Emerging market debt tightens on equity rally; Brazil up, Ecuador down

By Reshmi Basu and Paul A. Harris

New York, Sept. 27 - Emerging market debt saw tighter spreads Wednesday as the asset class tracked U.S. equities higher.

The move continued the week's trend, which has seen emerging markets move with U.S. stocks as local political worries have taken a backseat.

On Wednesday, equities extended their winning streak to three days on the back of encouraging economic data, which proved positive for emerging markets.

U.S. economic data suggested that a slowdown in the housing market would not be strong enough to temper corporate profits. That helped the Dow Jones Industrial Average Index close in on its all-time closing high of 11,722.97, which was recorded on Jan. 14, 2000.

At session's end, the Dow industrials were up 31 points at 11,701.

Firmer equities translated into tighter spreads for emerging markets, with the exception of Ecuador, noted market sources. However, a trader noted that trading volumes were on the light side.

By comparison, last week, the market saw a correction, as headaches emerged on the local political front as well as from the U.S. economic side. Jitters over the U.S. economy, along with political troubles in countries such as Brazil, Ecuador, Hungary, Poland and Thailand stymied investors' appetite for risk, particularly higher beta credits.

Brazil higher, Ecuador lower

In trading Wednesday, Brazil saw upward price movement as polls indicated that president Luiz Inacio Lula da Silva will most likely have garnered enough percentage points to avoid a second round run-off election.

During the session, the benchmark Brazilian bond due 2040 added 0.30 to 130 bid, 130.10 offered.

Meanwhile Ecuador's one-day winning streak was snapped Wednesday. The Andean country saw better bids Tuesday, buoyed by the equities run-up as well as short covering, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

However, that rally was short-lived on ongoing election jitters. Rafael Correa, friend of Venezuelan president Hugo Chavez, has seen a sudden rise in popularity. And he has unnerved Wall Street with market unfriendly declarations on debt restructuring.

In trading, the Ecuadorian bond due 2030 gave up 0.15 to 92.55 bid, 93.30 offered.

Venezuela up with oil

In other news, Venezuela also scored gains as oil prices spiked on concerns that OPEC may cut output to halt the recent fall in prices. During the session, the country's bond due 2027 moved up one point to 121.50 bid, 122 offered.

Even though the tone in the market is on the bullish side, Alvarez expressed concern that the market is a little bit too dependent on equities. He noted that the media as well as others are feeding into a frenzied hunt for the Dow industrials to score a new record high.

The problem, Alvarez said, is that equities are trading higher without fundamentals. And once the market turns bearish, which can be at anytime, down will go emerging markets.

Seychelles sells $200 million in bonds

In the primary market, the Republic of Seychelles sold a $200 million debut offering of five-year 9 1/8% notes (/B/) at 99.508 to yield 9¼% via Lehman Brothers.

The deal priced in line of price guidance for a yield in the 9¼% area.

Adding to the pipeline, Malaysian conglomerate Ranhill Ltd. plans to start a roadshow next week for an issue of five-year bullet bonds (/B-/B-) sized at up to $250 million.

The investor roadshow is scheduled to run from Oct. 2 to Oct. 13, with stops in Singapore, Hong Kong, London, New York, Boston and Los Angeles.

ABN Amro is the bookrunner for the Rule 144A/Regulaton S transaction. CIMB Ltd. is co-manager.

Out of Brazil, Banco Schahin SA plans to price a dollar-denominated offering of 10-year notes (expected B2) following the conclusion of an investor roadshow.

Dresdner Kleinwort is the bookrunner for the Rule 144A/Regulation S offering.

The notes will come with five years of call protection.

Meanwhile Dominican Republic power generator Itabo set price talk for a $125 million offering of seven-year senior unsecured notes (/B/B-) in the area of 10 7/8%, according to a market source.

ABN Amro is running the Rule 144A/Regulation S transaction.

Last of all, there are rumors that Russia's natural gas giant Gazprom OAO will tap the international markets with a $500 million to $1 billion offering of 30-year bonds, according to a market source.

Speculation is that Goldman Sachs, Morgan Stanley, Dresdner Kleinwort and Citigroup have been mandated to manage the sale.

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