Brazil stabilizes; Edcon prices €1.81 billion; 'Iraq incursion' headlines continue to erode Turkish debt

By Paul Deckeleman and Aaron Hochman-Zimmerman

New York, June 8 - Investors took a header on Friday trailing volatility that had badgered the emerging markets through much of the past week

The primary market saw the completion of a corporate mega-deal which betrayed the familiar signs of a market that has sailed into choppy waters, as South Africa's Edcon, priced a downsized and restructured €1.18 billion which had seen price talk hiked and then re-hiked.

And the buzz on the Turkish Army's alleged incursion into northern Iraq, in an apparent attempt to put the scare on radical Kurdish fighters that may be holed up there, continued to erode Turkish debt.

A mixed day

After a wild session Thursday which saw most emerging market bonds on the slide as U.S. Treasury yields ballooned out to their highest levels since last summer, EM investors could use a breather.

And they sort of got one on Friday, as activity levels fell off, and a cautiously improved tone was felt in the market, especially since Treasuries edged upward after Thursday's debacle, and U.S. equities were also on the rebound.

There was no similar broad upturn in emerging debt - in fact, some names continued to fall, their yields maintaining their upside momentum.

But others were seen to have stabilized.

Argentine bonds steady after slide

Among them was Argentina's bonds, which had been tumbling pretty much all week, hurt both by the generally negative tone seen in the emerging debt markets, as well as by a country-specific factor - investors' extreme skepticism about favorable inflation figures coming out of Buenos Aires.

Even though the government said that May inflation was only up 0.4% - far less than the 0.6% that most forecasters were looking for - many in the market didn't believe it, instead believing that the statistics were being manipulated by president Nestor Kirchner's government for political purposes.

The belief that the books had been cooked took hold earlier this year after Kirchner replaced the official in charge of putting out government economic data with one suspected of being essentially a political appointee.

Against that backdrop, the bonds had been falling all week, and especially on Thursday. However, the country's peso-denominated Par bonds ended about even at a price of 56.10, the Discount peso bonds trimmed their losses to end down just ¼ point at 146.05, and the local-currency Bogar 2018 bonds pushed up 0.39% on the day to 169.45.

Among dollar-denominated securities, the Boden bonds due 2014 were seen up 1.6%, although the dollar-denominated Par bonds continued to struggle, down another 2.5% on the day.

Brazil bonds recover with real

Elsewhere in Latin American dealings, Brazil's local-currency bonds got a boost, as its currency unit, the real, after having been lower for much of the session, finally firmed off its earlier lows to end up on the day, at 1.9595 to the U.S. dollar. Earlier the real had flirted with its three-week low at just above 1.99 to the buck.

Even though the real ended the session having racked up its biggest weekly loss in more than a year, down nearly 3%, the benchmark real-denominated instrument, the zero-coupon bond due 2008, was seen firmer, with its yield quoted at 11.27%, down about 15 bps from prior levels.

Although Brazil's financial markets were closed Thursday for the Corpus Christi holiday, its currency and bonds traded abroad.

Mexico bonds dip with peso

But in Mexico, the local-currency bonds were seen down on the day, as that country's peso was seen down sharply in intraday trading to as much as 11.06 to the dollar. Late in the day, the peso did improve from that nadir to end at 10.913 to the dollar - but it remains below the levels it held earlier in the week.

The peso-denominated 10-year bonds were being quoted yielding 7.76%, 4 bps wider on the session.

Venezuela quiet, IMF departure now less likely

Not much was seen coming out of Venezuela, whose volatile bonds had been big losers on Thursday amid the latest political turmoil to engulf president Hugo Chavez, whose moves to shut down media outlets perceived as voices of the opposition has proven controversial, and has aroused considerable criticism, both at home and abroad.

However, as the week ended, it appeared as though the government was finally making official what many observers had already suspected - it was backing away from the threat the bombastic leader had made in April to pull the country out of the International Monetary Fund, a step which could trigger a default on the bonds. Even Chavez himself seemed to acknowledge the realities of the situation, saying that Caracas need not pull out immediately "for technical reasons," including its impact on the debt. He reiterated, though, that as a practical matter, "we have nothing to do with the IMF or the World Bank."

Chavez has criticized both international financial agencies as puppets of his critics in Washington, saying they have hamstrung the economies of Latin countries for many decades.

Turkish bonds continue to retreat

Outside of the Americas, Turkey's bonds were seen continuing to tumble, as the effects of the global EM weakness were intensified by concerns over Turkey's military move this past week into northern Iraq.

Its benchmark dollar-denominated bonds were seen down over 2 points to about the 150.5 level, while the bonds' yield rose by 14 bps, quoted at the 7.27% level - its highest in over six months.

Meantime, the yield on its local-currency lira-denominated bonds rose even more - jumping 38 bps - to the 18.60% mark.

Investors were worried that what the Turkish military described as a limited, one-shot pursuit of Kurdish rebels across the border into war-torn Iraq could intensify, with the army chiefs on Friday asserting that they had the right to respond to attacks by militants and fight terrorism.

Edcon downsized, restructured

Friday saw completion of a downsized, restructured, talked and re-talked €1.81 billion two-part deal from South African clothing retailer Edgars Consolidated Stores (Edcon).

Edcon, issuing via Edcon (Pty.), priced a €1.18 billion of seven-year senior secured floating-rate notes (B2/B+) at par to yield three-month Euribor plus 325 basis points.

The senior notes priced on top of twice-revised price talk. Talk had increased from Euribor plus 275 to 300 basis points, after having initially been set at the Euribor plus 275 basis points area.

Meanwhile Edcon Holdings (Pty.) priced a downsized €630 million tranche of eight-year senior unsecured floating-rate notes (Caa1/B-) at par to yield three-month Euribor plus 550 basis points.

The unsecured tranche was downsized from €650 million, and was priced on top of price talk which had also been twice revised. The talk was increased from Euribor plus 450 to 475 basis points, after initially having been set at the Euribor plus 425 basis points area.

The overall transaction was downsized from €1.83 billion. A proposed tranche of senior fixed-rate notes was abandoned.

Barclays Capital and Credit Suisse had the physical books for the deal which will help to fund the biggest LBO in the history of South Africa.

Local sells in Chile

Elsewhere Santiago-based particleboard-maker Masisa SA priced five-year and 21-year tranches totaling UF2.5 million, the equivalent of $88 million.

The five-year UF500,000 F and G series bonds sold at annual rates of 3.73% and 3.72% with spreads over Chilean Central Bank bonds of 80 basis points.

The 21-year UF1.5 million tranche of H series notes sold at a rate of 4.64% with a spread of 114 bps.

IM Trust, a local investment bank, brought the deal to market for the Santiago-based interior designer and furniture producer.

Total demand exceeded UF5.9 million or approximately $209 million, 2.38 times the offering size.

The buyers were mostly institutional investors, including pension funds, insurance companies, mutual funds, banks, stockbrokers and asset managers, the company said.

Launches out of China

The Hong Kong-based Bank of East Asia disclosed plans to sell a benchmark-sized dollar-denominated10-year step-up tier II subordinated issue (BBB+).

JPMorgan will handle the books.

Elsewhere, China Netcom (Group) Co. Ltd., will sell 2 billion yuan in 10-year fixed rate notes (Chengxin International: AAA) at 4½%.

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