Emerging market debt softer as risk worries continue; Vneshtorgbank sells new debt

By Reshmi Basu, Paul Deckelman and Paul Harris

New York, March 2 - After a volatile week of trading, emerging market debt recorded another choppy session Friday amid thin volumes.

Meanwhile in the primary market, Russia's VTB Capital SA (JSC Vneshtorgbank) sold a €1 billion offering of two-year floating-rate notes (A2/BBB+/BBB+) at par to yield Euribor plus 60 basis points.

Barclays Capital, BNP Paribas, Deutsche Bank and HSBC managed the Regulation S sale.

Moscow-based Vneshtorgbank is a Russian state-run foreign-trade bank.

Also coming out of Russia, OJSC Bank Petrocommerce reopened its 8¾% bullet notes due 2009 (Ba3/B+) to add $125 million.

The retap priced at par to yield a spread of 422 basis points more than Treasuries.

ING and Merrill Lynch were joint bookrunners for the Regulation S reopening of loan participation notes, which were issued via Petrocommerce Finance SA.

On Dec. 7, 2007, Petrocommerce placed a $300 million offering of the original notes at par to yield 8¾%. With the additional issuance, the total size of the deal stands at $425 million.

Also Friday, Lithuania-based wireless communications operator Bite Lietuva priced a restructured €300 two-part notes transaction.

Issuing via special purpose vehicle Bite Finance International BV, the Vilnius-based company priced an upsized €190 million tranche of seven-year senior secured floating-rate notes (B3/B/B) at par to yield three-month Euribor plus 350 basis points.

The tranche was upsized from €185 million.

The company also priced a downsized €110 million tranche of 10-year senior subordinated floating-rate notes (Caa2/CCC+/CCC+) at par to yield three-month Euribor plus 675 basis points.

The subordinated tranche was downsized from €115 million.

Deutsche Bank was the bookrunner for the Rule 144A/Regulation S issuance. Calyon Securities was the joint lead manager.

High demand for Bono del Sur

In other developments, locals are whispering that there is around $12 billion to $15 billion in orders for the Bono del Sur, the joint bonds issued by Argentina and Venezuela, according to a market source.

Last November, the inaugural deal saw 56,000 investors. The remarkable increase in demand for the second tranche suggests there is real demand for U.S. dollars from the local private sector.

Results of the sale will be released on Monday. March 5.

EM sees thin volumes

Emerging market debt posted another day of losses amid light trading volumes as high beta names led the pack of decliners.

Since Tuesday, the market has seesawed as it faced a confluence of events such as Tuesday's plunge by the Chinese equity market as well as U.S. economic data, including the surprisingly soft durable good report that was seen pointing to a slowdown in the U.S. economy.

A sell-off in global equities this week set the tone for a bearish week, which triggered a reduction in risk appetite. In the EM universe, higher beta credits bore the blunt of the sell-off.

Concerns over the potential unwinding of the carry trade and the U.S. growth story have resulting in the ratcheting up of risk aversion in the emerging market category, although one source stopped short of describing it as a "panic selling."

"The market is re-adjusting itself and it needed some sort of consolidation," remarked a buyside source.

Nonetheless, the source added that he would remain on the sidelines, believing that the market has not bottomed out yet.

Cautious Asian trading

The Asian trading session Friday ended on a more soothing but cautious note Friday amid light trading volumes, according to a market source.

The lack of confidence in the credit market echoed the sentiment in Asian equity markets, which failed to push through a convincing performance.

Furthermore, investors remained more inclined to reduce risk than to buy on weakness, added the source.

On the Asian high-yield front, corporates underperformed sovereigns.

Turning to the New York session, the debt market remained cautious, as investors stayed on the sidelines.

Emerging market bonds continued to mostly weaken, with spreads widening out as investors took their cue from the continuing turmoil in the global financial markets in general and on Wall Street in particular.

The average spread on EM debt versus U.S. Treasuries widened out by 7 basis points, as measured by the widely followed JP Morgan EMBI+ Index, and now stands at 193 bps. Little more than a week earlier, on Feb. 22, the index had hit its record low point of 164 bps.

A trader in Latin American issues said that generally his market was "pretty soft, following the equity markets, the same as during the rest of the week," ever since Tuesday's meltdown.

He said that his market had "pretty much followed what the U.S. equities did during the whole day."

For the third time in four sessions, Wall Street ended on the downside Friday, pulled down by investor fears about the overall health of the U.S. economy - concerns which were aggravated by the release of data showing a steep fall in consumer confidence. The bellwether Dow Jones Industrial Average lost 120.24 points to close at 12,114.10, its lowest point since Nov. 10, while other broader indexes were down as well.

The trader said that emerging market spreads over U.S. Treasuries, which had widened all week on a combination of EM retreating while Treasury prices rose in a classic flight-to-quality reaction by the financial markets, saw more of the same on Friday. He estimated a widening of between 5 and 10 bps.

He saw no particular names standing out as noticeable underperformers, "just the whole market."

Among benchmark names, the Turkish bond due 2030 shed 0.25 to 152.38 bid while its spreads widened by 2 basis points versus Treasuries. The bellwether Brazilian bond due 2040 gave up 0.20 to 133.10 bid while its spread widened by 2 basis points versus Treasuries. The Russian bond due 2030 was unchanged at 113.38 bid.

In the corporate market, the trader said, little was going on. "It is not the environment for anyone to try to bring a transaction," he warned, noting this past week's news that the Province of Buenos Aires had postponed its planned sale of $425 million of bonds due 2029, due to market conditions.

Mexico's peso bonds up

One species of emerging markets debt which seemed to buck the overall heavier trend and pushed up smartly were Mexico's peso-denominated bonds, which firmed on news that analysts expect the country's interest rate to fall to a 3.64% rate by year-end, inside the Banco de Mexico's target range of 2% to 4%.

There had recently been fears in the market that inflation could top that 4% mark, which would force the central bank to raise interest rates - a step it had threatened the previous week, causing a tumble in its bonds.

But in Friday's dealings, with the possibility of more moderate inflation, the yield on country's benchmark 10-year peso fell by 6 bps to 7.90%, while its 20-year bonds were yielding 8%, also a 6 bps drop. The price of the former bond rose 0.379 point, while the latter was up 0.642 point.

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