Emerging market debt tightens on flows; Ecuador pressured by debt fears; corporates sell $1.3 billion

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Jan. 19 - Emerging market debt continued to post gains on positive inflows while Ecuador's bonds saw red triggered by investor concerns over its debt restructuring plans.

The primary market on Friday was unusually busy as both Brazilian and Asian corporates priced $1.304 billion in new deals.

Overall, "new issues are keeping up a good pace," observed a sellside source.

Brazil saw three companies issue $1.104 billion in new debt, with all the offerings seen trading up in secondary activity.

In Friday's biggest deal by size, ISA Capital do Brasil SA placed $554 million in a two-part offering of senior notes.

The issuer sold $200 million of five-year notes at par to yield 7 7/8%. The notes will be non-callable for three years.

The second tranche was comprised of $354 million in 10-year notes that priced at par to yield 8.80%. The notes have a make-whole call at Treasures plus 60 basis points.

ISA Capital is a holding company that owns 89.40% of the common stock of CTEEP, which is Brazil's second largest electricity transmission company.

ABN Amro and JP Morgan were joint bookrunners for the Rule 144A and Regulation S transaction.

Next Cosan Finance Ltd sold an upsized offering of $400 million in 10-year senior unsecured notes (Ba2/BB) at 99.24 to yield 7 ¼%.

The deal, increased from $300 million, will be non-callable.

Morgan Stanley and Credit Suisse were joint bookrunners for the Rule 144A and Regulation S deal. Deutsche Bank Securities was the joint lead manager.

The issuer is a subsidiary of Brazilian sugar producer Cosan SA Industria e Commercio.

Also pricing, Minerva Overseas Ltd placed a $150 million offering of 10-year notes (/B/B+) at 97.646 to yield 9 7/8%.

The deal priced tighter than price guidance, which was set in the area of 10% to 10 ¼%.

Parent company Industria e Comercio de Carnes Minerva Ltda, a Brazilian beef exporter, will guarantee the unsecured unsubordinated notes.

The notes will be non-callable.

Credit Suisse was the bookrunner for the Rule 144A and Regulation S transaction.

Deals up in trading

Overall, the new issues were seen firmer in the secondary, including Thursday's new deal by Brazilian private equity firm GP Investments, Ltd., which sold a $150 million offering of perpetual notes (/B+/B) at par to yield 10%.

A Latin American corporate trader noted that ISA Capital was up over 1 point in the gray market and that Cosan, GP, and Minerva were "all up fractionally from issue price."

GITI prices

Turning to China, tire manufacturer GITI Tire Pte. Ltd. priced a $200 million offering of five-year guaranteed senior secured notes (B3/B-) at 99.544 to yield 12 3/8% via Credit Suisse and Lehman Brothers.

The yield came on top of price talk.

Guaranty, Garanti plan deals

In other pipeline news, Nigerian Guaranty Trust Bank plc (/BB-/B+) set price talk for a minimum $200 million offering of five-year fixed-rate notes in the area of 8 5/8%.

Standard Bank Plc is the bookrunner for the Regulation S deal, which will be issued via GTB Finance BV. Afrinvest (West Africa) Ltd. is a joint lead manager.

This will be the first issue from Nigeria in the international markets following the country's settlement of its Paris Club debt in 2006, according to a market source.

Pricing is expected to take place on Monday, Jan. 22.

Elsewhere Polish steel producer Zlomrex SA talked its €170 million offering of seven-year senior secured notes (Caa1/B) at 8 ½% to 8 ¾% on Friday, according to a market source.

The deal is expected to price early in the week of Jan. 22.

Deutsche Bank Securities is the bookrunner for the Rule 144A for life and Regulation S notes which come with four years of call protection.

Adding to the pipeline, Turkish Turkiye Garanti Bankasi A.S. plans to sell a dollar-denominated offering of step-up subordinated callable notes due 2017 (Baa1).

The lower tier II notes will be backed by political risk insurance, according to a ratings statement issued by Moody's Investors Service.

Deutsche Bank Securities and Merrill Lynch are joint lead managers for the Rule 144A and Regulation S issue, which will be sold via T2 Capital Finance Co. AS.

