Emerging market debt sees consolidation on low volume; Galaxy scores in secondary

By Reshmi Basu and Paul A. Harris

New York, Dec. 8 - Emerging market debt underperformed Thursday's U.S. Treasuries rally as the primary market began to embark on the holiday slowdown. Meanwhile, Galaxy Entertainment's new deal soared Thursday in secondary trading. The issuer priced an upsized $600 million of senior notes in two parts on Wednesday night.

Emerging market debt was unable to keep up with the Treasuries rally, notes sources. At late trading, the yield on the 10-year note stood at 4.46%, down from 4.53% on Wednesday.

A trader said that emerging markets saw lower dollar prices and lower volumes.

"Maybe it's just consolidating a little bit after a good run for the last week or so," remarked a trader.

Brazilian bonds slipped during the session. The benchmark bond due 2040 shed 0.35 to 125.30 bid, 125.40 offered.

The country has given up most of the past week's gains over the last two sessions, noted a trader who focuses on Asian names.

He added that a fairly healthy correction has happened, but the market is still at very tight levels historically. But at least some of the froth from the recent gains has been taken out.

Indeed, valuations have been a concern as spreads have grinded to record lows.

"It's a rich market," observed a buyside source. "You've had bad news out of Argentina, which seems to be really the only market that seems to be down today [Thursday]," he noted.

Since the ouster of economic minister Roberto Lavagna on Nov. 28, investors have expressed concerns that president Nestor Kirchner will exercise more control over economic policy.

Ecuador up

However, defying the overall tone, Ecuador bonds saw a bounce after selling off the day before on technical concerns. Wednesday's issuance of $650 million of 10-year global bonds (Caa1/CCC+/B-) put pressure on the country's curve.

"The '12s rally because you expect them to be taken out but your '30s can have some risk attached to them," observed the buyside source.

During the session, the Ecuador bond due 2030 added half a point to 91.60 bid, 92 offered. The new bond due 2015 also rallied to 92.80 bid, 93¼ offered, up 1.45.

Elsewhere, the Philippines has given up a fair amount of its recent gains, noted the second trader, adding that there has been a slight pickup in perceived political risk.

There was some selling earlier in the week on the back of some inflation data, which has slightly turned the momentum, he noted.

"Right now about 15 to 20 bps, on the long end, off of the super-tights," remarked the second trader.

Meanwhile Indonesia and Vietnam are still very firm and very well supported. There has been some buying, and additionally, there is no real pressure when Treasuries come off, he commented.

Overall, the market is expected to trade in tight ranges, as liquidity dries up.

"With equities off, heavy calendar in high-yield, I don't know what the catalyst is to get you to rally," noted the buyside source, adding that liquidity will only subside as the calendar year ends.

Galaxy scores in secondary

In the primary market, the much-desired Galaxy Entertainment Finance Co. Ltd. priced an upsized $600 million issue of senior notes (expected ratings B1/B+) in two parts on Wednesday night.

The company priced a $350 million tranche of seven-year fixed-rate notes at par to yield 9 7/8%.

The Macau-based gaming company also priced $250 million of five-year floating-rate notes at par to yield six-month Libor plus 500 basis points.

Sources said the deal went very well. Moreover, both tranches were up immediately in the secondary, noted sources. The buyside source said that each tranche was up as much as two to three points.

The fixed-rate notes were trading in a range of 102 to 103 while the floaters were seen in a trading range of 101½ to 102.

"They got a decent amount of crossover people," the buyside source told Prospect News.

"I think a lot of the traditional high-yield funds participated. It was a good story and a lot of yield."

Merrill Lynch & Co. and Morgan Stanley ran the books for both issues of Rule 144A for life/Regulation S notes.

Advance Agro revises guidance

In other primary news, Bangkok-based paper and pulp producer Advance Agro PCL revised price talk on its $250 million offering of seven-year bonds (B3) to 11½% to 11 5/8% from initial guidance of mid-11%. The deal is coming via ABN Amro and Deutsche Bank and is set to price Friday.

The buyside source noted that in general, new deals are pricing just to get done. And of course, there is cash out there.

Unlike high yield, emerging markets are more transparent. For instance, investors know the funding needs for the Philippines for 2006, he noted.

"It's not like the high yield market, where deals fall from the sky," he said, adding that many of the sovereigns have already met their funding needs,

"They don't have to come to the market. They come when they want," he added.

"In the case of Galaxy...if you can get the crossover guys, that's a well-distributed bond."

The buyside source added that AES Dominicana, which priced on Wednesday, was about getting the price right - while True Corp. PCL was unable, or unwilling, to get to a level investors were happy with.

"AES priced it so that there was nothing left of the table," he observed.

AES Dominicana Energia Finance SA priced $160 million of 10-year bonds (/B-/B-) at par to yield 11% or a spread of 648 basis points more than Treasuries via ABN Amro.

Emerging markets is a slower market than high yield, so in that sense it is a harder market to get deals done, he added.

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