Emerging markets improve into break; Petrobras prices $1.25 billion retap; spreads tighten

By Aaron Hochman-Zimmerman

New York, July 2 - Emerging markets ended the short week quietly, but not as quietly as some had expected.

On Wednesday evening, Brazil's Petroleo Brasileiro SA priced a $1.25 billion reopening of its 7 7/8% notes, which traded up by 1 point.

In the wake of the successful move by Petrobras, other syndicate desks left for the long weekend with ammunition at the ready for the opening stretch of the second half.

Trading even left off on a high note despite a poor showing for U.S. equities on disappointing job numbers.

Volatility jumped up at the open and closed higher by 1.73 at 27.95, according to the VIX index. The index is an often used yardstick of market volatility.

Brazil's buzzer beater

Petrobras created the major news in the marketplace as it priced a $1.25 billion reopening of the 7 7/8% senior unsecured notes (Baa1/BBB-/BBB) at 106.962 to yield 6 7/8%, or Treasuries plus 332.3 basis points.

Citigroup, HSBC, JPMorgan and Santander Investment acted as bookrunners for the deal.

The $1.5 billion original notes were priced on Feb. 4, 2009 at 98.28 to yield 8 1/8% and are due March 15, 2019.

Proceeds will be used to repay a portion of the $4 billion owed to a consortium of financiers.

Petrobras is a Rio de Janeiro-based government-run energy firm.

"They had a lot of capex [needs]," a syndicate official said. "It's not surprising that they came."

"These guys need money," he said, but the deal was successful and traded up 1 point to 108 bid, which was "not bad at all."

LatAm pipeline still flowing

Venezuela's own national oil firm PDVSA was also the subject of new deal rumors.

The offering may be as much as $3 billion, the syndicate official said, adding "that's what they do."

PDVSA is likely after a "black FX market" play, he said, which "takes the liquidity out of the local market."

Investors would "locally buy in bolivars and resell at a discount," he said.

The buyers would "switch this into U.S. dollars," which "automatically makes a certain premium," he said.

"It's kind of a sneaky operation, but very lucrative for those who participate," he said, but participation is limited; "it's not really an international offering."

The 9¼% Venezuelan government bonds due 2027 added 1 point to 68 bid.

With new supply looming, "I'm surprised they're not widening out," the syndicate official said.

Plenty of other names have also been heard in connection with a new offer, the official said.

The Dominican Republic, El Salvador and Panama, "pretty much all the sovs," have been discussed, he said.

Mexico will likely join the crowd of issuers "toward the end of the year," he said.

LatAm climbing with supply

On the trading side, Argentina "is still jumping up, post the Kirchner complications," the syndicate official said.

"There has been some stabilization in the five-year [CDS]," he said, and "the discount bonds are performing a little bit better now."

The 8.28% Argentine discount bonds due 2033 were spotted at 52¼ bid.

What may be more significant in the long-term is that "Brazil CDS has tightened so much," he said.

"[Currency] reserves of the country have been increasing over the last four, five months," he said, plus there is strength in the "commodity play...also in Chile," he said.

The Brazilian five-year CDS was seen at 179 bps bid, slightly wider than its June low at 170 bps bid, but less than half of its March peak at 433 bps bid.

Europe wrangles for gas

Emerging Europe fluttered with activity, particularly with newly issued paper, a trader said.

Still, existing benchmark bonds were seen largely flat.

Russia's sovereign bonds due 2030 were spotted at 98¾ bid.

Meanwhile, after Russia asked for Turkey's support for the South Stream pipeline against the competing Nabucco pipeline, the European Union sought more information before making its decision.

"We need to know more about Turkey's energy strategy and its plans to increase its energy efficiency. If we know this, this will surely increase the transparency and predictability of the project. The ball is on your side," Jean Lamy, head of the French Foreign Ministry's Department of Energy-Climate, told the Hurriyet Daily News.

From the Russian side, "we hope that the Turkish side will look at our offer and that we will cooperate further so that our offer is more attractive and clear to our partners," deputy prime minister Igor Sechin said Wednesday.

Two competing proposals bypass Ukraine, but the Nabucco pipeline connects the Caspian Sea with Western Europe via Georgia and Turkey. The South Stream pipeline would bypass Turkey and travel beneath the Black Sea to Bulgaria.

Turkey's support may help Russia secure a future for its favored South Stream plan.

Asia improves before holiday

Asian bonds traded well on what many considered an unofficial half-day of trading in New York.

In the Philippines, the government was pressed by the World Trade Organization to ease trade barriers as internal forces lobbied for greater protection, according to the Manila Times.

The Federation of Philippine Industries asked the government to support local businesses with tariffs on certain critical products.

The local interests noted that room remains under the WTO rules to increase import protections.

"There are flexibilities available in our trade agreements which can be used to arrest the country's financial distress and to counter falling receipts from exports," said Wigberto Tanada of the Fair Trade Alliance.

The Philippine sovereign bonds due 2030 were quoted at 121½ bid.

Meanwhile, the Islamic Infrastructure Fund received $262 million in backing from financiers Asian Development Bank, Islamic Development Bank, CIMB Group and Standard Bank, according to the Jakarta Post.

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