Emerging market debt trading quiet; Argentina flat, Ecuador rebounds

By Reshmi Basu and Paul A. Harris

New York, June 2 - Emerging market debt drifted quietly into positive territory during Wednesday's session as some investors expressed their disappointment over Argentine's debt restructuring proposal.

"The session opened pretty quietly. Brazil was well bid with the C bond 89.125 bid, 89.25 offered, the 2040 wrapped around 90," said a sell-side source.

The major markets such as Brazil, Russia and Mexico were all up by the end of the session.

"Even Argentina is slightly up, on FRBs a quarter to three-eighths of a point," said a portfolio manager.

"But as a spread it reads much better because Treasuries have not done that well."

Some investors said that trading would be quiet ahead of the release of Friday's U.S. employment numbers.

But one source said the numbers would offer investors little direction.

"I think don't think people know what to do with it. I don't have a strong view one way or another," said a buy-side source.

"Most everything is tightening in. [It's] relatively quiet, [a] hangover from the weekend, [a] hangover from all the abuse the market has taken over the past few months," he added.

Meanwhile in primary news, two deals were added to the pipeline, both potentially of significant size.

Belize is expected to launch a $250 to $450 million sovereign bond due 2019 via Deutsche Bank and Morgan Stanley.

The transaction will initially be presented to investors on a "non-deal" roadshow. Actual timing for the bond sale was not available.

Also adding to the pipeline is Jardine Matheson. The Hong Kong-based conglomerate is expected to issue a $500 million bond.

HSBC Bank and UBS Securities are the bookrunners on the deal.

Mixed reviews for Argentina's restructuring

Meanwhile, Argentina's new restructuring proposal drew criticism from investors even though it went some way to meeting their previous demands.

In a press conference Tuesday, economy minister Roberto Lavagna announced a new proposal to restructure $99.4 billion in defaulted bonds. Most significant was that the government would assume past interest payments.

However, some investors are still critical of the new proposal that leaves bondholders looking at a loss.

"Argentina is getting mixed reviews on the debt offer with comment probably pushing prices lower in the near term," said the sell-side source.

The buy-side source was surprised that the Argentine government took such a hard line stance on the proposal.

"Although at the same time, the terms are fairly aggressive in Argentine's favor," said the buy-side source.

"But I think they are reasonable relative to where they were.

"My analysis has always been to get it down to reasonable debt to GDP numbers, you're going to have to take a 75% haircut on the external debt, assuming that none of the multinationals take a hit and internal stuff survives with minimal hits.

"Foreigners have to pay," he added.

Investors had previously balked when the Argentine government said it intended to pay 25 cents per dollar of face value at an International Monetary Fund meeting in Dubai last September.

"It was a better proposal than they offered in Dubai," said the portfolio manager of the latest announcement.

"But is it a good proposal? For someone who owns an Argentine bond and bought it at par, it's not a good proposal.

"Of course everyone by now knows that they'll never get par.

"I think everyone was counting on getting close to 30%, with accrued interest. And I think they're trying to improve on the interest side," added the portfolio manager.

While the proposal is a step up from the previous offer, the largest group of Argentine bondholders rejected the proposal.

Committee rejects offer

The Global Committee of Argentina Bondholders, which represents investors holding about $37 billion in bonds, said they were "extremely disappointed" in a statement.

"I think this deal isn't going to sit well at all with bondholders, but the important thing is not whether bondholders like this deal, but whether bondholders expect that the government will continue to improve its offer," said an emerging market analyst.

"I think given current market prices, it's pretty clear that investors expect Argentina to improve its offer again as negotiations continue," added the emerging market analyst.

Some said the new proposal was president Nestor Kirchner's attempts to show good faith and regain the country's standing with Wall Street.

The government said it would issue $38.5 billion of new bonds.

"In theory a restructuring does help Kirchner go back to the capital markets, but only because it's impossible to tap the markets while you're in default," said the emerging market analyst.

"I doubt Argentina will want to - or would really be able to - tap the markets any time within two to three years after the restructuring is complete."

Argentina would have to pay heavily if it wanted to raise additional money, according to the buy-side source.

"I think it's more about dealing with multinationals and self-respect," added the buy-side source.

After rising a quarter across the board, Argentine sovereign issues traded flat to lower during Wednesday's session.

Ecuador rebounds on new finance minister

Ecuador slid Tuesday on news that Wall Street darling finance minister Mauricio Pozo resigned. But the Latin American nation rebounded when it was announced that Central Bank economist Mauricio Yepez would replace Pozo during Wednesday's session.

While Pozo's resignation was a blow the market, Yepez is "a reasonable alternative," according to the buy-side source.

"The market appears to be stabilizing and doing a little better," he added.

The portfolio manager agreed with the decision.

"It's not negative," the investor said. "Yepez, the head of the central bank, is in.

"Yepez is very much like Pozo - well known to the IMF and very much in line with the program.

"I don't see that as being a negative for Ecuador," added the portfolio manager.

Venezuela referendum

Meanwhile the saga continues over the recall referendum on Venezuelan president Hugo Chavez.

The left-wing president has ordered an inquiry into whether opposition forces falsified identities to reconfirm disputed pro-referendum signatures in official checks held this weekend.

The inquiry may delay the referendum ruling.

"It's a soap opera," said the portfolio manager.

If the referendum is to make any difference, it must occur before Aug. 19.

"If it happens later than that and it passes - meaning that they vote the president out - he can pass power on to the vice president, who is not an elected figure but is selected by the president," the portfolio manager told Prospect News.

"So what the president could do is name a friendly figure as vice president, who could then name Chavez as vice president. Then the new president could resign and you would have Chavez again.

"That is probably what would happen if the recall referendum took place after Aug. 19."

The Carter foundation and the Organization of American States are pressing that the referendum takes place before that date.

"They are pressuring both the president and the National Electoral Commission to issue an opinion rapidly on the signatures on the recall petition which have been questioned," said the portfolio manager.

"We've had political noise from Venezuela for over a year and a half.

"It hurt in early 2003. But now everyone is looking at Venezuela as an oil producer, which seems to overshadow the political noise. Of course the political noise still makes you uncomfortable."

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