Emerging market debt loses traction on lower U.S., global markets; three sovereigns start buybacks

By Reshmi Basu and Paul A. Harris

New York, Sept. 6 - Emerging market debt tracked U.S. core financial markets lower Wednesday, failing to capitalize on the previous session's impressive rally. Meanwhile three sovereigns announced their plans to repurchase shorter dated debt and refinance it with longer term bonds.

In trading, emerging market debt saw spreads kick out as U.S. equity markets and Treasuries posted losses on renewed inflation worries and the possibility that the Federal Reserve may resume its monetary tightening campaign.

Raising concerns in U.S. stocks and government bonds was economic data, which showed that productivity growth in the United States slowed while unit labor costs exceeded market expectations. Later on, the Federal Reserve's Beige Book showed that higher energy costs were not being passed on to consumers, which helped chip away at inflation fears. Nonetheless, inflation concerns remained a focus and helped drag down sentiment, according to market sources.

In addition to that less benign global backdrop, new supply also weighed on emerging market debt Wednesday.

During the session, the bellwether Brazilian bond due 2040 lost 0.75 to 130.10 bid, 130.20 offered. Meanwhile Ecuador emerged as the session's worst performer, triggered by ongoing election uncertainty. The Ecuadorian bond due 2030 gave up 0.80 to 98.50 bid, 99.50 offered.

Three countries to buy back debt

On the primary front, news of sovereign buybacks dominated headlines as Colombia, the Philippines and Turkey announced plans to repurchase debt in an effort to improve their debt maturity profiles.

On Wednesday, the Republic of Colombia sold an upsized offering of $1 billion in global notes due 2037 (Ba2/BB/BB) to finance a buyback of shorter-term global bonds with maturities ranging from 2020 through 2033.

The issue, increased from $750 million, priced at 99.062 to yield 7.453% or a spread of 250 basis points more than Treasuries in a drive-by Wednesday.

Meanwhile the goal of the buyback "is not to clean up the 2007 amortization schedule, but to retire high coupon/high price paper, and to retire poor liquidity paper such as the 2027s and the 2033s," wrote Alberto Bernal, fixed income analyst for Bear Stearns & Co., Inc., in a research note.

"The 2020s enjoy decent market liquidity.

"We think that the goal of reducing the average coupon rate of the dollar bond curve is an important one for local politics, especially at this time, when the 2007 budget and the structural tax reform are being discussed in Congress," he wrote.

Goldman Sachs and Merrill Lynch were the bookrunners for the new offering of Securities and Exchange Commission-registered notes. The two firms are also managing the buyback.

Philippines announces swap

Also, the Republic of the Philippines announced that it would offer to swap up to $11.8 billion of existing dollar-denominated debt with maturities ranging from 2007 to 2025 for longer dated bonds in order to extend its debt maturity profile and as part of a broader program to manage its external liabilities.

The country said it would buy back global bonds due in 2007, 2008, 2010, 2013 through 2017 and 2019 in exchange for new amortizing global bonds due 2024 via a modified Dutch auction. The country will issue at least $750 million of the new bonds.

Additionally, holders can exchange 9½% global bonds due 2024 and 10 5/8% global bonds due 2025 for a reopening of the 7¾% bonds global bonds due 2031 via a separate auction.

Goldman Sachs and JP Morgan are managing the deal.

And the Republic of Turkey announced its plans to swap shorter-dated dollar-denominated notes with maturities ranging from 2006 to 2010 for new global notes maturing in 2016 in a modified Dutch auction.

Citigroup and Goldman Sachs are joint managers.

Overall, the buybacks are seen as positive as sovereigns try to extend their curve duration, according to a buyside source, who added that she was surprised that Turkey would come back to the market. Earlier in the summer, Turkey saw a prolonged sell off triggered by concerns over its large current account deficit.

However, the source noted that Colombia might be the least enticing of all three.

"But I think that the dynamics are fairly positive for the Philippines and well as Turkey."

As a result of the announcements, there was steepening in the curves due to expected supply in the long end, noted the source.

Brazil, Fiji tap market

In addition to Colombia, two more issuers tapped the market with new deals.

The Federative Republic of Brazil sold $750 million equivalent or R$1.6 billion in 15-year global bonds (Ba2/BB/BB) at 97.563 to yield 12 7/8% via Citigroup and JP Morgan.

The deal is denominated in Brazilian reais while payments will be made in dollars.

On Sept. 19, 2005, Brazil sold R$3.4 billion of 12½% global bonds due January 2016 at 98.636 to yield 12¾%. That was the country's first local currency-denominated sovereign issue. Wednesday's deal marks the second time Brazil has issued local-currency denominated debt in the international capital markets.

And the Republic of the Fiji Islands sold a $150 million offering of 6 7/8% five-year notes (Ba2/BB-) at 99.48 to yield 7%.

The yield came 12.5 basis points inside of the 7¼% area price talk.

JP Morgan was the bookrunner for the Regulation S transaction.

This week has seen the primary issuance market wake up following a summer hibernation.

"It was fairly quiet for a long time," remarked the buyside source.

"It's only fair that with sentiment being fairly positive, sovereigns would take advantage of that. But I didn't expected to happen all in one day."

And on the external debt side, it appears the new trend is for sovereigns to engage in debt buybacks and exchanges rather than issue new paper, observed the buyside source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.