Emerging market debt sees better bids; Ecuador stabilizes

By Reshmi Basu and Paul A. Harris

New York, Nov. 28 - Emerging market debt saw spreads come in Tuesday as U.S. stocks rebounded after a hefty sell-off. Meanwhile Ecuador saw an end to the recent market bloodshed as investors and traders waited for further clarification regarding president elect Rafael Correa's controversial agenda.

On the primary front, the Republic of Korea set price guidance for its $1 billion equivalent offering of senior unsecured notes (A3/A/A+).

Price talk for the tranche of 10-year dollar-denominated global notes was set at mid-swaps plus 23 to 26 basis points while guidance for the tranche of 15-year euro-denominated global notes was issued at mid-swaps plus 26 to 29 basis points.

The country intends to price the two-part deal on Thursday morning, following the completion of investor presentations.

Barclays Capital, Citigroup, Credit Suisse and Korea Development Bank are joint bookrunners for the issue, which have been registered with the Securities and Exchange Commission.

Also in the primary, Argentina's Banco Macro SA plans to start a roadshow for a $150 million offering of 30-year non-cumulative junior subordinated notes (B3//B-) this week via Credit Suisse and UBS.

The roadshow will run from this Thursday through the following Friday, stopping in Asia, Europe and the United States.

Ecuador recovers

Across the board Tuesday, market sources noted that most emerging market credits had rebounded following Monday's sell off, which was triggered by weaker U.S. equities on the back of a declining U.S dollar.

Turning to Ecuador, the country regained some of its footing Tuesday, after seeing returns decline by 4.51%.

On Monday, the Andean country suffered a thrashing on news that leftist Correa had pushed ahead of market-friendly candidate Alvaro Noboa in last Sunday's presidential run-off vote.

That unexpected result triggered a sell off as investors scrambled to unload positions or sold short in a knee-jerk reaction to avoid any further surprises, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

With no new news on Tuesday, some short sellers stepped in to cover, he noted.

Nonetheless, the credit saw a volatile session as president elect Correa, who assumes the leadership on Jan. 15, has vocalized a Wall Street unfriendly agenda, including the renegotiation of foreign debt and oil contracts. He is also against a free trade pact with the United States and has promised to shut down the U.S. military base in Manta.

Up until year-end, Alvarez said he expects that investors will be hesitant to add more Ecuadorian bonds, as many investment firms changed their recommendation to an underweight position.

"I think the real problem is going to be that he has no support in congress and he wants a constituent assembly," he noted, adding that most understand the inherent risks stemming from the governance issue.

"In the meantime, you are going to see a volatile market in the hands of short-sellers, but I don't think you are going to see an overly large amount of people coming back into the credit and try to build positions."

During Tuesday's session, the Ecuadorian bond due 2015 gained 1 point to 100.50 bid, 101 offered while the bond due 2030 added 0.75 to 94 bid, 94.75 offered.

In the prior session, the 2030 bond lost 5 points to close at 93.50 bid.

EM better bid

Returning to the broader market, emerging market debt saw improved sentiment Tuesday, according to market sources.

The whole tone in the credit markets shifted around during the afternoon, according to a trader who focuses on the Asian fixed income markets.

Even the spreads of Ford Motor Co., which suffered a triple-whammy ratings downgrade on Monday - with triple-C senior unsecured debt ratings delivered up by Moody's and Standard & Poor's - came back off of their wides rather nicely on Tuesday afternoon, the trader added.

"I don't know what sparked it but the whole market seems a lot more constructive now than it did in the middle of the morning," the trader commented shortly after the Tuesday close.

Focusing on Asia, the trader said that Philippine and Indonesian credit default swaps had come in 4 basis points from their wides.

The source also noted better bids coming in for most high-grade cash issues.

The trader said that the emerging markets, as a whole, seemed better bid at Tuesday's close, with Brazil going out 2 basis points better than the intraday wides.

During the session, the bellwether Brazilian bond due 2040 moved up 0.35 to 132.30 bid, 132.35 offered.

Monday's negative session comes after an abbreviated week, which exaggerated everything, the trader said.

Furthermore, liquidity has been withdrawn, given that a lot of year-end financials are due this week.

Hence the reactions to broader market moves are greater, noted the trader.

That coupled with Monday's equity sell-off as well as the weakness in the U.S. dollar has sparked some concerns that the market will be seeing some withdrawals from the carry trade, he noted.

A combination of a number of things suggested that there was some risk-reduction going on, observed the trader.

Meanwhile, a weaker U.S. dollar should theoretically bode well for the Latin American region as that pushes up the value of commodities.

But as IDEAglobal's Alvarez observed, the decline in the dollar has had a psychological impact on U.S. markets on speculation that overseas investments will wind down.

"It's creating sort of a climate that's adverse to risk tolerance, which is a negative for Latin America," he commented.

Furthermore, he added that the recent disruptions to the U.S. market may likely jeopardize a year-end rally for the emerging market asset class.

Corporates unchanged

In corporates, the trader said that there had been no big moves.

However when asked, the source conceded that the recently priced bonds of Shimao Property Holdings Ltd., which priced last week in an upsized $600 million two-part issue, came off a bit overnight on Monday.

The 8% fixed-rate senior notes due 2016, which had been wrapped around 101 bid for a couple of days, came down to 100.50 bid, 100.75 offered.

Also the Libor plus 195 basis points floating-rate notes due 2011 "probably came off ¼ point from Monday's levels, but there had not been a great deal of trading," the trader said.

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