Emerging market debt trades higher on rumored Brazil upgrade; oversubscribed KDB prices

By Reshmi Basu

New York, July 13 - Emerging market paper firmed on Tuesday on rumors that Brazil was in line for a sovereign upgrade.

"The market was generally lower off U.S. Treasuries in the early going," said Enrique Alvarez, Latin American debt strategist for think tank IDEAglobal.

"It turned around in the afternoon.

"It appears that there is a rumor out there regarding some upgrades in Brazil. And that seems to have propelled prices higher," he said.

The Brazil bond due 2040 was up 0.35 to 96.35 bid Tuesday while the C bond was unchanged at 93.375 bid.

The Russian bond due 2030 was up 0.375 to 91.875 bid.

The JP Morgan EMBI index rose 0.2% during Tuesday's session. Its spread to Treasuries tightened seven basis points to 477 basis points.

In other trading, Brazilian corporates fared better Tuesday but "not by a whole lot", according to an emerging markets analyst. In general, corporates were up a point to a point and a half.

"Market sentiment in the market is stronger today [Tuesday].

"There was some sell-off last week. And people are coming back from vacation so there's a little catching up to do," he said.

Two Asian deals price

Meanwhile in primary news, Asia continues to be the hot spot for investors.

Korea Development Bank priced an oversubscribed $1 billion of five-year global bonds (A3/A-) at 99.683 to yield Treasuries plus 115 basis points.

The two-times oversubscribed deal came at the tight end of initial price talk that put the spread at 115 to 120 basis points.

Barclays Capital, Credit Suisse First Boston and HSBC Holdings plc ran the books.

Korea Southern Power (KOSPO) priced $150 million of 10-year notes (A3/A-) at 99.221 to yield Treasuries plus 138 basis points.

Barclays Capital and ABN Amro Holding NV were bookrunners for the Regulation S deal.

Also out of the Asian region, China Export Import Bank of China will hit the road Friday to market its dollar-denominated 10-year benchmark deal (A2/BBB+ expected).

Marketing begins in Hong Kong, moves to London on Monday and then goes to New York next Tuesday.

Deutsche Bank, Citigroup, Goldman Sachs, and HSBC are running the Rule 144A/Regulation S deal.

Jamaica prices €200 million

Away from Asia, the Government of Jamaica priced €200 million of 11% notes due 2012 (B1/B) at 99.50 to yield 11.097%. Deutsche Bank and Commerzbank ran the books for the Regulation S only deal.

Adding to the pipeline, Evraz Securities SA is expected to price $200 million of five- to seven-year notes (B3/-/B expected) during the week of July 19.

The notes will be fixed-rate, guaranteed and non-callable.

Credit Suisse First Boston and ING are running the Regulation S deal.

Evraz Holdings is a Russian steel group.

Investors await Friday's CPI data

Overall, market sentiment is currently seen as positive. But the tone is only cautious optimism as investors look for the release of Friday's United States consumer price index numbers.

"Our sense is that if we can get to the CPI number on Friday and we get something market-friendly, the strong tone continues," said a market source.

"We have Petrol Ofisi right now in the market from Turkey and PTT from Thailand. And both of those deals are going quite well.

"It looks like KDB went pretty well, although they offered quite a yield pick-up to do it. Maybe that's not quite so good of an example.

"The Brazil deal was rather piggish at first," said the syndicate source.

"It didn't look like it was going that well, but it's done okay since. It's sort of come back.

"In general, the tone isn't bad," said the source.

Supply absorbed

Despite massive deals, the market has absorbed the supply issued in July. But each deal has to be taken on its own merits, said the source. The Brazil bond due 2014 is a good example.

"I think investors were a little surprised at the time when the deal was announced - that maybe it was coming too soon on the heels of the previous deal.

"And I think that contributed to some of its softness," said the source.

The bond has since performed slightly better, boosted by the market performance.

"I don't think that the deal was initially in good shape, but I think it got built up by the market.

In general, new issues are getting done. Investors are weary of a flood of supply but nonetheless people seem to be encouraged by what they are seeing, according to the source.

"It's a question of what are the issuers are in need of. With the majority of sovereign issuers done this year, some sovereigns may decide to start to prefinance for next year.

"Other than Brazil and Turkey, the big sovereigns are done.

"It tends to be a little more opportunistic in what issuers are looking to do," noted the source.

However, the source said Asian issuers will surely tap the capital markets -although they are slightly different because many have investment-grade ratings.

"I think investors are cautious and mindful that too much supply could wreck the positive tone in the market.

"They are cautious in terms of what they are looking at," noted the source.

Peru's $1 billion plans

The government of Peru plans to issue $1 billion in bonds to prepay Paris Club debt.

The strategy is puzzling, according to an emerging market analyst.

"I find the whole issue very strange," said analyst.

"Peru presumably pays lower interest rates on its PC debt than it would on a new bond, so why would they do this transaction to save money?

"It would provide some cash flow relief - the PC loans are amortizing now, whereas they could probably sell a 10Y bond - but that's all.

"So the transaction is nothing more than an attempt to extend maturities, but it will cost them dearly - through the increased yields they'll pay on the new eurobonds sold to finance the PC loan prepayment - to get this transaction done.

"And, as you say, it's not at all clear that Peru would be able to sell that much.

"$500 million is more realistic given current market conditions, although it appears they're going to wait until early next year to tap the market," noted the analyst.

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