Emerging market debt trades higher, Malaysia's Titan Petrochemicals restructures offering

By Reshmi Basu and Paul A. Harris

New York, March 30 - Without any apparent catalysts, emerging market debt traded up during Tuesday's session.

"Brazil was very strong. Columbia, Mexico, Peru, Philippines. Across the board, it really traded much higher," said a portfolio manager.

"It's the general theme, but no reason that I can point to."

The JP Morgan EMBI Global index jumped 0.36% by the end of Tuesday's trading session. Its spread to Treasuries tightened by eight basis points.

"It's much higher, but I'm not really sure of the reason why," said a trader.

However, trading continues to be thin.

"Virtually everyone I spoke said things were really quiet, said the trader. "All the clients are still on the sidelines. It's really pathetic."

Return of a juicier Titan deal

In the early morning session, it had been rumored that Malaysia's Titan Petrochemical had shelved its $300 million seven-year notes non-callable for four years, due to current market conditions.

By mid-afternoon, the deal had been restructured as a six-year bullet from the previous seven-year notes non-callable for four years.

And price talk was fattened to the 9% area. Price guidance of 8½% for the original issue emerged on March 24.

"They say [market conditions] whenever they can't get a deal done. They made it a little bit juicier," said a buy-side source.

Asian corporates tend to trade better than anywhere else given that most companies have two times leverage and very little credit work is necessary, said the buy-side source. But work needed to be done on this offering, he added.

Titan is a "four-times leverage company," the buy-side source explained. "Chemicals are very cyclical.

"If your expertise is looking at countries, not credit, you have to have credit capabilities in this bond," he said.

No worry on Indonesian election risk

Indonesians go to the polls to elect representatives at local, regional, and national levels on April 5, followed by its first presidential poll in July. This year, there are 24 parties and more than 450,000 candidates.

While this appears to be an unruly electoral mechanism, the political risks are low as President Megawati Sukarnoputri's Democratic Party of Struggle and ex-President Suharto's Golkar party are expected to bargain for position, according to the buy-side source.

"What is going to happen is that you will have a some kind of coalition of Golkar returning to power, and Megawati remaining as the other power player," said the buy-side source.

"The only negative outcome out of Indonesia would be if no two parties could form a government of their own. And that is a very low probability given Golkar and Megawati's party are doing well."

However, the Philippines has been a source of financial uncertainty in Asia and will continue to be a risky asset, according to a buy-side source.

"I don't think people are focusing on it enough. It is a very highly indebted country," said the buy-side source.

"They have to be much more prudent in their fiscal management going forward. I don't think the market is really pricing in those risks very well which is why I don't own any."

On Tuesday, news of a foiled terrorist attack emerged in the Philippines.

President Gloria Macapagal Arroyo said on a television interview: "We have pre-empted a Madrid-level attack on the metropolis by capturing an explosive cache of 80 pounds of TNT which was intended to be used for bombing malls and trains in Metro Manila," she said on national television.

Brazil pipeline heard building

Latin America's largest bank Banco Bradesco SA has set price guidance for an offering of at least €150 million lower tier two notes due April 2014 (Baa1) at a yield of 8.10% to 8.30%.

The notes are non-callable.

The issue is the first euro-denominated deal to carry political risk insurance, in this case via Zurich.

BNP Paribas is the bookrunner on this Regulation S deal, which will be listed on the Luxembourg Exchange.

Furthermore, unconfirmed market rumors suggest Brazil will bring a sovereign deal in April of $1.5 billion to $3.0 billion deal to take advantage of the upcoming big repayment.

"I hear that there is a new issue coming out of Brazil. I would not doubt that," said the trader.

"It's been in the pipeline. They have a major amortization coming on April 15 of about $3 billion rolling off."

Also heard through the grapevine, Banco de Brasil, Banco Alfa and Companhia Vale do Rio Doce are all rumored to be bringing deals down the road.

Meanwhile trading in Brazil's debt was more positive after a lengthy run of losses.

Brazil's component of the EMBI index jumped 1.29% after falling for nearly a week. Its spread to Treasuries tightened by 27 basis points.

The benchmark C bond was bid at 97.75, up 1.125 on the day.

And Brazil's bond due 2040 closed at 107 bid, 107.25 offered, up 2, according to the trader.

Allocations where they should be, said trader

For the most part, everyone is correctly allocated, according to the trader.

Adjustments were made during the first quarter of the year, especially during the first two months of this year.

"As money flows in, you make certain adjustments to your portfolio," the trader explained.

"You probably keep about an 8% cash level. And you continue to be patient and slowly and methodically invest in the market as opposed to behaving like a hedge fund that wants to drive things higher and have them drop lower the next day," added the trader.

"I think that mentality just doesn't exist right now because the market is kind of range-bound. People seem to be accepting the fact that C bonds are just not going to trade any higher than 98.5; and if it does you will probably see sellers, and it will drop down to around 96 or 96.5 at worst.

"You may have specific country news, like Venezuela, with a political situation going on. But that should all be priced in, especially with the price of oil being above $35 per barrel.

"There's not really very much to go on. If you want the bang for your buck, in a higher yielding situation like Venezuela, you put your money to work there.

"And if you still believe in Brazil, despite the poll ratings of Lula dropping off last week, you buy in the dip and you hold on to it."

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