A European and U.S. roadshow is expected to start on Monday, Jan. 22.

EM tightens on flows

While the primary market oozed with energy, the secondary market hummed along - bolstered by positive inflows into the asset class.

On the corporate side, Brazilian companies were better but most of attention was on Ecuadorian sovereigns, noted the corporate trader, who added that some of the new issues garnered focus.

Meanwhile Venezuelan oil project joint ventures remain under a little pressure in the wake of president Hugo Chavez's speech that he intends to nationalize companies in several key sectors of the country's economy.

Electricidad de Caracas, which is owned by AES Corp, saw its bonds at 101.25-102 level. Last Thursday, it was spotted at 101-102.

Ecuador's fall on debt worries

A trader in Latin American issues said that it was his opinion that "nothing too much was going on," Friday, "just a few little things, but not much change," as market players seemed to take a step backward from the fray to digest the events of a wild week which saw a steep fall in Ecuador's volatile bonds on renewed signs from the Quito government that it indeed plans to press forward with a debt restructuring scheme - one which could see investors take a 60% haircut.

That was the figure being bandied about this past week by Ricardo Patino, the economics minister in the newly installed government of Rafael Correa, who was formally sworn into office on Jan. 15.

Since his election, Correa had repeatedly called Ecuador's approximately $11 billion of foreign debt, incurred by his predecessors, "illegal," "illegitimate," and "corrupt," and suggested that his country might go the route that Argentina did in 2001, when it defaulted on much of its nearly $100 billion of debt and then restructured it over the next several years, with debtholders eventually forced to accept new longer-maturity debt with a substantially lower nominal value - on average, about 30 cents on the dollar - in place of the defaulted issues.

Upon taking office, the new president called for an impartial international tribunal to investigate Ecuador's debt, again labeling the debt burden "corrupt" and "illegitimate."

Ecuador may seek 60% haircut

The market was rocked at mid-week when Patino met with bondholders and said that while he hoped to be able to meet Ecuador's obligations, including a $135 million interest payment due Feb. 15 on its 10% notes due 2030, it would do so only if the funds were available after Ecuador increased its social spending in areas such as healthcare and education, a key campaign promise that helped get Correa elected. He said that it might restructure about 60% of the debt, or more, and subsequently, called this figure "reasonable."

Were it to occur, such a forced restructuring - tantamount to a default in the eyes of ratings agencies and others in the debt community - would be Ecuador's second since 1999. Ecuador indicated anew that it would seek Argentina's advice, hoping to profit from its sister Latin American nation's experience in dealing with the international creditor community.

Ecuador's bonds - which are down more than 20 points from where they were before Correa emerged in mid-November as the winner of the election - added to the earlier losses, with some issues seen down as much as 7 to 10 points on Thursday.

In Friday's follow-up activity, the widely quoted 2030 benchmark fell as much as 4 additional points during the session, hitting lows around 68, before coming off those lows to end at 72 bid, unchanged on the day.

The bonds dropped after Standard & Poor's downgraded Ecuador's debt one notch to CCC, and revised its outlook to negative from stable.

Patino, attending a regional trade conference Friday in Rio de Janeiro, again defended the notion that Ecuador might force its creditors to accept a restructuring of 60% of its debt, saying that "considering much of this debt is illegitimate, a cut of that magnitude is possible." He said that he expected to finish drawing up a debt restructuring plan by the end of the month.

Correa said that officials from his government would meet with their Argentine counterparts in the coming days.

No spillover from Ecuador

So far the story has been contained to Ecuador, with very little, if any, contagion in the rest of the asset class, noted an emerging market analyst.

"So long as the supportive technical backdrop to the market continues, it will be difficult for even an outright default to have much of an impact on the overall market," he added.

Furthermore the sellside source noted that investors are taking advantage of the market volatility in Ecuador to make a profit.

"People are buying in the morning, selling in the afternoon and getting a pick up," he added.

The analyst noted that levels now reflect the expectation of some loss on the bonds.

But he added: "The market is still far from pricing in a default as bonds are still trading at around 70 cents on the dollar on the bid side, so the debt could still drop a lot further if they miss the Feb. 15 payment and fail to pay within the 30 days."

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