Trading still sluggish; Brazil loses on rumors of staff chief's departure; Bank Danamon prices

By Reshmi Basu and Paul A. Harris

New York, March 24 - Emerging market trading continued to trudge along as little new information surfaced Wednesday. However, Brazil's debt continued to take losses on political rumors that Jose Dirceu will leave office.

President Luiz Inacio Lula da Silva's chief of staff, Dirceu, was again in the middle of controversy as local traders speculated he could lose his job after antagonizing two government allies.

The Brazilian benchmark C-bond ended the session bid at 96.375, down 0.625, its third consecutive day of losses. Meanwhile the 2040 bond was at 106½ bid, 106¾ offered, down ¼ point.

The Brazilian component of JP Morgan's EMBI index fell 1.64%. Its spread to Treasuries widened by 14 basis points on news that Dirceu may be leaving.

"It seems that the locals actually don't think it's a bad thing if he leaves, said a fund manager.

"But it's probably not true that he is leaving. There are conflicting rumors. I heard the rumor was coming from Sao Paolo not Brasilia. If it's something that close to government, it's should come from Brasilia, not Sao Paolo. Maybe it's just traders spreading around the rumor."

But overall trading activity was relatively quiet.

"It's a blah day generally. Everything traded sideways," said a San Francisco-based fund manager.

One reason for the trading inactivity is due to intensified risk aversion, said a research analyst.

"There's no question investors are risk averse in general and in EM in particular. If you look around the world, all the signs are there," he said.

"High yield spreads are higher and climbing, the VIX [volatility index] is higher, etc. So it's no surprise that high-beta EM credits are getting hit, with Brazil an obvious target because it has high external financing requirements and no oil revenues to prop it up."

Danamon draws safe-bet buyers

However, the $300 million issue from Indonesia's PT Bank Danamon is a sign that investors are still hungry for safe bets, according to the analyst.

Bank Danamon's sold its $300 million 10-year 7.65% subordinated bonds (B3/B-) at 99.592 for a spread of 508 basis points.

"This doesn't mean that there is zero risk appetite - the Bank Danamon sale was a good indication that the right deal can get done - just that investors are steering clear from the most risky assets."

Citigroup and Deutsche Bank Securities were the bookrunners on the issue.

Bank Danamon will use proceeds to raise capital following its planned purchase of a majority stake in PT Adira Dinamika Multifinances.

Korea pipeline keeps building

The build up of planned Korean issuance in the pipeline signals that investors are interested in emerging market paper, according to the analyst.

Korea added two more deals to its burgeoning pipeline, this time from Korea Electric Power Corp. and Korea Highway Corp.

"The successful Korean corporate deals are an indication that there is still cash out there to be put to work, but investors would rather keep it in high quality names, at least for now," said the research analyst.

Kepco plans to launch at least $300 million of 10-year bonds (A3/A-). Proceeds will be used to retire Japanese yen-denominated maturing debt.

The deal is expected to price in mid-April.

Also appearing Wednesday, Korea Highway Corp. plans to sell $500 million of 10-year bonds (A3/A).

The roadshow will start on Monday in Singapore, followed by Hong Kong on Tuesday, and finishing off in New York on Wednesday.

Citigroup, Deutsche Bank Securities and JP Morgan are the bookrunners on the Rule 144A/Regulation S issue.

Pricing is expected in April.

State-owned Korea Highway oversees construction, repairs and maintenance of roads.

Trading continues to crawl

In trading, the JP Morgan EMBI Global Index was 0.26% lower at 3:45 p.m. ET. Its spreads to Treasuries tightened 2 basis points in a sluggish trading day.

"We're more in the wait and see mode," said the first fund manager quoted above.

"The rest of market is relatively flattish, nothing else going on.

"What I heard earlier was that only accounts actually doing something were hedgefunds and euros. U.S. [accounts are] not really doing anything in terms of settling or adding on here or in Brazil," said the fund manager.

Manager sees little upside

"We're in the trading range at the top," said the San Francisco fund manager.

"The market can't get much better than it is. Which direction are emerging markets bonds spreads versus Treasuries going to move? 200 points bid up or 200 bid points down? It's an unfair question because it is not the same scale movement in the both directions."

Furthermore, the manager added: "If you asked in absolute yield terms, you would still get a predominate number of people saying that emerging market bonds will have to yield 2% more rather than 2% less in the future. The answer is everybody knows we are at the top in terms of valuations of these bonds. There is no reason to sell. But there is no great impetus in either direction.

"You're not paid to trade."

Bond prices should be in a pretty tight range, unless something goes horribly wrong. And it's hard to predict what that would be, said the San Francisco fund manager.

"Terrorism-related down trades will function as buying opportunities. In the grand scheme of things, the next move for this market over the next 24 months is down. This means the total return on the index will be negative. The dollar price of the Brazil '40s will far more likely be lower than higher two years from now."

Deals coming from Ukraine, Malaysia

Among imminent deals, Bank TuranAlem's planned $50 million minimum add-on to its existing $300 million 10-year 8% bond is talked at 98.75 to 99.00 (Baa3/BB-).

The issue is expected to price on Thursday.

Out of the Ukraine, Ukrsibbank set price guidance for its oversubscribed $100 million three-year bond offer (B1/B-) at a yield of 10½% to 10¾%, according to a market source.

The deal is expected to price Thursday.

Dresdner Kleinwort Wasserstein is the bookrunner for the Regulation S only issue.

Ukrsibbank is the sixth largest bank in the Ukraine.

And from Malaysia, Titan Petrochemicals & Polymers bhd set the price guidance for its $300 million bonds due 2011 (Ba3/BB-) at a yield in the 8% area.

The deal is expected to price Thursday.

Goldman Sachs & Co. and JP Morgan are running the Rule 144A/ Regulation S (with no registration rights) issue for the petrochemical company.

The notes are non-callable for four years.

Further off, Malaysia International Shipping Corp. is expected to offering approximately $1 billion of notes (Baa2/BB+) with a five- or 10-year tenor sometime during the second quarter of 2004, according to a market source.

Barclays Capital and Citigroup are reported to be the investment banks mandated to run the deal.

Proceeds will be used to refinance an existing $800 million bridge loan maturing in June 2004.

And from Russia, Credit Suisse First Boston and Deutsche Bank Securities are rumored to be the syndicate for OAO Lukoil's $500 million eurobond issue.

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