Emerging markets shrug off Katrina; KDB prices $750 million; Philippines recovers ground

By Paul A. Harris

St. Louis, Sept. 9 - Trading was "quiet" and "range-bound" in emerging markets on Friday, although the sector had strengthened during the post-Labor Day week, showing resilience following the sell off set in motion by Hurricane Katrina.

An investor said that the EMBI Global had returned 0.17% on the day, and spotted Brazil's benchmark 11% dollar-denominated bond due 2040 trading in a range of 120.30 to 120.40, up 10 cents from the previous close.

Specifying that the session had been "boring," the investor spotted Brazil up 0.3%, Mexico up 0.17% and Russia up 0.22%. Meanwhile Venezuela and Argentina were flat.

In the primary market Korea Development Bank priced a $750 million bond issue at a spread of 76 basis points, slightly tighter than the guidance.

And news was heard on deals in the pipeline.

Philippines paper attractive?

Early in the Friday session, a source in Europe told Prospect News that the Philippines had rallied by as much as a point in Asian trading.

The source spotted the 9½% dollar-denominated bond due 2030 at 104.50 bid, 105.50 offered.

An emerging markets analyst in the United States, spotting the bond 0.75 higher, said that the political noise concerning the recent - and apparently failed - bid to impeach President Gloria Arroyo had rendered Philippines paper cheap.

"The big driver of Philippines this week has been the general tightening of spreads in EM - the Philippines is still an outlier with relatively high spreads, so it has been one of the credits that has seen the most interest in this latest EM rally," the analyst stated in an email message Friday morning.

"Political concerns are still there for Arroyo and her government, but they appear to have simmered down to more manageable levels."

Later in the day a trader in New York said that the Philippines, after firming in Asia, failed to benefit from any follow-through in the United States, and spotted the '30 closing out at 104.375 bid, 105 offered.

The trader also spotted Indonesia's 7¼% dollar-denominated bond due 2015 at 99.0 bid, 99.75 offered, basically unchanged, but as with most other Asian paper, "stronger on the week."

A brave face in the wake of Katrina

As the cleanup continued in the wake of catastrophic Hurricane Katrina, which struck the U.S. Gulf Coast on Monday, Aug. 29 and devastated New Orleans, emerging markets bond prices were generally hanging in, according to the EM analyst.

"I'd say EM is putting on an even more brave face than high yield these last two weeks in terms of shrugging off Katrina concerns," the source wrote in an email message.

"The spread between high yield and EM (using the Merrill Lynch indices) has jumped from 90 basis points before Katrina to 129 basis points as of last Thursday's close. High yield spreads have tightened a little from their wides earlier this week, but nowhere near as much as EM, where spreads are now 15 basis points tighter than they were before Katrina."

Funds see $111 million inflow

As the post-Labor Day week drew to a close, players continued to maintain that there is cash on the sidelines ready to be put to work in emerging markets bonds.

Late Friday Emergingportfolio.com Fund Research reported that emerging market bond funds took in $110.9 million during the week to Sept. 7, putting year-to-date net inflows at $5.2 billion, the most since the company began tracking fund flows in 1995.

KDB slightly tighter than guidance

Terms were heard Friday on Korea Development Bank's $750 million issue of five-year bonds (A3/A/A).

The 4 5/8% notes priced at a 76 basis points spread to U.S. Treasuries, slightly tighter that the 77 basis points guidance.

The issue came at a 99.71 dollar price to yield 4.68%.

HSBC, JP Morgan and Merrill Lynch & Co. were the managers.

Gazprombank to price $500 million

Russia's Gazprombank set a size of approximately $500 million for its offering of senior unsecured fixed-rate loan participation notes (Baa2/B+) now in the market.

The notes are expected to be structured with five-year or seven-year maturities, and are expected to price this week.

Citigroup and Dresdner Kleinwort Wasserstein are the bookrunners.

Elsewhere in the world of Russian corporates, Moscow-based cellular telephone retailer EvroSet was heard to be coming with a $100 million bond deal in October, via HSBC and Rosbank.

A market source said that approximately $10 billion of Russian corporates have priced thus far into 2005, with a $2.5 billion more expected before the end of the year.

Gerdau Steel hits the road

A roadshow started Friday in Hong Kong for Brazilian steel company Gerdau SA's expected $300 million issue of perpetual senior fixed-rate notes (Ba1/BB-), via HSBC and Citigroup.

A market source said that a $500 million order book has already been built up for the notes, which are expected to yield in the area of 9%.

Sources tell Prospect News that Brazilian corporate issuers seem to be favoring the perpetual structure.

A buy-side source pointed out that Brazilian engineering and construction company Construtora Norberto Odebrecht SA (CNO) is presently in the market with a $150 million perpetual deal (BB-) via Credit Suisse First Boston. The roadshow is set to stop in Singapore on Monday, although no price guidance has so far been heard, according to source.

Earlier in the summer Companhia Siderurgica Nacional SA's 9½% notes offering was heard to have played to a massively oversubscribed order book.

"Brazilian corporates seem to have a preference for that type of security, and there is a market for them," the buy-sider commented.

"There seems to limited price appreciation with those bonds, however," the source added, saying that "Brazilian offshore money," could be going into the preferred securities.

"They probably like that kind of return for companies they know very well," the buy-sider said.

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