Emerging market debt hurt by Brazil's minimum wage; National Power sells upsized $300 million notes

By Reshmi Basu and Paul A. Harris

New York, Aug. 11 - Emerging market debt came under pressure Thursday as negative news for Turkey and Brazil spooked investors.

In the primary market, Philippines' state-run National Power Corp. sold an upsized offering of $300 million six-year floating-rate notes (B1/BB-/BB) at par to yield three-month Libor plus 425 basis points.

The Republic of the Philippines will guarantee the issuance for the debt-laden utility.

The issue was increased from $200 million.

Bear Stearns & Co. was the bookrunner for the Rule 144A/Regulation S transaction.

The deal was announced during morning hours in Asia, where there was strong demand, said a sellside source.

"They wanted to go as long as possible," he added.

"The investment base for floaters generally prefers shorter maturities. That was probably the longest we could go without losing the core investment group for these things."

In the secondary market, the issue traded up to 100.20 bid.

In separate news, El Salvador will likely tap capital markets this year, according to an analyst note. Congress appears unable to agree on the approval of some $200 million in loans from international financial institutions.

In late January, president Antonio Saca's administration received legislative approval to issue $540 million in bonds this year. But his administration intended to issue only $400 million, which would have included a $25 million domestic issue and a $375 million international issue.

The remaining $140 million, needed to fulfill the country's 2005 financing needs, would have been granted by multilateral credits.

However with no congressional approval, the government said it would issue bonds.

The analyst said the government would have saved $30 million by replacing new bonds with multilateral loans, but added that El Salvador should be able to issue bonds without serious hardship.

EM under pressure

There were two strikes against emerging market debt Thursday as Brazilian and Turkish news pushed down the market.

President Luiz Inacio Lula da Silva suffered a major defeat late Wednesday night. The Brazilian senate passed a minimum wage hike, which would add stress to the country's finances. If enacted, the raise would increase the monthly minimum salary to R$ 384 from R$ 300.

According to one research report, the impact of the additional hike of R$ 84 will be more than R$ 12 billion in the next year.

The bill will next move to the lower house for approval. And Lula may then choose to exercise a presidential veto, which may be seen as a politically unpopular move.

Recently, Brazilian bonds have moved higher as Lula appeared insulated from the votes for bribes scandal. Sources said the passage of this bill shows that there are cracks in his ability to push ahead with reforms.

"It's not final yet, but it does show how the government doesn't really have a lot of say," said a buyside source.

"It's not 100% sure that it will pass at R$ 384. It adds to the noise. I don't think investors were necessarily worried that it will actually pass. But it adds one more thing to the list of political noise in Brazil.

"That added a little bit of volatility and weakness in Brazil," added the source.

During the session, Brazil bond due 2040 was down a point to 118¼ bid while the bond due 2012 also lost one point to 117½ bid.

And Turkish bonds slid after a report from an investment bank recommended an underweight position for Turkey.

Credit Suisse First Boston cut its recommendation, citing uneasiness over the country's accession negotiations with the European Union.

"Those concern are on everybody's minds," remarked the buyside source.

"As far as its external debt is concerned, it's a fair move. It has tightened quite a lot and probably Turkey has tightened more than fundamentals would warrant.

"Taking profits here, that's seems a reasonable action," added the source.

At the end of the session, the Turkish bond due 2012 was quoted down half a point at 125 7/8 bid while the bond due 2030 was off 0.88 to 140 7/8 bid.

Those two events pushed spreads wider, noted the buyside source.

"It's a quiet day. There were really no supporting flows.

"People just mark things down on news in bigger countries, like what happened in Brazil and Turkey."

Other losers for the day included the Philippines and Russia. The Philippines bond due 2025 slipped 0.38 to 111.87 bid. The Russia bond due 2030 dipped 0.44 to 111 1/8 bid.

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