Emerging market debt dragged down by subprime mortgage fears; IADB sells new Turkish lira debt

By Reshmi Basu and Paul Deckelman

New York, June 25 - Emerging market debt extended losses Monday as the sector traded in tandem with the wild session posted by the U.S. stock market as it decoupled from the U.S. Treasuries market.

Concerns intensified over the potential spillover effect from the U.S. subprime mortgage market, which triggered another flight to safety trade.

In the primary market, the Inter-American Development Bank sold 100 million Turkish Lira of three-year bonds (Aaa/AAA/AAA) at par to yield 16 3/8%.

Barclays Capital managed the transaction, which was issued via IADB's global debt program.

IADB is a regional development bank in Latin America and the Caribbean.

Adding price talk, the International Investment Bank (IIB) set price guidance for a €150 million to €200 million offering of three-year senior bonds (/B-/B+) at the 9% area.

Calyon and Credit Suisse are bookrunners for the issue.

IIB is a Moscow-based corporate and retail bank.

Elsewhere, Malaysian liquefied natural gas carrier MISC Bhd. set price guidance for an expected $750 million offering of 10-year bonds (A2) in the area of mid-swaps plus 40 basis points.

Citigroup and Deutsche Bank are the lead managers for the Rule 144A and Regulation S deal.

More deals join pipeline

Joining the heavy pipeline, Hong Kong's Hang Seng Bank Ltd. plans to sell a dollar-denominated offering of 10-year subordinated notes (Aa2/AA-). The deal will be non-callable for five years. If the notes are not called, the coupon steps up by 50 basis points.

HSBC is managing the deal.

And Lupatech Finance is currently marketing a $200 million offering of perpetual bonds (Ba3/BB-) in Singapore.

The roadshow will next move to Hong Kong on Tuesday, to Switzerland on Wednesday, to London on Thursday and New York on Friday.

Brazilian manufacturer Lupatech SA and its subsidiaries will guarantee the issue.

Citigroup and Merrill Lynch are bookrunners for the Rule 144A and Regulation S deal. Santander Investment is also a lead manager.

The deal will be non-callable for five years.

EM falls to flight to safety trade

Back to trading, in the secondary market, investor angst continued over the likelihood that hedge funds in the United States and the United Kingdom will book losses as a result of unwinding positions in subprime loans and so have less of an appetite for riskier investments, like emerging market debt, going forward.

For yet another session, this was reflected in a "flight to safety", as market players seeking more security bought U.S. government paper, which in turn widened out spreads for lagging EM bonds.

The benchmark 10-year Treasury notes continued to gain in price, up another 3/8 point to 95.5, while their yield came in another 5 bps to 5.08% - well under the levels above 5.30% that the 10-year hit around mid-month.

The widely followed EMBI+ index of emerging debt performance, which tracks the average spread between the bonds of EM countries and Treasuries, was quoted as having widened out five or six basis points to 165 bps - its highest level since early May, and well above the recent tight levels in the upper 140s.

A New York-based trader in Asian issues characterized the market as "soft - certainly our market is, just because of the backdrop of what's going on elsewhere."

But he said that flows were "still relatively light. We've had a lot of [new-issue] supply over the past few weeks, and so far those issues are holding on. Typically, you would expect that in times of heavy issuance there would be some weakness, but the deals are holding up reasonably well."

New Asian issues hanging on

For instance, he said, the new bonds of Indonesian issuer PT Perusahaan Listrik Negara (PLN) - which priced $1 billion of paper in a two-part deal on Thursday - "have held their gains." He saw the state-run electric utility's 8% 2037 bonds, which priced at 98.586, having moved up slightly to 98.75 bid, par offered, while its 7 3/8% notes due 2017, which priced at 99.127, were just "a bit softer," at 98.625 bid, 99 offered.

Another issue he saw was Korean chipmaker Hynix Semiconductor's $500 million of 10-year notes, which priced last week at par and are now hanging in around 99.5-99.75.

"So in the scheme of things, the stuff is holding reasonably well."

Among the sovereign issues, he saw the 5-year credit default swap contracts on Philippines government bonds as "having just traded back up to overnight wides," at 104-108 bps - somewhat above the levels around 99-104 bps at which the CDS contracts had closed earlier in Asia.

Still, he said, "it's not like stuff is just blowing out wider. It's reasonably well-contained."

He did see more pronounced widening on the Philippine sovereign curve.

"With Treasuries bouncing here, prices are not keeping up at all, so we're seeing a reasonable amount of widening on a spread basis, but dollar-prices are holding fairly consistently."

The Philippine benchmark 2031 bonds are currently trading around the low 111 mark, while Manila's 2032 bonds are around the 96.5 level. But with Treasuries moving up, "we're as much as 10 bps wider on a spread basis, in the long end of the Philippine and Indonesian curves. But prices have actually been pretty stable."

Bank capital moves lower

One sector where he did see prices "getting bashed up a fair bit" is bank capital. For instance, he noted that the State Bank of India's new deal that priced last week was probably "6 or 7 bps wider" from where those bonds had been, while that same issuer's existing bonds were about 5 or 6 bps wider, in line with that movement.

"The whole sector is just backed up," he declared. "It's one sector where the technical position is not that strong, and there's concern that there's going to be ongoing supply from that sector, so that's under pressure."

Japanese bank capital, he said, is "also trading softly", widening out about 5-7 bps on similar market dynamics.

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