Emerging market debt retreats on U.S. Treasury decline; VimpelCom prices downsized offering

By Reshmi Basu and Paul A. Harris

New York, June 9 - Emerging market debt slid as U.S. Treasury prices fell amid uneasiness over how aggressive the Federal Reserve will be in acting to curtail inflation.

In primary action, Russia's second largest cellular network operator priced a downsized $250 million five-year bond at par to yield 10%.

"At $300 million, there wasn't too much demand," said a trader. "Market conditions were not ideal."

An informed source said the new issue was trading at 100 to 100¼ in the secondary market.

Another source said the deal traded poorly in the aftermarket. It was priced at par, and he saw it trade immediately down to 99 5/8.

The issue, decreased to $250 million from the originally announced $300 million, came in line with price talk. The issue had been talked at 10%.

The deal was a revived version of an offering delayed by an inclement market earlier in the year. In late April, VimpelCom postponed its $300 million offering, citing unfavorable market conditions.

JP Morgan and UBS Investment Bank were bookrunners for the Rule 144A/Regulation S offering.

Meanwhile, Industrial Bank of Korea priced $200 million 10-year subordinated notes to yield 5.8%.

Deutsche Bank and UBS Investment Bank ran the books for the Regulation S offering.

Adding to the Korean corporate pipeline is South Korea's largest fixed-line telecommunications operator KT Corp.

KT is planning to issue $500 to $700 million of 10-year bonds (Baa1) this month.

Treasury woes drag on emerging markets

In trading Tuesday, emerging market debt fell on movements in the U.S. Treasury market. The JP Morgan EMBI index was down 0.05% during Wednesday's session.

The market had a pre-holiday feel as trading volume and volatility were quiet.

"It seemed to be soft," said Enrique Alvarez, Latin American debt strategist for research firm IDEAglobal.

"You had a downside based on a little more negative sentiment creeping into the U.S. Treasury market. I think that was the actual guidance for the market the whole day," said Alvarez.

Greenspan jitters

On Monday, investors appeared ready to embrace the market. But after Federal Reserve Chairman Alan Greenspan's testimony Tuesday, investors returned to the sidelines as they awaited the next batch of economic data.

"I think everybody's a little more worried about the CPI numbers after Greenspan's speech yesterday [Tuesday]," said an emerging market analyst.

"Greenspan essentially said he didn't think inflation will be a big problem but he warned that if it did look like more of a threat the Fed will act accordingly.

"This makes the market jumpy about every U.S. data release, especially next week's inflation number."

And some of the weakness in emerging markets can be attributed to these Greenspan jitters.

"Up until Greenspan's speech, it looked as if some EM investors were ready to start to dip their toes into the market again," said the analyst.

"Since Tuesday morning, though, it looks like some investors have backed off, especially because it became clear that any spread tightening would be met by a rush of new issuance.

"I think it's the Greenspan fears plus concerns about excessive new issues on tighter spreads that have made the market retreat a bit over the last two days," he added.

Indeed, a June Fed hike is in the market, according to a strategist. The hike is priced into the futures at a probability of 100%.

"It ought to be priced in bonds," said the strategist.

"I have no idea why the currency market didn't get around to thinking about it until Mr. Greenspan's testimony yesterday [Tuesday] because that was pretty clear that they hadn't because we lost a cent and a half.

"Certainly the Treasury and futures market have it. The currency movement in the last 24 hours is a complete mystery to me because I thought it would already have been in the market," he added.

Meanwhile a sell-off in Russian debt is due to a decline in spot oil prices and the country's banking problem.

The strategist told Prospect News that 90% of Russia heartache can be attributed to the spot oil prices and 10% to its banking problem.

"We've lost a couple of banks over there," said the strategist. "We've been reading stories that banks have been reducing their lines to each other because nobody knows who's next.

"So that could have cost the market some liquidity," he added.

Peru minister quits over scandal

Early this week Peruvian agriculture minister Jose Leon resigned. The media was reporting that a business owned by Leon's son has allegedly been involved in running a brothel with under-aged prostitutes.

Leon denied the accusations on Monday but resigned that night. No successor has yet been named.

A source noted that this is one in a long series of political scandals related to corruption in the government. However this time the reaction, Leon's resignation, was almost instantaneous.

"Yesterday [Tuesday] S&P raised Peru's long term foreign currency debt rating to BB from BB-, citing rising exports and a narrowing fiscal deficit. The rating upgrade followed last week's improvement from Fitch, which improved the outlook to positive from stable, but left the long-term foreign currency rating at BB-," said a market source.

"The government is committed to gradually reducing the fiscal deficit. Tax collections are apparently increasing. These developments seem to be generating optimism among locals.

"But you have to keep in mind that there continues to be political noise in Peru, which is not expected to ease, at least in the near term," said a market source.

While Tuesday's S&P upgraded lifted Peru in trading on Tuesday. Peru was down 1.34% Wednesday as measured by its component of the JP Morgan EMBI Index.

The brothel scandal is "old news," which is having little impact on the market because administration changes are commonplace, according to IDEAglobal's Alvarez.

He described the upgrade by S&P as "news that needed to be absorbed.

"But now within the overall scope of things in Peru, you are back to a political framework that is very difficult. And I think that's why it is tailing off again," he added.

Chilean corporates better

Chilean corporate bonds were better Wednesday.

Chile's Empresa Nacional del Petróleo's bond due 2012 tightened by one basis point on Wednesday's session, 113 bps bid, 103 bps offered from 112 bps bid, 102 bps offered on Tuesday.

Latin America¹s largest electricity holding company Enersis saw its bond due 2014 narrow by five basis points in Wednesday's trading to 335 bps bid, 320 bps offered from 340 bps bid, 325 bps offered on Tuesday.

Pulp and paper company CMPC was unchanged at a spread of 135 bps bid, 125 bps offered.

Mexican corporates stable

Mexican corporate bonds have been trading relatively stable in the last week.

Grupo Transportacion Ferroviaria Mexicana's bond due 2012 is better by one point at 105 bid, 107 offered compared to 106 bid, 108 offered on June 6.

The world's third largest cement maker Cemex saw its bond due 2006 weaken 5/8 of a point to 117 5/8 bid, 118 5/8 offered from 117 bid, 118 offered on June 6.

And Mexico's biggest fixed line telephone company Telefonos de Mexico gained a point to 105 bid, 107 offered from 106 bid, 108 offered.

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