Two deals price; three talk; Harmony pulls notes in 'jittery' market; subprime troubles prompt risk aversion

By Reshmi Basu and Aaron Hochman-Zimmerman

New York, July 18 - Two deals priced in emerging markets primary action Wednesday, with deals coming from Interpipe Ltd. and Pivdennyi Bank in the face of volatile market conditions.

Meanwhile secondary activity saw a weak tone as investors remained nervous about taking on risk as the troubles in the U.S. subprime mortgage market continue to undermine confidence.

Market watchers were for the most part pessimistic about the state of emerging markets.

High yield issues are good, the others will postpone or underperform, said a market source.

"It's bad, [there is] no liquidity; it could end up in a mess," the source added.

A syndicate official said issuers lacked the patience to properly accommodate the current market conditions.

Issuers had the leverage for a long period of time but if they are not prepared to be flexible on price then they are putting a gulf between themselves and the investors, the syndicate official said.

However, "Latin America is holding pretty well," deals are getting done, currencies are holding, the official said.

There is a lot of watching, waiting and sitting on hands, the official added.

With a more cheery outlook, one buyside source said the market began turning around at the end of the day.

"There has been some cash put to work," the buysider said.

"Equities rallied toward the end of the day ... we ended the day with a better tone," the buysider added.

Terms from Ukraine, Brazil

Nonetheless two deals weren't sitting on their hands.

Ukraine's Interpipe priced $200 million of three-year senior notes (B+/B+) with a coupon of 8¾%.

The deal was increased from the $150 million originally expected.

ABN Amro and ING had the books.

Ukraine's Pivdennyi Bank completed the sale of its proposed $100 million three-year eurobond (B1/B-) at par with the annual rate of 10¼%.

The deal via BNP Paribas and Standard Chartered matched the initial guidance.

The bonds mature on Aug. 3, 2010.

Local currency talk

Meanwhile two South American local currency issuers released talk for their planned transactions.

The Republic of Peru put talk in the 6.9% area for its local-currency 30-year bond (Baa3/BBB-/BBB-), which will be worth a minimum of $1 billion.

Citigroup will bring the deal to market.

Pricing is expected Thursday.

From Colombia, the City of Bogota released talk in the 9 7/8% area for its $300 million 20-year local-currency senior notes (Ba1/BB+/BB+).

Citigroup and Deutsche Bank have the books for the deal.

The bonds will mature in July 2027 and amortize in equal parts in 2026, 2027 and 2028. They are payable in dollars.

Pricing is expected to follow the roadshow which ended Wednesday.

Deals talking

Elsewhere, Indonesia's PT Cikarang Listrindo issued talk in the 8% area for its $425 million seven-year senior secured note issue (Ba3/BB-/).

The notes will be issued by wholly owned subsidiary Listrindo Capital BV.

The energy provider will use proceeds generated from the sale to refinance debt, for capital expenditures and for general corporate purposes.

Mexico's Grupo Financiero Mifel SA released talk in the 10½% area for its $100 million perpetual notes (B-/B+).

The offer was lowered to $100 million from $120 million.

Deutsche Bank will bring the deal to market.

The bonds carry five years of call protection.

Qatar Real Estate Investment Co. talked its dollar-dominated five-year floating rate sukuk (A2/BBB+) at Libor plus 75 basis points.

HSBC has the books.

Harmony pulls, Edenor reaches

Meanwhile, South Africa's Harmony Gold Mining Co. Ltd. yanked its $350 million offering of seven-year senior notes (BB+) due to unfavorable market conditions.

Morgan Stanley and First Rand Bank were joint bookrunners for what was to be the Johannesburg-based mining company's debut in the global bond market.

Argentina's Empresa Distribuidora y Comercializadora Norte SA (Edenor) is reaching out to more investors by extended the period for interested parties to subscribe to its offering of $250 million of fixed-rate notes due 2017 to July 31 from July 18.

The notes are being offered under the company's $600 million global notes program.

Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. are the international placement agents, and Citicorp Capital Markets SA is the placement agent in Argentina.

Subprime losses hurt EM

Overall, emerging market debt traded with a weak tone Wednesday as the category continued to see a pullback in risk, triggered by concerns over the U.S. subprime mortgage market meltdown.

But Federal Reserve chairman Ben Bernanke's testimony Wednesday did little to impact the bearish mood in the asset class one way or another, according to a Latin American corporate trader.

