Market upbeat as Fed holds rates steady; Sul America sells $200 million in new debt

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Jan. 31 - Emerging market debt posted higher prices Wednesday as the Federal Reserve packed zero punches by keeping Fed fund rates steady at 5¼%.

In the primary market, Brazilian insurance company Sul America SA sold an upsized offering of $200 million in five-year bullet bonds (/B/B) at 99.00 to yield 8 7/8%.

The deal, increased from $150 million, came inside of price guidance for a yield of 9%.

Credit Suisse was the bookrunner for the Rule 144A and Regulation S transaction.

Meanwhile in sovereign pipeline news, the Republic of Indonesia plans to start investor presentations this week for a dollar-denominated offering of global bonds.

Simultaneous roadshows will be conducted in Singapore and Hong Kong on Friday, Feb. 2, followed by stops in Dubai and Boston on Monday, Feb. 5 and wrapping up in London and New York on Tuesday, Feb. 6.

Citigroup, Deutsche Bank and UBS Investment Bank will be acting as joint bookrunners for the Rule 144A and Regulation S transaction.

This is the first time Indonesia has tapped the market since last spring.

On March 2, 2006, the country (B2/B+) sold $2 billion of sovereign bonds in a dual tranche offering, which included $1 billion of notes due 2017 and $1 billion in a retap of bonds due 2035.

A source noted that the size of the new issue will be $2 billion, increased from an original amount of $1 billion. Additionally, there are whispers that the new bonds will be long dated with maturities running in the 15 to 20 year range.

On the corporate side, Egypt's Orascom Telecom Finance SCA upsized its offering of seven-year senior notes (B2/B-) to $750 million from $500 million, and lowered price talk to 7 7/8% to 8% from the 8¼% area on Wednesday, according to an informed source.

Pricing is expected on Thursday.

Credit Suisse and Citigroup are joint bookrunners for the notes, which are being marketed via Rule 144A for life and Regulation S.

The notes come with three years of call protection.

EM tightens on FOMC decision

Earlier in the session, emerging market debt was steady as higher beta credits such as Argentina, Brazil, Indonesia and the Philippines tightened as investors awaited the Federal Open Market Committee's interest rate decision.

The widely expected decision by the Federal Reserve to leave its key interest rate unchanged at 5.25% and the Fed's bullish comments, that the economy remains healthy and inflation pressures are easing, resulted in a largely unchanged market in Latin American debt on Wednesday, but one with a generally firmer tone.

"There were higher Treasury spreads, but things were not all that much changed," a trader declared.

"The market definitely felt better, although I wouldn't say that there was any tremendous bid that came into the market - it just kind of traded higher, in line with Treasuries," which had advanced solidly on the Fed news.

No names stood out in Wednesday's dealings, as "nothing really outperformed."

Ecuador unchanged

He said that Ecuador's recently volatile bonds were "weak and then strong, weak and then strong," with the benchmark 10% notes due 2030 closing out the session at 78.5 bid, 79 offered, about unchanged from Tuesday's session, which saw the bonds rise for a second straight day in response to investor perception of a more conciliatory attitude towards Quito's creditors on the part of the new Rafael Correa administration.

The Correa government on Wednesday announced its 2007 budget proposal, which calls for spending $9.767 billion, down 4.4% from last year's $10.22 billion budget. Included in the budget is $2.738 billion for debt service, consisting of $1.709 billion intended for capital repayments and $1.029 billion for interest payments.

The debt service provision accounts for about 28% of the total planned spending - but is also about 28% less than the $3.8 billion that Ecuador budgeted for debt service last year.

International financial markets are closely watching the new president's plans for servicing the debt in light of past statements by Correa and his economy minister, Ricardo Patino, indicating that they consider Ecuador's foreign debt incurred by their predecessors - generally estimated at about $11 billion, although some calculations put it as high as $16.8 billion - to be largely "corrupt" and "illegitimate," and that they intend to restructure the debt, comments that have raised fears of a possible default.

Earlier in January, the benchmark bonds - which had been in the mid-90s before the leftist Correa's election in November, but which had gradually declined since then - were driven down to the mid 60s by Patino's warning that Ecuador might pay no more than 40% of what it owes to bondholders and other international creditors, although the minister later seemed to soften that stance, saying he preferred a "friendly" restructuring done with the cooperation of the creditors rather than a scenario in which the government imposed a flat moratorium on repayments. The more cooperative tone, as well as hopes that Ecuador will pay the $135 million of interest due on the 10% bonds on Feb. 15, shot those bonds up 10 points over two sessions to current levels earlier in the week.

But uncertainty about Ecuador's intentions remains, which caused Moody's Investors Service to downgrade its debt ratings on Tuesday. Correa and Patino have said for weeks that Ecuador's repayment of debt would depend upon whether it first had the funds to pay for the large increases in social welfare spending that Correa promised the public during his recent successful election campaign.

Even as the new budget proposal was unveiled on Wednesday, Patino cautioned that just because debt service was included as a line item, it does not necessarily mean that government will make all of its scheduled payments this year, reiterating that "our commitment will be to pay on time salaries, education and health." He said of the foreign debt that "we reserve the right to pay, or not to pay, these obligations."

Correa's budget proposal goes to the opposition-controlled Ecuadorian congress, which has until Feb. 28 to approve a final version. Lawmakers were shaken up earlier this week when shouting pro-Correa demonstrators besieged the capitol building in Quito, with the legislators having to evacuate the building under police guard.

Venezuela up on oil

In Venezuela, meantime, that country's congress, controlled by forces loyal to president Hugo Chavez, on Wednesday voted to give the fiery leftist president sweeping powers to rule by decree, as he attempts to carry out his stated goal of turning Venezuela into a socialist state.

Venezuela's bonds, however, remain well bid for, with the benchmark 9¼% bonds due 2027 hanging in around the 122 mark, propped up by the country's great oil wealth. Unlike the situation in Ecuador - whose new president is a friend and ideological ally of Chavez - the Venezuelan strongman has given the international debt markets no reason to believe that his country will not honor its obligations.

But higher oil prices could not save Venezuela's oil ventures from pressure Wednesday. Chavez has vowed to nationalize several sectors of the economy, including the Orinoco River reserves. And those bonds continued to skid.

In trading, the Petrozuata 8.22% bond due 2017 slid 3.50 points to 93 bid, 95 offered.

Elsewhere, Brazil's global bond due 2040 rose 0.437 to 131.625 bid, as its yield eased to 6.176%.

Asian market firm

In the Asian market, meanwhile, "the market for the most part felt firm for a majority of the day," a trader said, although he added that "the overwhelming majority of the positive sentiment we got from clients was because [U.S.] Treasuries were higher and equities were higher."

He said cash spreads "actually widened a few basis points on the day, with Treasuries outperforming [the Asian market] after the FOMC."

He said clients "mostly stayed sidelined and watched the market trade higher following the 2:15 [pm ET] announcement by the Fed." He said the widening of the cash spreads "would lead me to believe that there was not a whole lot of depth behind this buying."

He noted the announcement by Indonesia that it would be increasing the size of its upcoming bond issue to $2 billion from the $1 billion originally envisioned.

"The feedback we're getting from clients is that it's going to be quite a bit tougher for the market to absorb, so there seemed to be a lot of wariness as to how well that deal will go when it comes to market in the next couple of weeks."

Elsewhere Indian corporates saw a positive push on the back of Standard & Poor's sovereign upgrade for India.

A market source noted that spreads for Indian banks tightened by 5 basis points.

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