Mexico sells century bond on slow day in EM; Brazil tax hike eyed; Slovak Republic on tap

By Christine Van Dusen

Atlanta, Oct. 5 - Much of the market's attention on Tuesday was on Latin America, with particular focus on Mexico's pricing of a 100-year bond and on Brazil, which doubled the tax imposed on foreign investment in fixed-income securities - a move that had no immediate effect on bonds but could impact allocations if further increases are undertaken.

"This is big news today out of Brazil. It's not a shocker, but still relevant," a trader said. "It definitely has woken people up, and another increase would definitely make people rethink their Brazil fixed income allocations as a percentage of their overall Latin America fixed income portfolio exposure."

This comes at a busy time for Brazilian bonds, which have been coming to the market at a particularly steady pace in recent weeks with issuance from BR Properties, Braskem, Gerdau Trade, Itau Unibanco, Suzano Papel e Celulose, CSN, Banco Cruzeiro do Sul and the Brazil sovereign.

For the short term, though, the market "blew right through" the Brazil news, "with global markets rallying everywhere, U.S. equities up, commodities up, the dollar down and emerging market currencies rallying," said Nick Chamie, global head of emerging market research for RBC Capital Markets.

The Brazilian real in particular "hardly paid any heed to the tax," he said, noting that the currency was stronger on the day. "And the backup in yields is not as severe as anticipated."

So what market-watchers are on the lookout for now, he said, is whether further tax hikes are imposed.

"It depends on the scope of whatever new measures there are," he said.

Brazil tax doubles

The current tax, called the IOF, was increased on Tuesday to 4% in an effort to limit the inflow of dollars into Brazil and curb currency appreciation.

"The timing was a bit of a surprise given the (Finance Ministry) statement last week that the timing of any measures would wait until after the presidential elections had been completed," Chamie wrote in a research note.

The announcement of the tax hike followed the ministry's assertion that a global "currency war is unfolding, with many countries seeking to deliberately weaken their currencies," he wrote. Brazil asserted that this was "damaging the competitiveness of Brazilian industry."

Also from Brazil on Tuesday, telecommunications company Telemar Norte Leste announced plans for an issue of up to R$1 billion in notes, which will go before shareholders for a vote at a special meeting on Oct. 20.

Proceeds will be used for general corporate purposes, including the repayment of short-term debt.

Mexico sells 100-year notes

Tuesday also saw Mexico's pricing of $1 billion 5¾% notes due Oct. 12, 2110 at 94.276 to yield 6.1%, or Treasuries plus 235 bps, a market source said.

Deutsche Bank and Goldman Sachs were the bookrunners for the Securities and Exchange Commission-registered deal, which is part of an $80 billion global medium-term note program and includes a make-whole call at Treasuries plus 35 bps.

The notes were whispered to yield in the 6% to 6 1/8% area.

Proceeds will be used for general government purposes, including the refinancing, repurchase or retirement of domestic and external debt.

"The conditions were ripe for it," Chamie said.

The deal was upsized likely as a result of reverse inquiries, according to an RBC report, and reaffirmed "investors' strong and rising appetite for, and confidence in, Mexico's debt and fiscal fundamentals.

"While Mexico is not the first EM to issue a 100-year bond - China did so in 1996 - it is a rarity, especially among EMs, and we may see other countries follow suit," the report said.

Slovak Republic mandates

In other news, the Slovak Republic mandated HSBC, SG CIB, Tatra Banka and Unicredit for a benchmark-size issue of euro-denominated senior notes due 2025, according to an announcement from the sovereign.

Proceeds from the Regulation S-only transaction will be used to enhance the Slovak Republic's liquidity and improve its debt maturity profile.

The transaction will be launched "in the near future," subject to market conditions, according to the announcement.

For the most part, though, activity among issuers was "unusually quiet" on Tuesday, a market source said.

Economy benefits EM

The day also featured another round of U.S. economic news, this time showing that the pace of growth in the services sector was stronger than expected in September, according to the Institute for Supply Management.

"People continue to fret over U.S. data, but it seems to be good enough for now, especially with the ISN data released today," Chamie said.

Overall, the global economic crisis has improved investor perception of emerging markets, according to a Barclays Capital Research report.

"Not only did their economic activity rebound sharply to end up, in many cases, higher than prior to the crisis, but many emerging economies have gained global respect as their share of global output has continued to increase," the report said.

That respect could make the road to advanced economy status "shorter than skeptics think," the report said.

Spreads narrow

Overall, risk appetite for the day was "strongly back in vogue," according to an RBC Emerging Markets report.

Emerging market sovereign debt spreads continued to narrow, with the JPMorgan Emerging Markets Bond Index Plus down 6 bps and Venezuela in particular tightening by 20 bps. Argentina was tighter by 24 bps and Turkey was tighter by 14 bps due to a Moody's Investors Service report that lifted the sovereign's debt rating outlook to positive.

Meanwhile, performance was mixed for recent new issues.

Suzano's 5 7/8% 2021 bonds, which priced at 98.116 on Sept. 17, were at 100.5 during the day. Gerdau's 5¾% notes due 2021, which priced at 99.051 on Sept. 23, were at 112.5 before ending the day at 102.125. Braskem's 7 3/8% perpetual notes, which priced at par on Sept. 27, were at 99.40 before finishing the day at 99.25.

"The corporate market continues to be the beneficiary of the search for yield," a trader said. "The majority of recent new issues that were smaller in size have poor liquidity and therefore have had a difficult time staying abreast with the uptick."

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