Brazil, Petrobras, Philippines come to market; Russian corporates in the pipeline

By Reshmi Basu and Paul A. Harris

New York, Sept. 8 - Both Brazil and the Philippines tapped the emerging markets Wednesday as spreads ended the day softer.

"It's seems like we've flipped the switch and now it's all about new issuances," said a buy-side source.

"We're a little softer on a spread basis today [Wednesday]," he added.

In a busy primary market, new deals from Brazil, the Philippines and Petrobras priced during Wednesday's session.

For the first time since 2002, the Republic of Brazil came to market with a euro-denominated issue. In a heavily oversubscribed deal, Brazil priced an upsized €750 million eight-year bullet (B2/B+) to yield 8.7% via Dresdner Kleinwort Wasserstein and UBS Investment Bank.

The deal, increased from €500 million, came in tighter than price guidance of 8¾%. It attracted more that €2 billion in orders.

"It was three-times oversubscribed," said the buy-side source. "Supposedly, they really won a squeeze out of hedge funds.

"They [Brazil] are in pretty good funding position after this is over," the source added.

"It will be interesting on how the market reacts, given that there has been such a pressure on their 10-year area."

The bonds will be free to trade Thursday morning.

Also out of Brazil, Petrobras International Finance Co. sold $600 million of 10-year notes (Ba2) at 98.638 to yield 7.95%.

The deal came at the wider end of price guidance. Guidance had been set at 7 7/8% to 8%.

One source told Prospect News that U.S junk accounts were major players in the deal.

Morgan Stanley and Bear Stearns & Co. ran the offering.

In secondary trading, Brazil's paper was up on a price basis. At 2:30 pm ET, the Brazil C bond was 0.62 higher at 98.125 bid while the bond due 2040 was bid at 109.05, up 0.30.

"We got a bit of a relief rally. They priced both Petrobras and the Brazilian eurobond so cheap to the curve," said the buy-side source.

"On balance, things are softer on a spread basis but are up on a dollar basis. So I can't see much of reaction one way or another."

Philippines reopens

Also pricing during Wednesday's session was a re-tap of existing sovereign issues by the Philippines

The Republic of Philippines priced a $1 billion add-on to two sovereign issues (Ba2/BB) on Wednesday to raise funds for National Power Corp. the country's state-owned but cash-short power monopoly.

A $300 million add-on to the 8 7/8% bonds due 2015 priced at 98.00 to yield 9.176%, or a spread of 497 basis points over U.S. Treasuries.

Meanwhile a $700 million add-on to the 10 5/8% bonds due 2025 priced at 106.25 to yield 9.907% for a spread of 492 basis points over U.S Treasuries.

Credit Suisse First Boston, Deutsche Bank AG and JP Morgan Chase & Co. arranged the Philippines' debt sale.

The deal comes after warnings by President Gloria Arroyo over the health of the economy.

"I think investors have taken the 'fiscal crisis' comments in context - the market knows that this is not a full-blown crisis, only that one is possible over the next few years if the Philippines does not get its house in order," said an emerging markets analyst.

"That was the point of Arroyo's comments, and she needed to impress upon congress and the nation that the Philippines will be in serious trouble if nothing is done.

"Given the level of optimism in the market now, I think a Philippines deal is possible, but investors would much rather wait until there's more progress on reforms until putting money into a new deal," he added.

Greenspan's comments have muted effect

Meanwhile there was little impact on emerging markets debt from the latest thoughts of Federal Reserve Chairman Alan Greenspan.

On Wednesday, Greenspan said the U.S economy had "regained some traction.

"Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months," Greenspan said in his prepared testimony to the House Budget Committee.

"He didn't say that much," said the buy-side source. "He didn't say anything new."

The absence of reaction in emerging markets bonds was in contrast to other sectors such as foreign exchnage.

"It seems to me what happened is that EM stood still and everything else seemed to rally. I don't understand why but it is what it is," the source said.

More new deals expected

Looking ahead, next week will be another busy week for new issues, especially out of Russia, according to the buy-side source.

"And then there's a long line of Russian corporates as well as some Brazilian corporates pricing next week," he said.

Russian corporates such as Russian Standard Bank, Bank of Moscow, Norilsk Nickel and Moscow Narodny Bank are in the pipeline with upcoming deals.

"I think Russia offers good value relative to other emerging markets," said the buy-side source. "At the same time, you've had quite a run up.

"The valuation is not what it was three months ago," he noted.

The Russia bond due 2030 was up a quarter of a point to 96 bid in trading Wednesday.

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