Emerging markets stronger but investors eye Russian developments; IDBI prices $250 million

By Paul A. Harris

St. Louis, Dec. 17 - Emerging market debt was generally stronger Friday, as bond buyers continued to nervously eyeball the Russian Finance Ministry and Vladimir Putin, the man who pulls its strings, for evidence that retro-Soviet heavy-handedness could be at play in the Federation's approach to property rights.

And players are making a bet that the Philippines, which is about to be taken to the ratings woodshed by Moody's Investor Services, may not receive as many downward whacks as had earlier been feared.

Late in the session a source spotted J.P. Morgan's EMBI-plus index at 327.62. Its spread tightened four basis points to 359 basis points.

Meanwhile the new issue market produced a paltry amount of news, Friday. Terms emerged on Industrial Development Bank of India's $250 million five-year bond, which came at the tight end of guidance.

And although it proved close to impossible to wring any news out of the new issue pipeline, a couple of names were heard: Brazil, sources said, is almost certainly going to show up early in 2005 with a real-denominated international offering. And Alrosa, which priced bonds in early November, is expected to show up again, possibly in January.

Russia hanging in

The drama unfolding in Russia, pitting the Federation's tax czars against the private industrial oligarchs, continued to unfold on Friday with reports that Western banks are taking a flyer on funding energy giant Gazprom's bid for the oil production assets of Yukos.

Yukos was lately hoisted onto the auction block by the Russian Finance Ministry for failing to pay in excess of $27 billion of back taxes.

Although sources have told Prospect News that the Yukos auction is open to international bidders, Gazprom is expected to be the only bidder to show.

And there is a sideshow, one emerging markets buy-side source added on Friday morning: on Thursday VimpelCom vice president Valery Goldin told a round table meeting on corporate governance in Russia that new tax claims for 2002 and 2003 may be filed against VimpelCom by the Finance Ministry.

What investors in the West want to know, added the source, is whether or not Putin's unleashing of the tax dogs against Yukos and VimpelCom represents a return to Soviet-era bureaucratic disregard for property rights.

"There's noise with Gazprom and VimpelCom," the buy-side source said, "and it's not giving anyone any support.

"Russia's sovereigns are trading along with Treasuries, and they are still doing pretty darn well. It's not a disaster," the source added.

"VimpelCom has been hit.

"Gazprom is hanging in there. The 2034 bonds are 116.125. They went out Thursday at 116.75. With Treasuries down a quarter, you're pretty much in line with what Treasuries are doing."

The source also spotted Russia's sovereign 5% bond due 2030 down three-eighths at 102.50 bid, 102.625 offered.

"I don't worry too much about the 'Democracy' issue in Russia," the investor continued. "It doesn't bother the market. The Wall Street Journal may claim that it's an issue but I don't ever hear the Wall Street Journal telling us to get out of China.

"The real issue has to do with property rights. Yukos didn't pay their taxes, so the state has a legitimate claim against them. But because of the politics involved people want to know if this is an uneven application of property rights. Is the government only enforcing property rights when they feel like it?

"If so, that's not necessarily progress."

Putin factor factored in?

Earlier a sell-side source said that trading levels seem to indicate that holders of Russian paper are not bailing out.

"The news is not having much of an impact on spreads," the investment banker said. "Everybody thinks that Putin is going to push this auction through and there isn't much anyone can do. People see the Yukos bankruptcy filing [in a U.S. court] as a last ditch attempt to stop anything from happening.

"In the end Gazprom is going to pay something that is viewed as being at the low end of the market price range for the Yukos assets.

"When you look at the valuations and you adjust for the fact that whoever buys it is going to have to pay this outstanding tax liability, they're going to pay a reasonable price. It may not be the same kind of price you would have if you really had international companies in there competing; international companies are able to go in there and bid, but it seems like no one is. Everybody seems to want to stay away from this thing."

The banker went on to say that players in Russian paper know very well that Russian president Putin is a former commissar in the now-defunct Soviet government.

"Let's face it, if you buy Russia you've got the Putin factor," the banker asserted. "People may not be wild about Russian politics, but the broader Russian economy is doing well. And Russia is now a net creditor.

"You have to feel fairly comfortable about the foreign debt. And everyone thinks that they are going to get the S&P upgrade to investment grade sooner rather than later.

"So people just keep buying the stuff."

Asian debt red hot

The only solid primary market news on Friday came from Industrial Development Bank of India, which priced $250 million of 5 1/8% five-year bonds (Baa3/BB/BB+) at mid-swaps plus 125 basis points, on the tight end of the mid-swaps plus 125 to 130 basis points talk.

