are long finally capitulate - you will see a lot of up and down sessions, and the volatility will remain.

This trader said that as soon as the market does stabilize the pipeline is apt to be "scarily robust."

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