Brazil softer despite Moody's upgrade; emerging market debt lower; new issues hit the road

By Reshmi Basu and Paul A. Harris

New York, Sept. 9 - Profit taking drove down emerging market debt Thursday as Brazilian paper failed to gain on a ratings upgrade by Moody's Investors Service.

Overall, the JP Morgan EMBI+ Index fell 0.21%. Its spread to Treasuries tightened four basis points to 424 basis points.

Among individual countries, Russia's bond due 2030 fell 0.312 to 95.625 bid and Mexico's bond due 2026 was down a quarter of a point to 149 bid.

And the Brazil C bond was down 0.438 to 98 bid while the bond due 2040 lost 0.15 to 108.60 bid.

Moody's raised Brazil's foreign currency rating to B1 from B2 Thursday, saying that export growth had reduced the country's external debt burden.

The action, Moody's said, reflects its view "that a continued export expansion combined with less reliance on foreign-currency borrowing that has sharply reduced the ratio of external debt to exports is sustainable."

In addition, "a high level of public-sector revenues is helping to stabilize the ratio of general government debt to revenue," the rating agency continued. "The authorities have also substantially improved the composition of the domestic bond debt by increasing the share of fixed-interest-rate debt and reducing the share of dollar-linked debt."

"No one expected an upgrade," commented a trader. "This was the story of the day, but it didn't send prices soaring."

"Quite a piece of news today [Thursday], but the market is still kind of soft, despite that," said a buy-side source.

"Apparently, it was viewed as an opportunity to take some profits by some investors.

"And also there is some indigestion, in addition, from yesterday's [Wednesday's] new issuances."

Both Brazil with a sovereign bond and corporate borrower Petrobras tapped the markets Wednesday, weighing on Brazilian paper during Thursday's session.

The Republic of Brazil priced an upsized €750 million eight-year bullet (B2/B+) at 98.88 to yield 8.7% via Dresdner Kleinwort Wasserstein and UBS Investment Bank. The deal, increased from €500 million, attracted more that €2 billion in orders.

And Brazil's Petrobras International Finance Co. sold $600 million of 10-year notes (Ba2) at 98.638 to yield 7.95% via Morgan Stanley and Bear Stearns & Co.

Good time for profit taking, says buy-side source

Meanwhile, the carry trade may unwind on profit taking, according to the buy-side source.

"The carry trade is still there, but if you have been long for a while I would view this as an opportunity to just take a little bit of profit - probably still stay long but maybe not so much as before," said the source.

"We are getting closer and closer to January levels."

And also new supply on Wednesday from Brazil, Petrobras and the Philippines is impacting the overall market, added the source.

"But this is how the market works, you need to take a breather after the rally.

"I'm surprised that maybe Brazil didn't do a little bit better on the upgrade, considering it was unexpected," noted the source.

"It seems that we may have a few bumps in the road, but the carry trade is still there."

Russian corporates hit the road

News emerged on a number of upcoming new deals in Thursday's session with Russian corporate borrowers notably prominent.

Moscow Narodny Finance BV will start a roadshow for an offering of approximately $200 million three- to five-year floating-rate notes (Baa3//BBB-) on Sept. 14.

Barclays Capital and ING are joint bookrunners for the Regulation S bond offering.

Russia's largest metals producer Norilsk Nickel will start roadshows in Asia and Europe for its $500 million bond offering next week.

Citigroup and Morgan Stanley are the bookrunners for the Regulation S deal.

"Russia is another one of those countries that is going to have a lot of supply maybe in the next two to three weeks - mainly on the corporate side," said the buy-side source.

"Probably we are going to see some softness there too."

Also, in the pipeline are Russian Standard Bank and Bank of Moscow.

And, out of Brazil, Companhia Siderurgica Nacional SA, through its subsidiary CSN Islands IX Corp., will roadshow from Sept. 13 to 16 a minimum $200 million offering senior unsecured notes due January 2015 (B1/B+/B+).

Looking ahead, the next few weeks will be all about new issues.

"We are going to have to see how well that can be absorbed, but inflows are still expected to pick up in the quarter," said the buy-side source.

"If those inflows match the supply, then we're are going to be fine."

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