"Market was weak prior to testimony and remains weak following," he noted.

Bernanke said that U.S. economic growth would be moderate while core inflation would dip, suggesting that the central bank would not veer from its current policy stance and that it would leave interest rates unchanged for the remainder of the year.

"Core inflation should edge a bit lower, on net, over the remainder of this year and next year," Bernanke said in his prepared speech to the house financial services committee.

"If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters."

Nonetheless, Bernanke's comments on the housing picture sullied investors' appetite for risk. He noted that U.S. economic growth would be deterred by the housing slowdown.

"If anything, [Bernanke's testimony is] a little less hawkish than most were expecting," said another trader, noting that the Fed chief's comments added to investors' fears regarding the subprime mortgage fallout.

And creating more angst, Bear Stearns Cos. told investors that its failed hedge funds, which made big bets on the home mortgage market, were essentially worthless.

At the close of Wednesday' session, the JP Morgan EMBI+ index was down 0.10% while spreads were wider by 5 basis points versus U.S. Treasuries.

Argentina is day's loser

Among Latin American names, Argentina was the worst performer of the session as its component of the JP Morgan EMBI+ index lost 1.54% while spreads kicked out by 14 bps, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Bearish market sentiment on top of recent domestic scandals weighed on investors' appetite for the country's paper, noted a market source.

On Monday finance minister Felisa Miceli resigned after being summoned by the court to testify as to why a bag of money was found in the bathroom of her office.

Meanwhile the latest Poliarquia survey showed a decline in support for presidential candidate Cristina Kirchner, the wife of current president Nestor Kirchner.

Underscoring the loss in support may be voters' disillusionment with the current administration, coupled with the country's energy crisis, remarked the source.

Venezuela holds firm

However Venezuela, normally a high-beta underperformer, was the session's standout amid the general losses.

Spreads widened by a very minor 1 basis point while dollar returns were flat, encouraged by the strength of oil, according to Alvarez.

"Subprime spillover was the theme of the day with flight to quality in the U.S. Treasury [market] and U.S. equity market losses/volatility the catalysts for LatAm," he said.

"Outlook for EM is very much dependent on subprime noise levels from US side, with intensification a negative for all the LatAm investment camp."

Most other Latin American credits widened by 4 to 5 basis points

Cash bonds not reflecting risk, says analyst

Most of the recent weakness in the asset class has involved the credit default swap market. However one analyst warned that the cash bond market does not adequately reflect the risks out there.

"Definitely the case that CDS is driving this market, there seems to be very little selling of cash on the screens, but higher CDS is marking down the bonds," the emerging market analyst said.

"The market is starting to look a little ridiculous in its refusal to price in much more risk from this subprime mess, though.

"Lehman is now trading almost flat to Brazil; MBIA is trading almost flat to Serbia. At some point risk aversion is going to spill over with more force into EM," he concluded.

Ecuador takes minor hit

In other country specific news, Ecuador continued to perform somewhat decently, encouraged by words from a member of its new external debt committee, which was assembled to make recommendations on the country's borrowings.

The committee is leaning towards restructuring and will most likely find most of the external debt to be illegitimate, according to another analyst.

However, committee member Galo Arias said it would take a full year for the panel to complete its analysis, which the market interpreted as good news, noted the source.

Many investors took that to mean a restructuring in 2007 was unlikely. But the analyst pointed out that whether Ecuador will default on its bonds has less to do with whatever the panel may conclude and more to do with prevailing political and economic conditions, such as oil prices.

While investors appear that they will exit 2007 without a haircut on bonds or a default, the following year may be a different story, noted the source.

In trading Wednesday, Ecuador held up relatively well, given all the weakness.

"Ecuador only took some minor lumps" with its share of the EMBI+ lower by 0.25% and spreads widening by 20 bps," noted Alvarez.

Elsewhere, Turkish bonds sold off ahead of this weekend's parliamentary election. According to polls, the AK party is expected to retain control, but investors are "reducing their positions ahead of any surprises", noted a trader.

Finally after the market close Wednesday, Brazil's central bank was expected to cut the Selic base rate by 50 basis points to 11½%, which would match market consensus.

However, one market source said he would have preferred to have seen a 25 basis point reduction since it appears that consumer price inflation is accelerating on a year to year basis.

He added that the market would pay close attention to how members of the country's central bank monetary policy committee voted.

In trading Wednesday, Brazilian bond were steady, the source noted.

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