Emerging market debt steady on eve of Fed's decision; Ecuador rallies; Axtel issues new debt

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Jan. 30 - Emerging market debt scored a positive session Tuesday ahead of Wednesday's interest rate decision by the Federal Open Market Committee.

Meanwhile Ecuador saw another day of gains, shrugging off a downgrade by Moody's Investors Services and amid reports of violent political protests against congress.

In the primary market, Mexican telecommunications firm Axtel, SAB de CV sold an upsized $275 million offering of 10-year senior unsecured notes (Ba3/BB-) at par to yield 7 5/8%.

The deal, which was increased from $250 million, came in line with price guidance for a yield in the 7¾% area.

The notes are callable beginning Feb. 1, 2012 at 103.81. Up until Feb. 1, 2012 there is a make-whole call at 50 basis points.

Proceeds from the sale will be used for the partial payment of a $311 million bridge loan.

Credit Suisse was the bookrunner for the Rule 144A and Regulation S transaction.

EM steady

Emerging market debt was steady Tuesday as investors waited for Wednesday's rate announcement from the FOMC.

The Federal Reserve is expected to keep rates unchanged at 5.25% while maintaining a bias towards tightening. The FOMC's decision coupled with a heavy slate of economic data due this week is expected to give the market some direction, noted sources.

"For now, investors lack conviction while risk aversion is on the uptick," said an analyst.

At the close of Tuesday's session, the JP Morgan EMBI Global index rose by 0.10% while spreads widened by one point, underperforming the rally in U.S. Treasuries.

Among major benchmark issues, the Brazilian bellwether bond due 2040 added 0.20 to 131.15 bid, 131.20 offered. The Argentina discount bond due 2033 gained 0.60 to 114.90 bid, 115.50 offered. The Russian bond due 2030 moved up 0.13 to 111.25 bid, 111.625 offered.

Ecuador up again

Turning to Ecuador, the Andean country posted its second straight day of gains on news reports that the country is softening its tone on debt structuring.

According to the local newspaper El Comercio, finance minister Ricardo Patino Monday said that "creditors are not our enemies, they are our creditors. They have paper that is a little bit illegitimate in some cases, but that will be discussed in due time."

Another positive signal is that Patino will likely submit a budget to congress that will cover the entire debt service for this year, noted a market source.

But nonetheless, investors are skeptical that Patino would have a change of heart so quickly, he added.

Nonetheless, the country's debt continued to firm Tuesday, despite noisy civil unrest in the capital city of Quito, where hundreds of supporters of recently installed president Rafael Correa stormed the country's congressional building to demonstrate their displeasure with lawmakers who they feel are trying to block his efforts to reform the government.

The legislators had to be escorted by police as they evacuated the capitol building, parts of which were briefly occupied by chanting protestors armed with sticks and bottles. Police had to fire tear gas to quell the disruption and finally evict the demonstrators.

The protestors were demanding that the congress support Correa's call for a referendum to determine whether a national assembly should be convened to draft a new constitution containing sweeping governmental reforms the leftist president had advocated during his successful election campaign.

Correa has only limited support in the congress, and has denounced what he calls its "corruption." His government denied opposition charges that it had organized the protest and planned the attack on the legislature.

But the emerging bond market apparently shrugged off whatever unease it may have felt at the raucous turn of events in Quito, pushing Ecuador's bonds higher for a second consecutive day in the wake economy minister Patino's new, more conciliatory tone toward creditors.

Those bonds, including the benchmark 10% notes due 2030 had shot up anywhere from 6 to 8 points on Monday - the biggest gain in three months - with debtholders encouraged by Patino's assurances that he would like to have a "friendly" restructuring of the country's $11 billion of debt, rather than a confrontational one. Investors were also feeling more hopeful that Ecuador will make the scheduled $135 million coupon interest payment on the 10s that is due on Feb. 15.

In Tuesday's activity, the positive tone continued, with the 10s seen up another 2¾ points to 78.5, while the yield on the bonds dropped by another 48 basis points to 12.93%, the lowest it has been in some two weeks.

