Emerging market debt gains despite equities breakdown; Banco Hipotecario sells $100 million add-on

By Reshmi Basu and Paul A. Harris

New York, Jan. 20 - Emerging market debt squeezed out returns Friday, even as U.S. equities buckled on the back of disappointing earnings and high oil prices.

In other news, the primary market saw two deals price. Banco Hipotecario SA added $100 million to its 9¾% notes due 2010 (/B-) on Friday via Deutsche Bank

The add-on, upsized from $50 million, priced at 100½ for a spread to five-year Treasuries of 529 basis points.

And Inter-American Development Bank (Aaa/AAA) sold Ps. 2.5 billion or $236 million equivalent of 10-year bonds (Aaa/AAA) at 99.574 to yield 8.06%.

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

Meanwhile news surfaced relating to several Brazilian corporate pipeline deals.

First off, National Steel SA (Vicunha Siderugia) set initial price guidance for a $400 million issuance of perpetual securities (/B+/BB-) in the area of 9 7/8%.

Credit Suisse and Deutsche Bank are running the Regulation S deal.

Next Cosan Industria e Comercio SA is expected to price its maximum $250 million offering of perpetual bonds (Ba2/BB) at 8½% or lower.

The issuer set price guidance in the area of 8½% on Wednesday, Jan. 18,

Credit Suisse and Morgan Stanley are bookrunners for the Rule 144A/Regulation S transaction.

And Sao Paolo, Brazil, based-Banco Fibra set price talk for a $50 million offering of three-year bonds at 6 % to 7%.

Banco Espírito Santo SA is managing the deal.

New supply worries did little to harm corporate bond prices Friday, according to a Brazilian corporate analyst, who added there is appetite out there.

Over to South Korea, C&M Finance Ltd. tightened the price talk on its $550 million two-part offering of senior unsecured notes (Ba2/BB+) on Friday.

The Seoul-based company's tranche of floating-rate bullet notes is now talked at the Libor plus 262.5 basis points area, revised from the 275 basis points area.

Meanwhile talk was revised on C&M's 10-year fixed-rate notes to 8 1/8% to 8¼% from 8¼% to 8½%. The fixed-rate notes come with five years of call protection.

A buyside source said the deal is seeing "a lot of demand" in the United States as well as in Asia.

Pricing is expected on Monday.

Goldman Sachs and Citigroup have the books for the Rule 144A/Regulation S notes.

Over to Europe, the Republic of Poland set initial price guidance for an offering of €3 billion in 10-year notes (A2/BBB+/BBB+) at mid-swaps plus 13 to 16 basis points.

The country is facing a political showdown. President Lech Kaczynski is talking to opposition groups in hopes to end the stalemate that could result in the failure to approve the 2006 budget and force a second general election in six months.

Nonetheless, the new issue is expected to price with relative ease on Tuesday, according to an emerging market analyst. But the market is definitely nervous about the political situation in Poland, he said.

"Using Merrill Lynch index spreads over USTs, Poland's index spread on the USD external debt has gone from the high +20s to around +75bp today [Friday].

"They'll still be able to get their EUR deal done relatively easily and at a low spread to swaps, but the threat of early elections will keep the market worried for the foreseeable future," he said, adding that the extra supply generated from the new deal will not help.

Credit Suisse, Deutsche Bank and JP Morgan are joint lead managers for the Regulation S transaction.

U.S. equities in tailspin, EM higher

During the session, the Dow Jones Industrial Average skidded more than 200 points on the back of disappointing numbers from General Electric Co. and Citigroup Inc. and another spike in oil prices. All of the Dow's gains in 2006 have now been erased.

But yet again, emerging market debt showed resilience in the face of a downtrodden equities market.

Investors have "faith" in the asset class, said a trader, who added that "cash being put to work" and "limited supply" has cushioned the asset class from the equities tailspin.

During the session, the Brazilian bond due 2040 gained a quarter of a point to 131 bid, 131.10 offered. Oil producers Ecuador and Venezuela also saw higher dollar prices. The Ecuadorian bond due 2030 notched up 0.65 to 95 bid, 96 offered. The Venezuelan bond due 2027 gained one point to 124½ bid, 124.90 offered.

"The market is running under its own psychology," noted Enrique Alvarez, Latin American debt strategist for IDEAglobal, who added that such secondary factors such a rumored Brady bonds buyback in Brazil and global liquidity are helping prop up investor sentiment.

Alvarez said he is amazed at the market's recent performance.

"I'm incredibly surprised. I've been around this market...since it was conceived," he remarked. He said he was trading "emerging markets" in its formative years, back when it was essentially bank loans.

"The only time I've seen a similar environment was in '97/'98 just before Russia pulled the plug," he noted.

While the sentiment may seem extremely bearish, Alvarez said he does not understand why the market is rallying given the context of high oil prices and the equities meltdown.

He added that the high oil prices are reaffirming market sentiment that interest rates will move lower in the United States going forward. A slowdown in the U.S. economy would trigger a loosening of the Fed's monetary tightening campaign.

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