Emerging market debt nipped by U.S. growth worries, lower commodities; three corporates issue talk

By Reshmi Basu and Paul A. Harris

New York, Sept. 11 - Emerging market debt retreated Monday as risk aversion ratcheted higher amid concerns as to the health of the U.S. economy. Meanwhile three corporates issued price guidance.

Market sentiment continued to erode on signs of a potential slowdown in the United States and elsewhere.

In a domino effect, fears of weaker global growth brought down commodities, which resulted in wider spreads for emerging markets. In particular, export economies in Latin America saw dollar prices on their debt fall and spreads kick out, according to market sources.

Oil exporters such as Venezuela posted losses as crude oil prices tumbled after OPEC said it would keep oil production at current levels, despite an increase in inventories and lower demand.

During the session, the Venezuelan bond due 2027 shed 1.70 to 120.60 bid, 121 offered.

Elsewhere, Mexico's bond due 2026 lost 0.50 to 157.50 bid, 158.50 offered. And the bellwether Brazilian bond due 2040 shed 0.25 to 129.60 bid, 129.70 offered.

Ecuador down

Yet again, Ecuador earned the distinction as one of the market's underperformers as several factors, such as lower oil prices and political noise, worked against it.

"What you have is a sentiment shift," according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"There are a number of things that are occurring domestically in Ecuador that are worrisome," such as the upcoming presidential election, he remarked.

Center-left candidate Leon Roldo is leading in polls ahead of the October election, but there is a large universe of undecided Ecuadorian voters, which means that anything could happen. Roldo has worried Wall Street with his comments regarding debt restructuring and his opposition to paying down the country's debt during his possible administration.

Adding consternation, former finance minister Rafael Correa, who has close ties with Venezuelan president Hugo Chavez, has moved up in support heading into the October election.

"I tend to think we are going to see a race towards populism in Ecuador and the closer we get to the election, then people will start to lean in that direction overall," Alvarez said.

"You are going to have a very similar experience to Peru" where neither of the two candidates was favored by Wall Street, he said, referring to Peru's dead-heat election, in which saw leftist and a former military officer Ollanta Humala and former president Alan Garcia faced off in a run-off election in June. Garcia won the election with 52.62% of the vote.

Additionally, Alvarez pointed out that there are concerns surrounding the negotiations between state-run oil company PetroEcuador and Los Angeles-based Occidental Petroleum Corp. In May, the Ecuadorian government took over the oil fields operated by Occidental, which is demanding a payment. Both were expected to enter arbitration, but Ecuador has yet to name an arbiter.

During the session, the Ecuadorian bond due 2030 gave up 0.50 to 97.15 bid, 98 offered.

EM players

Meanwhile, there are two types of investors currently playing in the market, observed Alvarez.

"You have the position players that are more anxious about their holdings here," he said, noting that this group is concerned as to whether the market can hold on to such tight levels.

"Then obviously, you have the technical hedge fund-type players...they understand that the sentiment is starting to shift somewhat, he remarked," adding that those players may be readjusting their positions in anticipation of a dip.

Last week the asset class came under pressure on renewed worries over inflation. That coupled with a heavy dose of new issues as well as announcements of three sovereign debt buybacks dragged down the market.

Nonetheless, as the market digested new supply, it was able to maintain important spread levels, according to Alvarez. The JP Morgan EMBI+ closed out Friday's session at 193 basis points versus U.S. Treasuries, which is still a relatively expensive level, noted market sources. Prior to the prolonged sell-off that started in mid-May, the EMBI+ index was dancing around the 186 basis point range.

Three corporates set talk

The supply hangover also continues to remain in the market as more issuers are expected to tap this week.

On Monday, three more corporates issued price guidance. Ukrainian Bank Khreschatyk set price talk for a dollar-denominated offering of loan participation noted due 2009 (B2//B) at 9% via Deutsche Bank.

Out of Brazil, Brazil's Banco Mercantil set price talk for a dollar-denominated offering of 10-year lower tier II subordinated notes (B3 expected) at a yield in the 10¾% area.

The anticipated issue size is $100 million.

Banco Finantia and ING are the lead mangers for the Regulation S only notes.

Also from Brazil, Banco Votorantim set initial price guidance for a $200 million offering of 10-year notes (Ba2/BB/BB+) in the area of 6¾%.

Citigroup and BNP Paribas are bookrunners for the Rule 144A/Regulation S offering, which will be sold via the issuer's Nassau branch.

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