Emerging market debt down on equities, uncertainties; Brazil, Uruguay issue $800 million of bonds

By Reshmi Basu and Paul A. Harris

New York, May 10 - Emerging market debt started Tuesday's session with a strong tone but ended down as new supply and a souring equity market cast a shadow.

In the primary market, Brazil reopened its existing bonds due 2009 to add $500 million while Uruguay revived its offering of $300 million of 12-year notes.

After a flurry of rumors suggesting a potential retap in the last few sessions, Brazil reopened its 8 7/8% bonds due October 2019 (B1/BB-/BB-) to add $500 million via Goldman Sachs and Merrill Lynch.

"It came a little bit expensive," said an investor.

The retap priced at 100 3/8 to yield 8.827%.

A sellside source said that Brazil's reopening was a reverse inquiry - "that was the only reasoning for opening that specific bond at that size."

One buyside source said that investors seemed pretty excited when the drive-by deal was announced.

"People bid up the paper when they announced the news; they had expected a larger tap," the source said soon after terms had emerged.

"The market rallied on it. But after the deal priced it just seems to have gone sideways. It's been trading plus or minus an eighth," added the source.

Real money and mostly trading accounts played in the deal, remarked the investor. The book size was more than $2.5 billion, said sources.

The sellside source said that Brazil was down across the board, given the softness in the market. The spread on the bond due 2010 was 40 basis points wider while the bond due 2019 was 20 basis points wider.

He spotted the bid price on the 2019 at 99.60, down from the retap price of 100 3/8.

Uruguay sells $300 million of 12-year bonds

Uruguay resurrected an offering of $300 million of 12-year bonds Tuesday. The new bonds priced at par to yield 9¼% via Citigroup.

Early in the session, the investor said it looked like a good day for issuers to test the market, by the afternoon, she wasn't so sure, particularly for Uruguay.

"They had shelved this deal a few weeks back. It's a good time if they find trading accounts willing to invest. It could get worse ahead, so you could look at it like that."

The deal was previously postponed on April 14.

Philippines reaction

In addition to Tuesday's new deals, the market was still debating Monday's big sovereign offering. In that session, the Philippines reopened its bonds due 2015 and bonds due 2030 (Ba2/BB-/BB) to add $750 million.

A $250 million add-on to the 8 7/8% bonds due 2015 priced at 101 3/8 to yield 8.661% or a spread of 438½ basis points over U.S. Treasuries.

Meanwhile a $500 million add-on to the 9½% bonds due 2030 priced at 97 7/8 to yield 9.726% or a spread of 510½ basis points over U.S Treasuries.

Deutsche Bank AG, HSBC and JP Morgan arranged the Philippines' debt sale.

"It was a pretty cheap offering, particularly the '30," said the investor.

An emerging market analyst said the retaps came at a relatively fair price, "but the high spreads on the re-opening show how eager the Philippines is to get cash in, especially after the news from Congress on tax reform was mixed at best.

"President [Gloria Macapagal] Arroyo promised higher tax collections, and it's still very uncertain whether she'll be able to deliver. With the fiscal outlook still uncertain, the Treasury decided to tap the primary market while it still could," he said.

However, one market source in Asia said the deal seemed rich, "especially when you take the fundamentals into consideration.

"However, there is just too much liquidity in the markets and the Philippines have the big advantage that Asian investors (who like Asian investments) are gobbling up their bonds as there are no comparable yields elsewhere in Asia and of course hardly any choice."

EM slumps on stocks, risks, supply

During Tuesday's action, a number of factors added volatility to emerging market debt such as new supply. In the last two sessions alone, $1.55 billion of sovereign debt has hit the market.

Additionally, prices sagged Tuesday in response to a tumble in equities. The Dow Jones Industrial Average fell 103.23% or 1% on the session to end at 10,288.11 on speculation about problems at hedge funds. There were rumors circulating that certain hedge funds were in trouble as a result of their exposure to General Motors Corp.

The sellside source said there is too much uncertainty for market players and was perplexed by Tuesday's afternoon drop.

He added that emerging market debt might have been pressured from other markets such as high yield and high grade.

During Tuesday's session, the Brazil C bond slipped 0.94 to 100.43 bid while the Brazil bond due 2040 fell 1.1 points to 114.20 bid. The Russia bond due 2030 slid 0.32 to 106.93 bid. The Venezuela bond due 2027 fell 0.65 to 99 bid.

"Treasuries are tighter, which would lead to credits being tighter. Oil is up today [Tuesday]," he added. "People don't know what to do."

The investor added that the market was all over the place.

"We started pretty well and now we've been coming off for the past few hours.

"I think GM is still looming over our heads. And there are different things that could go wrong at this point. I think investors tend to be more cautious," added the investor.

She added there U.S. Treasuries could potentially drive emerging markets lower, given that Treasuries did not sell off that much after the release of Friday's non-farm payroll numbers in the United States. According to the Labor Department, there was a 274,000 jump in non-farm payrolls in April, far exceeding predictions of 175,000.

"We still have potential for a Treasuries correction here that would probably weigh on our market," noted the investor.

"I don't think the GM news has been completely digested by the investment community," she added.

Auto downgrade seen not fully felt

On Thursday, Standard & Poor's cut ratings for both General Motors Corp. and Ford Motors Co. to junk.

The investor warned that there might be more selling to come even though the ratings cut was expected.

Furthermore, she added that the market would have to monitor the technical part of the downgrade, such as the developments that ensue when the bonds are included in high-yield indexes and kicked out of investment-grade benchmarks.

The sellside source agreed that the market has not absorbed the ramifications of the GM downgrade.

"The indexes still have them in their portfolios. Investors can still have them and they don't have to sell them in the market because two ratings agencies have them as investment-grade," he said.

He added that if either Moody's Investors Service or Fitch were to downgrade the troubled automakers' debt, there would be a huge sell-off.

Additionally, he said he believed the high-yield market could not absorb all the new paper from GM and Ford.

And since the indexes currently consider the paper high grade, "investors are not going to sell them," he remarked. "Why? Because it is yielding 700 basis points over Treasuries."

Meanwhile, the investor said that emerging market trading would be based on what is happening in the equity market and on credits in general, high yield included.

"EM has really held in while high yield has not," said the buyside source.

"The Brazil deal was smaller than expected, which allowed them to price it better."

Emerging markets has outperformed high yield. Typically in rough markets emerging markets underperforms.

"But this is not your father's emerging markets anymore, or at least not your older brother's emerging markets," said the buyside source.

"Nevertheless, I just feel like it's getting rich in emerging markets, and that the value proposition between high yield and emerging markets just doesn't make sense.

"Emerging markets was up 1.5% in April, meanwhile high yield was down over 1%. Go back to March and high yield was down over 2%, while EM was up that month too.

"It just doesn't make sense," commented the source.

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