Brazil scores high on upgrade rumors; talk of delay for Philippines' non-deal roadshow

By Reshmi Basu and Paul A. Harris

New York, June 16 - Emerging market debt saw better bids Thursday, while Brazilian paper stepped higher on rumors of a ratings upgrade.

In the primary market, Home Credit and Finance Bank LLC sold $275 million of three-year loan participation notes (Ba3/B-) at par to yield 8 5/8% via ING and Merrill Lynch & Co.

Korea Development Bank priced ¥30 billion of five-year bonds (A3/A-/A) in Japan.

The samurai bonds priced at par for a spread of 30 basis points more than yen swaps.

Daiwa SMBC and Nikko Citigroup of Japan managed the sale of the samurai bonds.

Brazil up on upgrade rumors

Brazilian paper firmed on rumors of a potential credit rating upgrade, said a Latin America debt strategist at Refco EM.

"That had a positive effect on the market," he added.

"The Brazilian '40s are now trading around 119 bid. And there has been activity going on from locals as well as hedge funds trying to get exposure on the credit in the event that the upgrade materializes," remarked the strategist.

The strategist is not at all surprised at such a potential move for Brazil as the economic story continues to be a good one.

The fallout from last week's corruption scandal appears to have subsided for the near-term, said sources.

"Overall, the fundamentals in the country are strong," said the strategist.

"We still have a government committed to fiscal discipline and overall microeconomic discipline.

"In addition to that, the export sector continues to be vibrant, bringing the current account to a surplus at the end of the year," he added.

Brazilian paper began to rebound Wednesday after Roberto Jefferson, a Labor Party deputy, testified that he had no proof to back up his charges of corruption against president Luiz Inacio Lula da Silva's administration.

Despite all of the political turmoil that rocked the Lula administration last week, the Brazil bond due 2040 never dipped below 116 bid, quite an unexpected accomplishment.

"We've seen this time around a resilience by the [Brazilian] currency to stay at the current levels," the strategist told Prospect News.

In February 2004, the Brazilian financial markets took a dive when former government adviser Waldomiro Diniz was accused of extorting money for the Workers' Party.

"Historically, that created a lot of volatility, which this time did not occur," remarked the Refco strategist.

The lack of volatility is a positive testament to how the political as well as the economic traditions in the country have improved, he observed.

"There was not a panic or a reaction in a very negative way," he cited.

Nonetheless, as the summer season kicks in, liquidity in the market traditionally tends to dry up.

"The tone has definitely changed in the last few days," said the strategist.

"You have a region that is outperforming some of the other asset classes.

"And the story in Brazil was a negative in that it created uncertainty, it was able to withstand it. And now we're talking about rumors of an upgrade," he added.

If the upgrade happens, the market will move higher over the next couple of session.

"I also believe there is a window opportunity here for countries as well as corporates. I think we're going to see new issues coming to the market."

The Refco strategist added that that the positive sentiment should continue over the next few weeks.

Overall market higher

Meanwhile, a U.S. Treasuries rebound helped lift emerging market debt. The Philadelphia Federal Reserve's business outlook of economic activity came in at negative 2.2 this month, versus 7.3 in May, which helped Treasuries rally.

The yield on the 10-year note stood at 4.07% by the close, improved from 4.12% in late trading Wednesday.

"The whole market is strong," said a trader, adding that the strength in the market was related to the late-day move in Treasuries.

"There is $9 billion in free cash coming into the market next month," he said,

"I think that's the biggest print on record. All of that money is going to get re-deployed throughout the EM space. A lot of it is going to wind up in Russia. But a lot of it will end up outside of Russia too. With $9 billion, there is plenty to go around.

"This could be the beginning of the summer rally," he remarked.

During the session, the Russia bond due 2030 jumped 0.249 to 109.812 bid. The Venezuela bond due 2027 added 0.43 to 102.65 bid.

Delay rumors for Philippines' roadshow

A source said that a Philippines non-deal roadshow, set to run next week in the United States via Deutsche Bank and Citigroup, was rumored to be delayed because of the spreading scandals surrounding Philippines president Gloria Arroyo.

However another source said that hedge funds are known to disseminate such information on the Philippines.

Accusations have been flying around that President Arroyo fixed last year's close presidential election. Additionally, members of her family have been accused of involvement in an illegal numbers game.

Nonetheless, Philippine bonds were stronger on the day. The bonds due 2030 were bid at 102 3/8 late Thursday. They closed Wednesday at 101 7/8 bid.

Also from south-east Asia, the new issue from Indosat performed well in the secondary. On Thursday, the telecommunications operator priced $250 million of seven-year bonds (B1/BB-) at 99.323 to yield 7¼%. The deal was seven-times oversubscribed.

The new bonds were spotted at 101 1/8 bid, 100 ¼ offered in trading.

Credit Suisse First Boston, Goldman Sachs & Co. and JP Morgan were the joint bookrunners for the Rule 144A/Regulation S offering.

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