The issue price was 99.965, and the bonds, when priced, yielded 5.195%.

Barclays Capital and Merrill Lynch & Co. ran the books.

Apart from the IDBI deal, trade in existing Asian paper was brisk, according to one trader.

"India is red hot," said the trader. "There is a lot of buy-interest.

"Right now in Asia everything is generally better bid," the source added, specifying that the most active name was Hong Kong conglomerate Hutchison Whampoa Ltd.

"There seems to be a lot of really deep buy-interest," the trader said. "What we've been seeing lately is atypical compared to what we had been seeing for the past month or two.

Philippines: one lump or two?

Ever since early December when Philippines central bank governor Rafael Buenaventura announced that Moody's Investors Service may cut the nation's debt rating by two levels unless lawmakers addressed the country's budget deficit, some holders of Philippines sovereign bonds have suffered from watery knees over the downgrade, which could come in February.

However the Asian debt trader who spoke to Prospect News on Friday said that there is a discernible counterplay at work in the market

"We're also seeing much better buying interest in the Philippines, which has lagged anything in any emerging market," the trader said.

"Moody's is about to give an opinion as to whether they are going to downgrade the Philippines or not. That's expected to happen in the next one to six weeks.

"A lot of people think that Moody's is going to come out and only downgrade them one notch. And right now [Philippines bonds] are priced as though Moody's is going to downgrade them two notches, or even worse.

"So the market has caught a really nice bid."

The trader spotted the Philippines 2025 paper at 107.25 bid, 107.75 offered and offered as a comparison the Dec. 1 price of 104.

"The market has priced in a more dire expectation than what Moody's is actually going to do," the trader asserted. "They are basically pricing the credit right now behind single-B Venezuela, whereas Philippines is double-B.

"So if Moody's comes out and downgrades them two notches, which would be pretty severe - and not many people think that they are going to do that because it would be such a severe move - it's still going to be double-B rated at S&P, and it will be high single-B at Moody's, presumably with a stable outlook.

"So it will still be cheap even if the Moody's downgrade happens.

"People are betting that if they just get downgraded one notch Philippines paper is going to rally like crazy.

"The buy interest is what has pulled valuations up off of the lows. There has been a heck of a lot of it.

"It's the biggest dynamic in the market right now."

Brazil tighter on the session

Elsewhere in the secondary market Friday, Latin paper continued to tighten, as sources suggested it is catching a lift on the U.S. dollar's lingering misfortunes.

One source had the Brazil bond due 2040 at 117.60 bid, 118.10 offered, up 1.65 on the day.

Meanwhile the Brazil component of the EMBI-plus index was spotted at 439.29, having tightened by nine basis points to 394 basis points over Treasuries.

Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal, said that to a certain extent the story continues to be the relative strength of the Brazilian real versus the U.S. dollar.

"The market is taking advantage of the lack of overall liquidity and lack of broad-based participation," Alvarez said Friday. "So it's very sensitive to any types of orders that come in.

"Overall we're seeing a continuation of the same thing we have been seeing. While U.S. Treasury markets don't move out of the set range, particularly in the 10-year, we're going to continue to have a very positive environment in Latin America."

Quiet along the pipeline

Finally, as the week of Dec. 13 came to a close in the emerging markets, sources told Prospect News that things are mostly quiet along the new issue pipeline.

One name that was heard was that of Moscow-based diamond-mining giant Alrosa, which just finished a $300 million deal in early November via JP Morgan and ING. On Nov. 9 the company's 10-year bonds (B2/B) priced at 99.511 with an 8 7/8% coupon to yield 8.95%, slightly inside of price talk.

One source familiar with the credit told Prospect News that while there's nothing in the way of solid information on a new Alrosa deal, it certainly is within the realm of possibility.

"When they came in November our guess was that they would do more, so they may have some needs for 2005," the source said.

"Before the November deal, the company had gotten approval from the Russian government to do considerably more than $300 million," the source added, conjecturing that the ceiling could have been as high as $800 million.

"And it was a big book, with people were begging them to do more," the source said regarding Alrosa's November deal.

"But they are a government-owned company. They were clearly under orders that they should not be borrowing more than they needed."

Elsewhere, sources on Friday said that evidence is mounting that Brazil is going to show up early in the new year with a real-denominated global bond offering, perhaps leading a parade of local currency-denominated international deals (see related story on page one of this issue).

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