Emerging market debt edges higher, Argentina bonds down on opposition to exchange plan

By Reshmi Basu and Paul A. Harris

New York, June 3 - With no visible guidance, emerging market debt drifted higher during Thursday's session while Argentina's bonds were knocked down for the second straight day on bondholders' opposition to the government's restructuring proposal.

Emerging market debt "drifted sideways" during Thursday's session, according to Enrique Alvarez, Latin American strategist at research firm IDEAglobal.

The JP Morgan EMBI Index fell 0.03%. Its spread to Treasuries tightened one basis point to 491 basis points during Thursday's session.

Trading this week was expected to shift into neutral ahead of the release of Friday's U.S. employment figures. Those payroll numbers may serve as a tip off as to how the Federal Reserve will act at its late-June meeting.

However, some downplay the significance of the numbers.

"The market may have a knee-jerk reaction depending on the strength of those numbers," said a trader. "But I don't think it will tell us how the Fed will act in the long run."

Meanwhile in primary action, two more corporates added to the pipeline.

The Philippines's largest power distributor Manila Electric Co. (Meralco) plans to issue $200 to $250 million five- to seven- year notes.

The deal is expected to price this summer.

And Telekom Malaysia sent out requests for proposals earlier this week for a potential $500 million of 10-year global bonds.

JP Morgan and Merrill Lynch & Co. are financial advisers.

Telekom Malaysia is seeking to acquire a 49% stake in Idea Cellular, India's largest wireless telephone company. The majority stake would go to Singapore Technologies Ltd.

The deadline for proposals is set for the week of June 7.

Argentina's bonds fall

The big news on Thursday was the nosedive by Argentina's bonds. The bonds fell on opposition from the Latin American country's largest bondholder group, the Global Committee of Argentina Bondholders, which said it would block the government's proposal to restructure $99.4 billion in defaulted debt.

Across the board, Argentina's bonds were slammed. The Boden bond due 2012 fell 1.15 points to 64.35 bid, 64.60 offered. The benchmark bond due 2008 dropped 1¼ points to 27¾ bid, 29¾ offered. And the bond due 2017 sank 1½ points to 30½ bid, 32 offered.

Nonetheless, Argentina's component of the JP Morgan EMBI Index rose 0.24%. Its spread to Treasuries tightened 67 basis points to 4,839 basis points.

"There was still enough confusion over the release by the government," said a source.

"But overall foreign investors feel that the proposal did not go far enough.

"The inclusion of the PDI [past-due interest], which is a positive and constructive event, is not going to be paid up front.

"The haircut on the existing debt prevails at 75%," added a source.

"You have seen the response from the largest organization of the debt - rejection of the proposal for the most part."

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 pay overdue interest.

Some have said that the rebuff to bondholders is a normal part of the negotiation process. But investors' disappointment is natural given that under the latest proposal holders will recoup very little of the face value of the bonds.

According to an investor, Santander Investment Securities has calculated that holders would be compensated on average at the rate of 11.6 cents on the dollar.

"The government is saying that this is the last proposal that they are going to give to investors, while investors are demanding more," said the investor.

"My feeling is that this is not the last proposal.

"We are going to see more pressure from the investors community to get better terms," added a source.

"There is still a lot of uncertainty. The local press was being a lot more positive about the proposal.

"Some of the items within the proposal are not clear enough," the source said.

And investors have said that the Argentine government has taken much too long to resolve the issue.

However, the government also faces a time crunch with its International Monetary Fund review looming.

"President [Nestor] Kirchner now finds himself caught between the need to stick to his pledge to stick with a 75% discount to save political face and the need to rapidly resolve this issue before the quarterly revision of the program with the IMF at the end of this month," according to Banc of America Securities' "Situation Room" daily report Thursday.

Ecuador up, but expect volatility ahead, says strategist

Ecuador's debt continues to firm up, as capital markets appear to be pleased with President's Lucio Gutierrez choice of Mauricio Yepez to replace finance minister Mauricio Pozo. However, Gutierrez's presidency hangs in the balance. And in order to stay in power, he may have to displease Wall Street to please opposition forces.

"The president [Gutierrez] has been more and more isolated in Congress," said a Latin American debt strategist at Refco EM.

"As a consequence, the opposition has been asking for his replacement.

"As president Gutierrez struggles to regain some type of coalition within the government, he had to give certain concessions to the opposition. I believe Minister Pozo was one of them," added the debt strategist.

Yepez is a very well known economist and has been in the central bank for four years. He also has been involved with negotiations with the IMF. He has a very good reputation with the international community and the local community, according to the debt strategist.

Nonetheless, the outlook does not look good for Ecuador as Gutierrez has little power to make decisions and push through reforms.

"We're going to see more and more pressure from the opposition to obtain concessions that investors believe are negative. Expect more volatility in the coming weeks," predicted the debt strategist.

In Thursday's session, Ecuador was up. Its component of the EMBI Index rose 0.12%. Its spread to Treasuries tightened 11 basis points to 897 basis points.

Chavez rumored to quit

Meanwhile in Venezuela, political noise from the recall referendum aimed at president Hugo Chavez is getting louder.

"The process of validating the signatures to obtain a political referendum took place last weekend. Without any formal confirmation from the government or the National Electoral Commission, there were rumors that the validation was overwhelming," said the debt strategist.

"The government is going to have to agree with the referendum. The commission will set a date for the referendum to take place in the first or second week of August."

However, rumors came out Thursday morning that Chavez may quit to bypass the referendum - and then run again for the presidency.

"Locals are saying that if this is the case, and if president Chavez agrees to take the referendum, he has another route to take and this may give him more leverage in the process," said a source.

"And that is to quit and leave the presidency and not participate in the referendum.

"If he takes such an action, he can run for the presidency again when elections are called.

"If he goes through the referendum and loses, he will not be able to that," added the source.

If he avoids the referendum and participates in national elections, he could be back in office given the lack of unity among the opposition forces.

"The fact is that the opposition is so divided and they don't have a clear candidate that could unite the opposition. This might be an advantage to him," noted a source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.