Emerging market debt higher on upgrades; Brazil's new 20-year bonds trade upwards

By Reshmi Basu and Paul A. Harris

New York, Feb. 1 - Upgrades by Standard & Poor's on Monday helped fuel investor confidence, while Brazil's new 20-year bonds were well received as they traded up in the secondary.

"There were the upgrades that we saw yesterday [Monday] morning that put a lot of confidence in the market," according to a Latin America debt strategist for Refco EM.

Standard & Poor's lifted Mexico's long-term foreign currency sovereign credit rating for Mexico to BBB from BBB-. The ratings agency also raised Russia's long-term foreign currency sovereign credit rating to BBB- from BB+.

"The S&P upgrade of Russia seemed to be largely priced in," a trader said Tuesday, spotting the Russia's benchmark 2030 bond at 105 bid, 105¼ offered in extremely light trading.

At session's end, the Russia bond due 2030 was bid at 105.12, up 0.37 on the day.

In other news, S&P also lifted the ratings for a slew of Mexican corporates on Tuesday such as Proyectos de Energia, Fideicomiso Petacalco, Petroleos Mexicanos and Comision Federal de Electricidad.

"There has been a lot of demand for Mexican corporates today [Tuesday]," said the strategist.

Looking ahead, investors are awaiting Wednesday's decision by the Federal Open Market Committee. A move by the Fed is a foregone conclusion, but more importantly, investors will be focused on the language and whether or not "measured" will be removed from the statement.

"Investors are more cautious here than they would be at substantially wider spreads," said a sellside source.

"But at the same time, they are really looking more to risks that are external to the market, i.e. U.S. interest rates."

Brazil's new issue

Brazil's new deal consistently hovered around a bid price of 98.90 for most of the day, according to the sellside source.

"It's been hanging about a quarter of a point above the reoffer," said the source.

"It didn't go zooming up or anything like that. But on the other hand, it's been consistently above the re-offer price about a quarter of a point. I haven't seen it go above 99 on the bid side," said the source.

In primary action Monday, Brazil issued its upsized $1.25 billion 20-year bonds at 98.61 to yield 8.90% via Deutsche Bank and UBS. The deal was four times oversubscribed.

While the new issuance made gains, other Brazilian issues drifted lower in secondary action, added the source.

"In general Brazil, more broadly, opened up a little bit lower. The Brazil '40s opened a little lower and that's been the way it has been all day," noted the source.

"Overall, it's a fairly quiet day," remarked the source.

The Brazil C bond was down 0.063 to 102.187 bid while the bond due 2040 lost 0.10 to 115.45 bid.

Appreciation of the real

The Refco strategist pointed out that one important development is the appreciation of the Brazilian real.

The real closed Tuesday at R$ 2.610 to the dollar, which fell 0.04%.

"For some investors, it has been very profitable if they were able to go into local markets," he noted.

Furthermore, more real-denominated deals are expected to come to market, as investors become more relaxed with these types of deals, he observed.

"You had about four or five deals a couple of months ago that did extremely well.

"The market is now a little bit more comfortable with this type of structure. With those initial ones, you had mostly institutional buyers," the strategist remarked.

Nonetheless, these new issues have had a hard time finding an audience in the secondary.

"They are not very liquid because of the currency exposure.

"I believe we are going to see more. But they are not going to be very liquid. You are just buying them and holding them 'till maturity," he remarked.

EM passes new supply challenge

The primary market has been active in the last month as technicals remained intact.

"We had a steady level of supply overall," said the sellside source.

"We had a pretty big month in January - like $19.5 billion for January." (Prospect News' figures show total supply for the month at $19.1 billion).

"On a business-day basis, we had about a billion a day. Of course that number is distorted by euro deal that Poland did."

On Jan. 11, the Republic of Poland priced an upsized €3 billion of notes due 2020 (A2/BBB+/BBB+) at 99.375 for a spread of mid-swaps plus 27 basis points.

"The good thing is that you've gotten a lot of supply done by the key issuers," remarked the source.

Another supportive factor is that the market has been able to absorb the supply.

"Compared to last year, we are actually slightly above January 2004 in terms of volume. The tone at the end of January last year was more negative than it is now. Some of that was more driven by external events," commented the sellside source.

For instance, as the market approached late January, fears over potential U.S. interest rate hikes intensified.

"At least right now, with 10-year Treasuries at 4.13%, people don't seem to be too concerned about that," said the source.

Ecuador to issue, Chaoda Modern prices

The Republic of Ecuador plans to sell $300 million five-year bonds in the first quarter, according to a market source.

"Last week Standard & Poor's raised Ecuador's long-term foreign and local currency sovereign credit ratings to B- from CCC+," a second sellside source said.

"S&P cited Ecuador's use of cash from an oil stabilization fund in 2004 to ease its local debt burden.

"People have been expecting Ecuador to come with an offering of between $275 million and $500 million. With the upgrade they could probably get a five-year bond done for 9.5%."

JP Morgan and Deutsche Bank will manage the sale.

On Monday, Indonesia mandated its upcoming sovereign bond. Deutsche Bank Securities, UBS Investment Bank, Citigroup will run the sale.

The deal is expected to do well, according to a source.

Upon the news, the Indonesia bonds due 2014 fell slightly on profit taking after moving up two points in the last two weeks.

And China's Chaoda Modern Agriculture Ltd. tightened price guidance two times before coming to market with its upsized $225 million five-year bullet (BB/Ba3), which priced at 98.985 to yield 8%.

The deal, increased from $200 million, came at the tight end of final revised price guidance. The deal was launched in the area of 8% to 8 1/8% Tuesday morning.

On Monday, guidance had been revised to 8 1/8% to 8 3/8% from initial guidance of 8½% area.

The continued tightening of the deal points to the search for yield in the market, according to the source.

Credit Suisse First Boston, Deutsche Bank and Merrill Lynch & Co. were the bookrunners for the Rule 144A/Regulation S offering.

The transaction was Chaoda Modern's second attempt. It postponed a previous $150 million deal in July 2004 amid a market made nervous by banking troubles in Russia.

Argentina's debt swap

Figures released Friday showed that only 26% of investors have accepted Argentina's $100 billion debt swap proposal. The exchange started three weeks ago and will run through Feb. 25.

One market source said that the retail market appears to be participating while the institutional market is not.

The International Monetary Fund has said that they want the issue resolved.

"Argentina has said they are not interested in a standby agreement," said the strategist.

A standby agreement would give power to the IMF because they would be allowed to outline objectives and make recommendations.

Argentina wants an extension of its four-year repayment schedule, with fewer structural reform targets.

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