Emerging markets spreads approach historic tights; corporate pipeline builds, Gazprom to bring $1 billion

By Paul A. Harris

St. Louis, Nov. 23 - The shortened pre-holiday session in the United States saw emerging markets spreads approaching their all-time tights, with one source in New York spotting JP Morgan's EMBI Global Index spread late in the session set to close at a spread of 230 basis points.

That would represent an all-time low, inside of the 231 basis points spread seen on Oct. 3, the source added.

Meanwhile there was build up in both the corporate and sovereign pipelines.

Gains across the board

As the Wednesday session got under way, an investor based in Asia said that emerging markets saw Tuesday's gains in U.S. trading carry into and through the Wednesday session in London.

This source gave a 123.071 bid, 123.717 offered spot on Brazil's benchmark bond maturing in 2040, and added that it was up slightly.

Three hours later a sell-side source in New York said that the Brazil 2040 remained above 123.0 bid.

"It has come off a little because we have had a reversal in Treasuries late in the day," the source said. "But overall it has been doing pretty well.

"There was political noise earlier in the week but it seems to have died down."

Shortly after, a trader in the United States had the Brazil 2040 closing at 123.25 bid, 123.40 offered, and added that it had led a rally in Latin American sovereigns. Most were up 0.10 to 0.15 in terms of dollar price, the trader said, adding that trading volume, although light, was "more than nothing."

Also firming by approximately the same amount was the Venezuela bond maturing in 2027, which the trader spotted up slightly at 116.75 bid.

There were exceptions, the trader noted, adding that although prices have been better in Ecuador over the past three days, "possibly because they think they may be able to get a loan that they have been waiting for from one of the multilaterals," Ecuador bonds were slightly softer on Wednesday.

Uruguay has also underperformed the rally, the trader added.

"In general the sovereign market has had a pretty good feel, and the corporates have probably followed," the source said.

The trader went on to forecast that the November rally in emerging markets would continue into December.

"People expect that the seasonality of this market will likely cause it to tighten again because of decent fundamentals and money flows that are still positive for the asset class," the trader said.

"There is little resistance to the upside in terms of supply."

Ecuador with triple-hooks

One official on an emerging markets syndicate desk in New York said Wednesday that sovereign issuance is not expected to be heavy in the run up to year-end.

One name out there, the source said, is Ecuador.

The Republic of Ecuador has mandated JP Morgan and Deutsche Bank to manage a dollar-denominated sovereign bond offering with "triple-hooks" from both ratings agencies: Caa1 from Moody's and CCC+ from Standard & Poor's.

The offering is expected to launch after Thanksgiving. The size of the issue remains to be determined.

The source mentioned that it is not the first time that Ecuador has tried to get something done in recent months, and commented that the low credit ratings are thought to primarily be a function of Ecuador's continuing political travails.

Most recently, former president Lucio Gutierrez, who attempted to reclaim power last month and was arrested for his trouble upon his return from exile in Colombia, filed a criminal complaint against his successor, president Alfredo Palacio, for allegedly overthrowing the Gutierrez government.

The syndicate official said that other than Ecuador not much sovereign issuance is anticipated as 2005 winds down.

The source said it is possible that Brazil will do one more deal before the end of the year, but added that Brazil has already pre-funded $3 billion for 2006.

The official also said that Peru has been out on the road with Citigroup, and added that there is a potential second round of Paris Club debt that Peru could raise money to refinance.

Gazprom and the corporate pipeline

News also circulated Wednesday on a growing calendar of corporate emerging markets deals, although Latin American names were conspicuously absent. Most of the news emanated from Russia, Eastern Europe and Asia.

Trumping all other comers was Russia's OAO Gazprom, which is expected to start a roadshow next week for an approximately $1 billion offering of eurobonds (issuer ratings Baa2/BB/BB+).

The deal is expected to be comprised of dollar- and/or euro-denominated bonds.

ABN Amro and Credit Suisse First Boston are the bookrunners for the deal, which Gazprom is bringing to take out debt associated with its acquisition of Russian energy company Sibneft.

Elsewhere Finansbank Russia Capital SA was scheduled to hold a roadshow Nov. 24 and 25 in Asia for its dollar-denominated offering of three-year bullet eurobonds (Ba2). The size remains to be determined.

Merrill Lynch & Co. has the books for the Regulation S-only offering.

The prospective issuer is a Moscow-based subsidiary of Turkey's Finansbank SA.

And Romania's Banca Comerciala Romana talked its euro-denominated offering of three-year senior notes (Ba2/BB-/BB+) at a yield in the 4% area on Wednesday.

The size of the issue remains to be determined. Pricing was expected Thursday morning London time via ABN Amro and BNP Paribas.

Asian corporates

Sources note that as 2005 winds down significant issuance is anticipated from Asian corporate names.

The Bank of East Asia, Ltd., the largest independent local bank in Hong Kong, will start a roadshow Monday for its $400 million offering of 10-year subordinated notes (expected ratings Baa1/BBB).

Goldman Sachs & Co. and Citigroup are leading the deal.

And Hong Kong-based aluminum products provider Ocean Grand Holdings Ltd. is talking its $100 million to $125 million offering of five year guaranteed secured notes (BB-) at 9% to 9¼%, with pricing expected late in the Nov. 28 week.

ABN Amro is the bookrunner.

Going out firm

Late Wednesday a trader in New York, who focuses on East Asian credits, threw a little water on pricing levels supplied earlier by his counterparts.

Four basis points of weakening in the 10-year Treasury likely exaggerated some of the moves, the source said.

Nevertheless, the trader added, emerging markets bonds were headed into the holiday weekend with firmness.

"They were definitely rallying up until the last 20 minutes when the weakness in Treasuries started to filter into the market a little," the trader said.

"But there is definitely a firm tone."

The source said that the Philippines global bond maturing in 2030 was up until just before the close to 112.0 bid, 112.50 offered, half a point to three-quarters of a point better on the day, but it faded a bit as Treasuries came off.

Meanwhile the Indonesia sovereign maturing in 2016 was at 102.25 bid, 102.75 offered, also up slightly.

This source expected the rally to continue when trading resumes after the long holiday weekend in the United States.

"The backdrop is pretty good," said the trader. "The bounce in Treasuries after the Fed minutes [on Tuesday] has been very supportive for the credit markets in general, especially in East Asia."

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