Emerging markets at rally pace; Cemex, Digicel wait to price bonds; LatAm sector bounces back

By Aaron Hochman-Zimmerman

New York, March 4 - Emerging markets followed equities' lead in standard fashion on Wednesday, but equities broke a five-day losing streak and were headed upward.

Levels in emerging market credit were up nearly across the board, but the day's strong performance was weighed down by Mexico's Cemex SAB de CV and Jamaica's Digicel Ltd., which both finished roadshows and could not immediately price.

On the trading side, attention was focused either on Wall Street or simply on the investment-grade market where much of emerging market capital has drifted.

Russia managed to add 1 point to its bonds due 2030, while Indonesia was unable to see its new bonds due 2014 and 2019 above their reoffer prices.

Meanwhile in the major markets, volatility made a decided drop during the day's rally and lost 3.37 to close at 47.56, according to the VIX index. The index is an often used gauge of market volatility.

As a sector, emerging markets tightened by 10 basis points to a spread of 672 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

High yields, hard sells

Two high-yield bond issuers finished roadshows on Wednesday, but both had trouble pricing their bonds, sources said.

Cemex with its $500 million three- or five-year deal was still working with many of the accounts attracted by the roadshow, a source said.

Still, "it's not ready to come to market," a strategist said near the end of the working day.

"Despite today's rally ... people are still trying to get their arms around it," another source said.

The comparable maturity 5 5/8% Mexican bonds due 2014 were quoted at 101.25 bid, 101.5 offered.

Cemex is a fallen angel now in the market with its first bonds to feature high-yield covenants.

"They need to sell a significant amount of assets in order to cover some of the debt repayment they're talking about," an emerging markets mutual fund manager said.

"I don't know if that is going to be achieved efficiently in this kind of market."

And given present volatility in the capital markets Cemex is likely not benefiting from its status as a fallen angel, the investor added.

"Cemex was pretty much a blue chip credit.

"Now they have to deal with a totally different audience, so it's a much more challenging market for them now that they are a high-yield credit. I don't think they've looked at a deal from that perspective for the past 10 years.

"And they were pretty much forced to come to market because of the lack of interest on the part of their bankers to roll over their debt.

"They had to find another option."

The investor expects the company to sell $450 million. Elsewhere a source close to the deal expects around $500 million.

No price talk surfaced Wednesday on Cemex.

However the emerging markets fund manager also believes that Cemex is attempting to get the deal done with a yield in the mid-teens.

Digicel aims for junk buyers

The other offer of $435 million from Digicel had a difficult time attracting attention in the high-yield market.

Proceeds will be used to acquire an equity interest in the prospective issuer's sister company, Digicel Holdings (Central America) Ltd. and for general corporate purposes.

Digicel Holdings launched operations in Honduras and Panama in late 2008, according to a market source.

The emerging markets fund manager said that the Digicel dealrunners have not been actively marketing the bonds to conventional emerging markets accounts.

"It seems that they are looking for a different audience," the manager said.

"They have to pretty much depend on the U.S. high-yield buyers, who at least have some comparables to Digicel, in order to see where the appropriate yield would be," the emerging markets investor remarked, adding that the main holders of Digicel's existing bonds are no doubt in the center of the dealers' gunsights.

"They need the money to fund the acquisition of two Central American operations," the investor said.

"The proceeds from that sale are pretty much going into the hands of the CEO of the company, who is basically cashing out of the Central American operations, and passing those operations onto the company.

"So it's a difficult story to tell."

No Digicel price talk surfaced on Wednesday, according to market sources.

However the investor said that the company is likely attempting to get the deal done with a yield in the mid-teens.

LatAm lifts on U.S. rally

In the traditional Latin American space, the day was quiet, a strategist said.

Spreads tightened on a strong day for Wall Street while other news was drowned out.

Nationalizations in Venezuela and labor negotiations in Argentina exist in the periphery, a strategist said.

"The issue right now is that the market is not trading on domestic fundamentals; the picture is a much broader one," he said.

Still in Argentina, president Cristina Kirchner surprised a meeting of government negotiators and farm leaders and brought an air of optimism to the proceedings, the Buenos Aires Herald reported.

The farm leaders reminded the government that their dispute is not yet over, but progress was made, the report said.

Production minister Debora Giorgi hinted that measures scheduled to be implemented in two weeks will ease bans on the export of wheat, beef and dairy products.

The initial ban dates back to 2006 as the government attempted to corral domestic food prices.

The 8.28% Argentine discount bonds due 2033 slipped 0.125 point to 27.5 bid, 28.5 offered.

The 9¼% Venezuelan government bonds due 2027 added 0.5 point to 55.8 bid, 60.1 offered.

Also, the 11% Brazilian bonds due 2040 were seen at 121.9 bid, 122.15 offered.

Emerging Europe undercut

Emerging Europe remained weak and more interested in the high-grade corporate sector, a trader said.

"The music is in the new issue corporates," he said, where better rated paper pays sufficiently high yields.

On the emerging market side, "it's still not so good; there are no new issues," he said.

At the trading desk, there was little buying in the classic emerging names, he said, as only some slight bottom fishing for Ukraine drew notice.

Meanwhile in Ukraine, the headquarters of the state oil firm NJSC Naftogaz Ukrainy was raided by federal officers, reports said.

A company spokeswoman, Marina Ostapenko, said the officers were seen near a deputy director's office, but said the raid by armed and masked agents was all part of a "standard" investigation surrounding the diversion of $880 million in gas.

Russia has repeatedly accused Ukraine of redirecting and siphoning gas intended for its customers in Western Europe.

Naftogaz has also recently asked its Moscow-based counterpart OAO Gazprom to release it from the full amount of gas it is under contract to buy.

Kiev agreed to buy 40 billion cubic meters of gas in 2009, but, due to a lack of funding, Naftogaz asked to buy only 33 billion cubic meters.

Gazprom acknowledged the request but did not indicate how the firm would react to modifying the agreements.

The Russian sovereign bonds due 2030 were better by 1 point at 87.5 bid, 87.875 offered.

The Ukrainian bonds due 2016 were spotted at 34 bid, 36 offered.

Elsewhere in Turkey, the national unemployment for 2008 was calculated from 10.4% to 10.6%, said Namik Ata, general director of Turkish Employment Agency, according to the Hurriyet Daily News.

The official figures have not yet been released.

The Turkish government bonds due 2030 were seen higher by 0.55 point at 123.75 bid, 124.475 offered.

Asia strong, Indonesia drags

Asia largely traded stronger on externals and saw its spreads narrow with the broad rally.

However in Indonesia, the new bonds due 2014 and 2019 began to show fatigue and buckle under the weight of supply, a trader said.

"Indonesia lost dramatically," he said, since the Feb. 26 sale of the bonds at 99.455 and 99.276, respectively.

On Wednesday, both bonds dropped below the reoffer price, he said.

The Indonesian sovereign bonds due 2014 were seen at 98.5 bid, 99.5 offered, and the bonds due 2019 were at 99 bid, 100 offered.

Meanwhile, the central bank took aim at spurring the economy as it cut interest rates by 50 bps to 7¾%.

The low inflation numbers allowed for the cut, said Didy Laksmono, head of the central bank's strategic planning and communication bureau.

"Inflation pressure was relatively low - at 0.21% - during February, thanks to lower fuel prices and availability of food supplies," he said, according to the Jakarta Post.

The rupiah was seen trading at 12,025 to the dollar.

Paul A. Harris contributed to this report.

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