At the close of the session, Ecuador's spreads were tighter by 70 basis points while posting a 5.4% return.

Investors shrug off Moody's downgrade

However, a trader took a very blasé view over the latest movements in the country's debt, and also shrugged off Tuesday's downgrade by Moody's, which dropped Ecuador's foreign-currency debt rating and its foreign-currency country ceiling to Caa2 with a negative outlook, from Caa1 with a stable outlook previously, citing the likelihood that any restructuring Ecuador undertakes will be far from voluntary and will result in large creditor losses.

"That's been a constant in the market for the last few weeks," the trader said, "so I don't think anybody's really too flustered or excited about movements in Ecuador at this point - you know, it goes up a couple of points one day and then down a couple of points the next, based on whatever random comments come out of the politicians."

Referring to Patino's latest comments, the trader said "he said they might put a line item in the budget for debt service, which made people [feel] more positive - but also said it didn't mean anything [if the country didn't have sufficient money available for social spending]. It's emerging markets - so what can you say?"

The bonds still remain well below the mid-90s levels they held before the election of Correa, a charismatic economist who pledged major governmental and economic reforms during his campaign, and who has repeatedly denounced the country's debt burden, incurred by his predecessors, as "illegitimate" and "corrupt."

Correa and Patino have warned that Ecuador might default on its obligations if it came down to a choice of servicing the debt or funding the expansion of social welfare programs he promised the voters. The benchmark bonds tumbled down to the mid-60s when Patino on Jan. 17 said that Ecuador might pay only 40% of its debts, and Correa said his country would seek the advice of Argentina, which defaulted on nearly $100 billion of debt in 2001-2002 and which eventually forced its bondholders and other creditors to accept new bonds carrying lower nominal values and longer maturities than most of the defaulted old debt.

The prospect that Ecuador may follow the same path clearly concerns Moody's, which said that any such similar default could have "overwhelmingly negative consequences" for the economy.

Despite Patino's talk of a "friendly" restructuring that would work with the creditors rather than trying to cram one down on them, the ratings agency warned that "the odds of a successful voluntary restructuring are low given the reluctance of creditors to participate in an exchange prompted by a lack of willingness, rather than of ability to pay."

Moody's said that Ecuador's plan to restructure its external bonds is "purely based on ideology" rather than on economic necessity, since Quito has built up considerable resources from the oil windfall of the past few years.

The trader noted that oil prices were higher Tuesday, "so any of the oil-exporting countries, like Venezuela or Ecuador, will be generally viewed [by investors] a little more positively" when oil prices are heading upward.

Venezuela up on oil

And with oil prices doing just that - and strongly - on Tuesday, Venezuela's bonds were also seen on the upside, since oil is that country's main export commodity and the underpinning of most of its economy.

Its benchmark 9¼% bonds due 2027 saw their biggest gain in eight weeks, rising more than 2 points during the session before finally backing off a little from their intraday highs to end up about 1 5/8 points at 122. Their spread against Treasuries declined 11 basis points to 212 bps.

That rise in the bonds coincides with stronger oil, as the price of a barrel of sweet, light crude for March delivery shot up by $2.96 to $56.97 per barrel - well up from recent lows in the $50 area - in trading on the New York Mercantile Exchange. Prices got a boost from investor expectations that the Organization of Petroleum Exporting Countries will make good on its previously announced plans to prop up prices by cutting output across the multinational cartel, whose members include Venezuela.

The onset of genuinely wintry weather in much of the northern part of the United States following several weeks of unseasonably balmy temperatures and little real snow, particularly in the Northeast, is also a factor in the oil price rebound.

Mexico stable

Moving to Mexico, the country saw a positive tone on a spread basis, according to a market source.

In trading, the Mexico bond due 2026 was unchanged at 159.10 bid, 160.10 offered.

Overall, though, the EM trader said that Tuesday was "an amazingly dull day - I guess we're all waiting for the FOMC [Fed rate decision due Wednesday] and payrolls [data] to create some excitement."

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