Emerging market debt spreads tighten; two more sovereigns add another $1 billion in supply

By Reshmi Basu and Paul A. Harris

New York, July 25 - Emerging market debt saw spreads tighten Tuesday while two sovereigns sold more than $1 billion in new paper.

In the primary market, issuers are capitalizing on the recent market stability to raise capital. Since mid-April, sovereigns have stayed on the sidelines, but the last two weeks have seen new paper from Turkey, Colombia, El Salvador and Uruguay.

On Tuesday, the Republic of Panama priced a $313 million add-on to its 7¼% sovereign bonds due March 15, 2015 (Ba1/BB/BB+) at 102.803 to yield 6.813%. The tap priced at a 175 basis points spread to Treasuries, which was on top of the price talk.

Barclays Capital was the bookrunner. Deutsche Bank was the co-manager.

The original $600 million issue priced at 99.301 to yield 7.350% in November 2004. The total issue size following the $313 add-on is $913 million.

Proceeds were used to repay a bridge loan with Barclays, a $318.9 million agreement obtained on July 10 and used to redeem some of its Brady bonds. The remaining Brady bonds were redeemed on July 17.

Meanwhile the Republic of Philippines sold $750 million in a two-part reopening of its sovereign bonds (Ba2/BB/BB), according to a market source.

The country reopened its 8% bonds due 2016 to add $300 million. The issue priced at 103.125 to yield 7.531% or 246.4 basis points over Treasuries. The deal priced tighter than revised price guidance, which was set at 7.532% to 7.568%.

Meanwhile the south-east Asian nation retapped its 7¾% bonds due 2031 to add $450 million. Those bonds priced at 99.25 to yield 7.819 % or 262.4 basis points over Treasuries. The deal priced at the tight end of revised price guidance, which was set at 7.819% to 7.842%.

Citigroup, Deutsche Bank Securities and Morgan Stanley were the bookrunners.

Philippines a success

The new deal out of the Philippines was described as "pretty successful" by a trader who focuses on Asian fixed income.

And that success can be credited to the size of the deal, in which the country capped the issue size to $750 million. Another positive was that the issue was timed right when the market had a decent tailwind.

There was selling when the deal was first announced in Asia Tuesday, the trader noted, adding that the new issue concession that was priced in was immediately re-established after the deal announcement, which all took place in Asia.

"Some dealers and hedge funds took prices down. But it only seemed to spark buying interest because immediately prices snapped straight back up again," he observed,

By the time the morning session kicked off in New York, everyone knew there was not a great deal of selling pressure.

"And the deal size was capped. That merely encouraged investors to put in massive orders," remarked the trader.

The deal was rumored to have attracted $10 billion to $12 billion for the book, of which 80% was probably padded, noted the trader, adding that "even so it was a sure thing because there had not been that much weakness on the announcement."

"There was $4 billion to $4.5 billion in the book before New York came in. Knowing the deal size won't grow they have to put massive orders in just to get some bonds," he said

In the secondary, the 2031 bond closed at 100.50 bid, 100.625 offered while the 2016 paper closed at 104 bid, 104.50 offered. Prior to the deal announcement, the 2016 bond was bidding at around 103.5 or 7.47% yield while the 2031 bond was bidding at around 99.75 or 7.77% yield.

The Philippines capitalized on the positive tone in the market, observed the trader,

"Its five-year credit default swaps are 35 to 38 basis point tighter than they were at this time last week," he said.

"It's six or seven tighter on the day: going out 194 bid, 199 offered, on a spread basis, opened in the New York morning at 200 bid, 205 offered. There have been some pretty strong moves."

Positive technicals

Despite the new supply, another source noted that technicals remain positive as investor positions stand at historical lows. August will see $3.4 billion in coupon and amortization payments while sovereigns' financing needs remain light.

"There is obviously still plenty of cash on the sidelines," noted the trader. "There has not been a lot of supply. Overall the tone is pretty solid."

Additionally, he commented that the market has been trading pretty well.

"The deals that have come and gone have traded nicely. The Colombia deal went well. The Uruguay deal went well. Panama went well," he told Prospect News.

EM spreads tighten

Emerging market debt saw a mixed session Tuesday, as U.S. equities posted gains while U.S. Treasuries ended the session lower.

The U.S. stock market saw a late afternoon rally on falling oil prices and on stronger than expected consumer confidence numbers, which helped lessen the sting from poor corporate earnings. However, the confidence data triggered a sell off in U.S. Treasuries.

Confidence among consumers was higher for the second straight month in July, a surprise to the market given soaring oil prices. The Conference Board said the index had jumped to 106.5 from 105.4 in the previous month. Investors interpreted that as a sign that the economy is may be heading for a soft landing.

At session's end, the Dow Jones Industrial Average index rose 52.6 points to close at 11,103.71 while the yield on the 10-year Treasury note stood at 5.06% from 5.04% late Monday.

Those sovereigns that are highly correlated to the performance of equities saw more support on the day than those names that are linked to Treasuries, such as Mexico, noted sources. But the effect was somewhat muted as prices traded in narrow ranges.

"We had a more neutral tone today [Tuesday] than we've had in the past days," observed Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

He added that there was slight uptick in most Latin American credits with the exception of Colombia and Mexico. Furthermore, Argentinean bonds were mostly flat for the day, which Alvarez noted as "a tale-tell sign that the market is drifting."

"And the high beta camp has been very mixed," he said.

At session's end, the JP Morgan EMBI global index saw its spreads tighter by two basis points at 200 basis points versus U.S. Treasuries, reaching a level it has not seen since May 17.

During the session, the Brazilian bond due 2040 added 0.10 to 127.45 bid, 127.55 offered. The Colombian bond due 2020 lost 0.25 to 135 bid, 135.50 offered. The Ecuadorian bond due 2030 moved up 0.25 to 100.25 bid, 101.25 offered. And the Mexican bond due 2026 lost 1.50 to 152.50 bid, 153.50 offered.

Overall, the market has been trading with a positive tone since last week's dovish testimony by Federal Reserve chief Ben Bernanke.

But the market has since squeezed out all of the juice from that event, which means that the asset class will likely trade sideways until the market can be pushed higher by another positive catalyst. And Alvarez cautioned it would be difficult to find such a trigger because most of the positive themes in the market have since run their course.

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