Emerging market debt higher despite new supply; Brazil's new deal poorly received

By Reshmi Basu and Paul A. Harris

New York, Jan. 20 - Emerging market debt drifted higher Thursday despite initial concerns over a hit-and-run euro-denominated issuance by Brazil.

Brazil had been expected to come to market at any moment, yet some investors were taken aback by Brazil's decision to tap the euro-market with a benchmark deal.

"It's a bit of a surprise after they just tapped the Europeans for $1 billion in September, but I think their idea was that the technicals were not as bad in the euro market as they are in the dollar market, so the new issuance, they hope, should not hurt the market as much," said an emerging market analyst.

On Thursday afternoon, the country priced €500 million bonds due 2015 (B1/B+) at a reoffer price of 98.80 to yield 7.55% via BNP Paribas and Deutsche Bank.

"Sure enough, the USD market is liking the news, with Brazil '40s up 3/8ths [in the early afternoon] largely because of the news that the dollar market won't get tapped for a while," he noted.

The Brazil C bond added 0.062 to 101 bid, during Thursday's session.

Overall, while the deal was good for the dollar market, it was bad for the euro market, according to a sellside source.

"In general, the deal just came expensive, so I think it didn't go especially well. "And I think the sense was that it was pretty heavy and may not be fully placed," said the source.

"Certainly, if you compare that to doing a dollar deal that does not get fully placed, it's much better that it was in euros, right?

"I think part of the weakness in the market this morning was that people sensed that it wasn't going well," noted the source.

While the euro deal took some pressure off dollar-denominated issues, it failed to please investors, according to market sources.

"It wasn't such a strong deal in terms of pricing," said a Latin America debt strategist at Refco EM.

"It traded about a quarter of a point/half point in the grey market and then it came out. It wasn't as successful as the previous ones - but that's explainable by the shadow that has been overhanging in the market for the past few weeks," he remarked.

While the deal was not placed under ideal market conditions, Brazil did need to meet their financing needs of close to $4 billion, he noted.

"It's not the best time. It's also not the worse time," he added.

With the weakness of the dollar, a euro tap does makes sense, he countered.

"The market has been asking for more euro deals. If you look at the number of dollar deals versus euro deals, there are definitely a lot more dollars out there.

"The fact that investors keep on asking for the diversification from a dollar exposure explains why they came out with that euro deal.

"It was not a surprise," he noted.

Colombia up on brewery bids

Meanwhile Colombia's received a boost on news that European corporations were bidding for Grupo Empresarial Bavaria, Colombia's largest brewery.

"That gave a lot of speculation to the corporate market," said the Refco strategist.

The Colombia bond due 2012 added a quarter of a point to 113 bid.

Overall, there was not a lot activity in Latin America, he noted.

The Mexico bond due 2009 gained 0.20 to 121.60 bid.

Out of Europe, the Russia bond due 2030 was up 0.375 to 103 bid. Turkey's bond due 2030 fell 0.188 to 141.062 bid.

"Cautious" tone

Overall, the tone in the market is "cautious," said the sellside source. The market of late has been driven by external factors such as interest rates as well as the impact volatility in the dollar is having on local currencies.

"The Brazil real moves a lot with the dollar. And also the high-grade market is also pretty soft with all this noise over Ford and GM [General Motors]," the source noted.

Pricing is one driver that is holding back investors, said the strategist.

"People think that pricing is a little bit rich. Second, the interest rate environment in the U.S is the main obstacle at this point. You are getting news from the Treasury market here that there could be a possibility that the Fed could increase the speed of raising interest rates," he said.

The market needs more clarity in order for it to move ahead, he added.

Behind Venezuela's downgrade

Venezuela's downgrading by Standard & Poor's was a "technical anomaly," according to Enrique Alvarez, Latin America debt strategist for IDEAglobal.

On Tuesday, S&P cut the country's foreign currency rating to SD (selective default) because the country missed payments on its oil-indexed debt.

Part of the Brady bond issuances contained discount bonds, which carried oil index payment obligations, explained Alvarez.

"There was a kicker to the bonds where holders got certain payments from the government if oil exceeded a certain benchmark - they got a percentage of that excess," he said.

"Since the oil markets were more on the defensive than actually spiraling out of control over the last few years, there wasn't a whole lot of noise in that regard."

As oil rallied to record highs, there were payments due on these bonds.

"There seems to be some sort of lack of coordination with the payment agent on this. It would seem that they haven't had the elements in place in order to calculate how much is due or that the holders list is not complete," he said.

It's a technicality that kept Venezuela from making its payment, he noted.

But Venezuela has said they will pay the $30 million or $35 million due, which is a "drop in the bucket," said Alvarez.

"Obviously, S&P went ahead and downgraded because they were late on the payment and are still late on the payment.

"They went really by the book on what is technical glitch on a very small holding within the overall universe of Venezuelan bonds.

"These are part of the par bonds and discount bonds. It's not like every run of the mill holder who usually has global bonds in their portfolio is affected - they're not.

"This pertains to the people who are still holding the Brady era par and discounts bonds and still have those oil-indexed payment obligations attached."

The news of the rating cut sent Venezuelan bonds down on the "surprise" factor.

"We hadn't seen anything like this - a temporary downgrade on a technical factor.

"The market was astounded at the downgrade. But once the facts hit the market that this was related to the oil warrants and the technicality, the prices came back," noted Alvarez.

The Venezuela bond due 2027 slid 0.05 to 102¼ bid.

On the other hand, the action prompted a concern from Fitch Ratings.

It described the glitch as evidence of deficiencies in Venezuela's debt management capacity.

But the rating agency added: "The situation also underscores general concerns about willingness to pay."

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