Emerging market debt rides higher as U.S. stocks extend gains; Ecuador surges on election shocker

By Reshmi Basu and Paul A. Harris

New York, Oct. 16 - Emerging market debt saw tighter spreads Monday amid a supportive backdrop while Ecuador triumphed on unforeseen presidential election results.

Ecuador's bonds soared Monday after the country's wealthiest man Alvaro Noboa pulled ahead of radical leftist Rafael Correa in Sunday's presidential election, a pleasant surprise for Wall Street.

Weeks before the election, polls had showed a quick rise in popularity by Correa, who had scared Wall Street with his hard-line rhetoric regarding debt negotiation. Those jitters slapped Ecuador's debt, earnings it the distinction of being one of the asset class' worst performers.

But now the market is faced with a market-friendly scenario, the likelihood is that the country's biggest banana exporter Noboa will become the next president, which has diminished much of the country's risk, noted many sources.

"If he were to win, we would expect him to: negotiate a free-trade agreement with the U.S., to keep dollarization, to not mess with the financial sector and to welcome foreign direct investment," according to a research note by Alberto Bernal, fixed income analyst for Bear Stearns & Co., Inc.

On that election surprise, the Andean nation posted a stellar performance Monday as bond prices revisited levels seen prior to pre-election worries, according to market sources.

Ecuador 2015 up 7¼

In trading, the Ecuadorian bond due 2021 surged 4 points to 102.25 bid, 102.75 offered. The bond due 2015 added 7.25 to 102.30 bid, 103 offered while the bond due 2030 gained 6.70 to 98.45 bid, 98.95 offered. Monday's action was quite a stark contrast to the price levels seen earlier this month.

As a comparison, on Oct. 4, for example, the Ecuadorian bond due 2015 gave up 2.25 to 93 bid, 94 offered while the bond due 2030 gave up 0.90 to 90 bid, 91.25 offered.

"Despite the impressive rebound in prices seen today [Monday] as a result of the positive election surprise, we continue to see room for upside. Hence, we now think that this credit will outperform the market through the end of the year," Bernal wrote.

Nonetheless, the cheers may be premature, given how much time is left before the next vote, according to a buyside source. The two contenders will now face off in a second round run-off vote on Nov. 26.

"Bonds are up seven points today [Monday]. It's definitely good news, but I don't know if its seven points worth of good news," he added.

"We're not out of the woods yet."

EM tighter

Meanwhile emerging market debt saw its spreads tighten amid a supportive global backdrop. Risk aversion is decreasing across global markets on the belief that the U.S. economy will see a soft landing.

A rally in the global equities markets helped drive sovereign prices higher.

During the session, the bellwether Brazilian bond due 2040 added 0.35 to 131 bid, 131.10 offered. The Argentinean discount bond due 2033 moved up 1.10 to 99.70 bid, 100.25 offered. And the Venezuelan bond due 2027 rose 1.25 to 122.20 bid, 122.86 offered.

Nonetheless, while the market may be bullish, the buyside source said he is cautious, based on valuations. He noted that the market is riding higher on a goldilocks scenario, in which the economy will see the right amount of growth and inflation.

The source noted that the inflation fears from the second quarter have gone away and worries of a hard-landing have dissipated.

"Not too much inflation. Not too much growth. It's goldilocks."

Looking ahead, the buyside source remains underweight in emerging markets.

"The valuations are just too tight," he cautioned.

"To me, it's a question of price, not fundamentals."

And perhaps what is even more amazing to the buyside source is how the market has reacted to declining oil prices. Commodities posted a terrible third quarter as oil prices fell to their lowest level of the year.

"It [EM] hasn't even budged," he noted, adding that price declines would usually have resulted in spread widening of 40 basis points during that time period.

In fact, the market has actually tightened 20 basis points.

"Fundamentals have gotten worse. To me, it comes down to a question of price."

Moreover certain themes are going awry such as oil prices and election stories, and the current levels are not compensating for that risk.

In the pipeline

In the pipeline, Brazilian water and sewage service provider Companhia de Saneamento Básico do Estado de São Paulo (Sabesp) (BB-) plans to sell a dollar-denominated offering of 10-year bonds this Friday via Deutsche Bank.

The size of the issue will depend on the results of its tender offer for its $225 million of 12% notes due 2008.

While formal price guidance is expected on Thursday, there are rumors that the deal will price at Brazil sovereigns plus 150-ish basis points.

Meanwhile more news emerged on the deal from Brazilian aircraft manufacturer Empresa Brasileira de Aeronáutica SA (Embraer). Its subsidiary Embraer Overseas Ltd. plans to sell $300 million in guaranteed notes due 2017. JP Morgan and Citigroup are lead bookrunners. Barclays is co-manager.

The investment-grade deal is being whispered at 170 basis points over Treasuries, according to the buyside source, who added that such pricing does not make sense for that type of industry, which is so dependent on cutting edge technology.

"That's crazy. Brazil is at 150, 160, 170, depending on which part of the curve you are looking at," he said.

"There's questions about how good a business that is. We're not talking about an oil company or something that's relatively improving," he warned.

"It's a fairly risky business. And it's a fairly risky business in a risky country. So should that trade through the sovereign?

"You can't treat a Brazilian corporate on the same merits that you treat a U.S. corporate - that seems to be what they are trying to do with that deal," he observed.

Elsewhere, India's ICICI Bank Ltd. set price talk for a $300 million offering of five-year senior bonds (Baa2/BB+/BBB-) at mid-swaps plus 75 basis points.

Deutsche Bank and Merrill Lynch are leading the Regulation S sale.

Meanwhile the book size has surpassed $700 million.

Finally in primary news Monday, Hungarian fixed-line telecom Invitel Holdings NV priced a €125 million issue of three-month Euribor plus 825 basis points senior floating-rate PIK notes (B3/B-) at 99.00 on Monday.

The issue was priced on top of the price talk.

Credit Suisse ran the books for the Rule 144A/Regulation S transaction. The co-manager was BNP Paribas.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.