Emerging market debt tightens to another record low; three corporates issue debt

By Reshmi Basu

New York, May 21 - Emerging market debt traded sideways Wednesday as spreads tightened to another record low amid light trading volumes. Spreads were assisted in their downward move by the aggressive sell off in U.S. Treasuries, which saw the yield on the 10-year note rise to an almost four-month high.

In the primary market, three corporates issued new debt.

Out of the Ukraine, Vseukrainsky Aksionerny Bank (VAB Bank) sold a $150 million offering of three-year loan participation notes (B2/B-) at par to yield 10 1/8%.

The deal came at the tight end of guidance for a yield in the 10¼% area.

Credit Suisse and Deutsche Bank were lead managers for the Regulation S deal, which was issued via Credit Suisse.

From China, Parkson Retail Group Ltd. sold a $125 million offering of five-year senior guaranteed notes (Ba1/BB) at par to yield 7 1/8% on Wednesday, according to a market source.

The notes will become callable on May 30, 2010 at 103.5625 and on May 30, 2011 at 101.7813. The deal also contains an equity clawback until May 30, 2010 for 35% at 107 1/8.

JP Morgan was the bookrunner for the Regulation S transaction.

Proceeds from the sale will used to refinance a bridge loan from JP Morgan and for working capital.

The issuer is a Chinese retail chain owned by Malaysia's Lion Group.

Coming out of South Africa, processed foods company Foodcorp. Pty. Ltd. priced a €135 million add-on to its 8 7/8% first priority senior secured notes due June 15, 2012 (B2/B+) at 107.375 on Wednesday.

The issue price came at the rich end of the 107.25 area price talk.

Citigroup was the bookrunner for the Rule 144A and Regulation S add-on.

Proceeds will be used to fund the acquisition of First Lifestyle, a South African producer of ready-to-eat meals.

The original €175 million issue priced at par on June 15, 2005.

The issuer is a unit of Bedfordview, South Africa-based branded grain-based processed foods company Foodcorp Holdings Pty. Ltd.

Pakistan issues talk

The Islamic Republic of Pakistan set initial price guidance for a dollar-denominated benchmark-sized offering of 10-year bonds (B1/B+) at the 7% area.

The deal will also include a reopening of its dollar-denominated 2036 bonds.

Pricing is expected to take place on Friday.

Citigroup, Deutsche Bank and HSBC are lead managers for the Rule 144A and Regulation S transaction.

The bond deal is part of the sovereign's strategy to tap the market once a year.

And adding to the pipeline, OAO LUKoil plans to offer a two-tranche benchmark-sized offering of 10-year and 15-year fixed rate notes (Baa2/BBB-/BBB- expected).

Credit Suisse and Deutsche Bank are the lead managers for the Rule 144A and Regulation S transaction, which will be issued via LUKoil International Finance BV.

Pricing is expected to take place following the completion of an investor roadshow, which is scheduled for May 29 to May 31.

Moscow-based oil company OAO LUKoil will guarantee the issue.

EM narrows

Back to secondary trading, emerging market debt posted another record spread low Thursday. But unlike previous trading days, Thursday's performance saw U.S. Treasuries crawl out from the backseat to become more of a visible driver in the day's action.

"You can see the market start to soften through the effect you are seeing coming from the U.S. Treasury market," remarked Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

In trading, the yield on the 10-year Treasury note rose to 4.85%, the highest level since January, as investors scaled back their expectations of an interest rate cut by the Federal Reserve this year.

With yields topping 4.80%, the recent decoupling of U.S. government bonds from emerging markets may become a thing of the past as EM becomes more sensitive to trends in the Treasury market, noted market sources.

Among benchmark names, high beta credits led the market's softness. In trading, the Argentine discount bond due 2033 gave up 0.60 to 106.10 bid, 106.60 offered. The bellwether Brazilian bond due 2040 lost 0.30 to 134.70 bid. 134.80 offered. The Mexico bond due 2026 shed 0.30 to 165 bid, 165.70 offered.

During the session, spreads for the JP Morgan EMBI index tightened by 1 basis point to 148 basis points versus Treasuries.

Ecuador softer on video

In another development, Ecuador's attorney general Jorge German said he will look into allegations of market manipulation, triggered by a "shock video" which shows finance minister Ricardo Patino in a meeting with alleged debt holders. The recording included an audio of a plan to "shock" the market with hardline comments, which would push bond prices lower.

In February, Patino said the Andean country would miss the deadline for a $135 million coupon payment on its global bonds 2030. But shortly afterwards, the government said it would make the deadline, which some have suggested may be "market manipulation."

The Feb. 8 recordings, which aired on Teleamazonas TV, were leaked by a former disgruntled employee of Patino's. As a result, calls for his resignation have mounted. In response, he has asked for the entire video to be aired, claiming the three-minute clip aired on the news was taken out of context.

The scandal, coupled with the market's softness, led to lower prices. During the session, the Ecuadorian bond due 2015 gave up 0.25 to 95.25 bid, 96.25 offered.

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