Emerging market debt flat despite equities rally; Petrobras Energia sells $300 million in new debt

By Reshmi Basu and Paul Deckelman

New York, May 2 - Emerging market debt posted a sluggish session Wednesday, despite a strong performance by U.S. equities.

Meanwhile Turkey continued to see a relief rally while Venezuela slid as president Hugo Chavez announced that the Latin American nation would withdraw its membership from the World Bank and the International Monetary Fund.

In the primary market, Petrobras Energia SA sold $300 million of 10-year series S notes (Baa2/BBB-) at 99.617 to yield 5.926%.

Proceeds from the sale will be used for working capital, for investment in fixed assets, for refinancing debt and to offer capital to associated companies

HSBC and Morgan Stanley were lead managers for the transaction.

The Buenos Aires-based issuer is a subsidiary of the Brazilian state-run oil company Petróleo Brasileiro SA, which is backing the debt.

Adding to the pipeline, Shinhan Card Co. Ltd plans to sell a $400 million offering of five-year senior unsecured notes (BBB+//BBB+).

ABN Amro, Bank of America, BNP Paribas and Goldman Sacks are lead managers for the Regulation S deal.

The Seoul-based issuer is a credit card company and part of Korea's second largest financial services provider, Shinhan Financial Group.

A roadshow is expected to take place in Asia and Europe next week.

Coming from Mexico, media company Grupo Televisa, SAB plans to sell a Mexican peso-denominated offering of 30-year senior unsecured notes (Baa1/BBB/BBB+).

Price talk has been set at the 10% Mbono due 2036 plus 68 basis points area.

Holders of the notes will have to option to receive payments in U.S. dollars at the prevailing exchange rate or in Mexican pesos.

Goldman Sachs and HSBC are bookrunners for the Rule 144A and Regulation S deal.

Lackluster session

Overall emerging market debt was lackluster Wednesday even as U.S. stocks continued to roll ahead.

At the end of the session, spreads for the JP Morgan EMBI Global were flat on the day.

During trading, the bellwether Brazilian bond due 2040 gave up 0.05 to 135.90 bid, 135.95 offered.

In other news, Turkey's bonds were being quoted at better levels in a continuation of Tuesday's relief rally, as political tensions over the choice of the next president appeared to have eased, at least for the moment.

The local-currency lira-denominated bonds due 2009 - which saw its yield widen out sharply in trading Tuesday in Turkey ahead of a supreme court ruling on the election process - were seen going the other way on Wednesday, tightening 11 basis points to 9.14% - essentially leaving those bonds back where they were before tensions came to a head.

Other Turkish financial markets were also seen doing better Wednesday, as the country's investors breathed a sigh of relief.

Following Tuesday's ruling by the court, invalidating a parliamentary vote which left foreign minister Abdullah Gul of the ruling Justice and Development Party, or AKP, close to the amount of votes he needed to become the country's next president, the country's prime minister, Recep Tayyip Erdogan - like Gul, a member of the AKP - announced early general elections, and proposed constitutional changes that would leave the choice of the president in the hands of the voting public, rather than parliament. That body could enact the constitutional changes this week or next, and the elections are tentatively slated for June 24.

Erdogan also publicly appealed to the populace for unity and calm.

The moves were seen by observers as gambits aimed at defusing the tensions between Turkey's Islamists and its secularists. Gul and Erdogan were formerly members of a now-banned Islamist party, and the prospect that either might succeed the staunchly secular incumbent, Ahmet Necdet Sezer, whose term of office expires on May 16, raised the hackles of secularists who fear the growing Islamist movement and its possible effects on Turkish society. Turkey's military leaders warned that they would defend the secular nature of the government.

While the court ruling that the parliamentary vote was invalid on the technical grounds of lack of a proper quorum headed off an immediate showdown between the military and other secularists on the one hand and Gul and Erdogan on the other, the controversy has caused other problems for Turkey - including possible damage to its bid to join the European Union, which viewed with disfavor the military's veiled threat to take action against the civilian government if it didn't like the outcome of the presidential selection process.

While the presidential post is largely ceremonial, its holder has the power to veto legislation he considers to be in conflict with the constitution. Secularists notes that Turkey's first president, Kemal Attaturk, who helped found the modern Turkish state after the fall of the Ottoman Empire eight decades ago, was a staunch believer in the separation of mosque and state.

Venezuela lower on possible IMF exit

Elsewhere, Venezuelan bonds were lower as investors reacted to president Hugo Chavez's threat to pull his nation out of the International Monetary Fund - a move that could spark a technical default on the bonds. The indentures of a number of its bond issues include such a default should Venezuela leave the organization.

Chavez sought to calm investor fears of such an occurrence, assuring the bondholders that Venezuela would continue servicing the debt even after it pulls out of the 185-member global lending agency, which he considers to a pawn of the United States.

Venezuela's benchmark 9¼% bonds due 2027 were quoted more than ½ point lower at 122.188, and their yield widened out by about 4 or 5 bps to 7.161%. At another desk, the bonds were seen as low as an even 122. Total returns on the country's debt, as measured by JP Morgan's widely followed EMBI+ index, declined by 0.60%, as the average spread between the Venezuelan bonds and U.S. Treasuries widened by 6 bps to 228 bps.

Several investment banks reacted negatively to Chavez's threat and the possibility of a default, even if only technical. Bear Stearns & Co. downgraded its recommendation on the sovereign bonds to "underperform" from "outperform" previously. Meanwhile, RBC Capital Markets said that as much as $21 billion of debt could be affected by a technical default and recommended in a research note that investors "steer clear" of the country's bonds until uncertainties are lessened.

Bondholders would not have a reason to accelerate bonds payments since most Venezuelan bonds are trading above par, wrote Alberto Bernal, fixed income analyst at Bear Stearns.

"In our view, the two logical ways to play this are: a) to buy the low dollar price bonds (2010, 2016, 2020 issues) and to sell the high dollar price bonds (2013, 2018, 2017, 2034 issues) or b) to buy Venezuela CDS," he noted.

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