Philippine $500 million sovereign seen well timed; warm feelings, questions on Argentina

By Reshmi Basu and Paul A. Harris

New York, March 10 - The Republic of Philippines made a splash in emerging markets Wednesday with a $500 million bond due 2015. The deal was seen as happily timed by market observers, who said it came at a safe distance ahead of the country's upcoming elections.

The sovereign issue priced at 99.138 to yield 9% yield via Credit Suisse First Boston, HSBC Securities and UBS Investment Bank. Proceeds from the deal will be used to fund the budget deficit.

A fund manager said the issue was opportune given that presidential elections take place on May 10.

"They brought it at a good time because the political noise may increase in the run up to elections," said the manager.

President Gloria Macapagal-Arroyo is in a heated race with action movie star Fernando Poe. According to a press release issued by Poe's party, Poe said he wants to extend the country's debt maturities, while paying down its existing obligations. This had some bondholders nervous about the issue.

However, one trader said the political risk was already priced in.

"The political issues that country has are not a secret," said the trader. Poe is looking to restructure external debt. "It's a typical emerging market scenario."

An emerging market analyst said that how the issue fares might provide clues into the liquidity of the market.

"I think it could be an important event for the market," said the analyst.

"Philippines is a weak credit facing an uncertain political future and yet it's trying to stuff the market with a new deal to finance its high fiscal deficit.

"The market never reacts well when it has to digest a deal that it doesn't like. Of course, if the deal goes well, it would be an important hint of how positive the liquidity conditions are in the market right now.

Argentina still benefits from IMF deal

Meanwhile, Argentina's debt continued to see a positive effect - though only a small one - from the accord reached with the International Monetary Fund.

Argentina's bonds due 2008 were seen closing the session at 28.75 bid, up 15 cents, according to a trader.

"It looks like people are buoyed by the idea that there is going to be some sort of restructuring agreement with the bondholders," the trader said.

"I'm not sure where that optimism has come from. But that seems to be how the Street is interpreting this situation, given the price action we're seeing."

"These things are still cheap, on a dollar-basis: 28 cents or 29 cents to the dollar. I mean, can it get any lower in an economy that has really bounced off of its low?

"Even the slightest amount of optimism about any sort of a reasonable, real proposal from the Argentine government to restructure debt with existing bondholders - a 75% haircut with PDI included - everything is going to seem fine.

"It could be that the market is a little ahead of itself here," the trader added. "But maybe the talk of Kirchner making the payment to the IMF is sending a signal that they're serious about sitting down at the negotiation table with the bondholders, to restructure their existing debt situation."

On Tuesday, Argentina's debt had traded somewhat higher in response to news reports that the country had reached an agreement with the IMF on a debt payment. Included in the pact is a recommendation that the IMF release more money and a push to move the debt restructuring talks forward (see report elsewhere in this issue).

As news of an accord surfaced Tuesday, a trader said he saw the Bodens due 2012 at 66 bid after the announcement, up two points on the news. He saw Argentina's debt due 2008 trading at 28½ and its 2031 bonds trading at 28.5, up a quarter to half a point from previously.

Questions about restructuring

According to fund manager, the lockdown between the IMF and Argentina will be revisited in six months.

He said he was surprised by Argentina's decision to pay back the $3.1 billion due Tuesday.

"I'm not sure what benefit they get from it, said the manager.

But he was even more surprised that the IMF consented to such hazy terms for debt restructuring.

"Argentina is supposed to get 50% approval by August. What does that even mean? Can they just sit on the position that they have been on for the next six months?

"The IMF is going to roll over the facility. Argentina is going get all this money back because they made this promise to the IMF that somehow they're magically going to get 50% approval in six months, but it doesn't explain how," said the manager.

"It's like drawing up a peace plan to the Middle East. Everybody can say what agreements need to be reached or what parties need to reach an agreement for a solution to be arrived at. For the IMF to say to you need to get an agreement from 50%, they really are deferring the issue for five months."

Action in the pipeline

According to an informed source, many new issues are brewing in the emerging markets pipeline.

"There was this rumor that there are a lot of new issues, [and it] was weighing on the market even before the U.S. market opened today," he said.

Venezuela, Turkey, and Indonesia are a few of the names that have been tossed around, according to the source.

"This morning I heard a rumor that they're reopening the Brazil sovereign."

Brazil C bonds closed at 96.75, down 1.625 on the day.

"I think there is a huge pipeline out there," said the source

And a trader added Thursday could prove to be a lively for the markets.

"Everything softened up today big time. The EMBI widened 10 basis points. It's going to be interesting to see how things open up tomorrow."

Nonetheless, a source said the slide in the U.S. equities market is a good thing for emerging markets.

"The rally in Treasuries creates a pretty supportive environment for all spread products," he explained.

"The things that drove the stock market lower are beneficial to emerging market debt," the source added.

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