Brazil reopens for €250 million; Venezuela launches Brady exchange; Mexico prices $1.5 billion

By Reshmi Basu and Paul A. Harris

New York, Sept. 22 - Latin American paper hit the capital markets with about $1.8 billion equivalent of new issuance Wednesday.

Brazil added €250 million to an existing euro issue while late in the day Mexico priced $1.5 billion of 30-year bonds.

And Venezuela announced an exchange offer for some of its existing Brady bonds in which it will issue new 10-year global bonds and then sell additional global bonds for cash up to a total of $1.5 billion of the new bonds.

"Trading volumes were high during Wednesday morning," said a New York-based trader.

But, he added: "Things definitely got quiet around 12 [p.m. ET]"

The announcements from Venezuela and Mexico generated trading activity, according to the trader.

"People that were nervous of supply were selling before supply came in. People were adjusting portfolios and boom, ended, done."

But the new supply remains a non-issue as technicals remain strong, said the trader.

"There are some people who are concerned, but being that the [U.S.] Treasury market continues to rally and the U.S keeps on showing a weak economy, I think you will continue to see new money coming in that absorbs that new money supply."

Brazil prices

The Republic of Brazil reopened its 8½% bonds due 2012 (B1/BB-/B+) to sell €250 million. The retap priced at 101.875 to yield 8.17%.

Dresdner Kleinwort Wasserstein and UBS AG were joint bookrunners for the Regulation S deal.

"I think yesterday [Tuesday] there was a little noise in the market about potential dollar supply, so I think you probably had different banks that were showing them different alternatives, testing one versus the other," said a senior sell-side official.

But since Brazil tapped the euro market instead of the dollar-denominated market, it took a little weight off the dollar market, albeit a strong market, said the source.

"Investors are even more comfortable if they were sitting there and saying 'Gee, I'll wait and spend my cash on new issues.'

"Then to realize it's not coming immediately and maybe they'll just buy in the secondary."

Brazil chose a good time to tap the market, given the strength of the emerging market rally, according to an emerging market analyst.

"It was certainly a good time to go to the market - in a few weeks, all the sovereign and corporate EM issuance will have saturated the market. So Brazil made the right decision and went ahead and closed out its 2004 financing program," he said.

"Nobody knows if the supportive external conditions - especially low UST yields - are going to continue for much longer, so I think Brazil was wise to strike while the iron was still hot," he said.

But Brazil is due for some spread widening if and when U.S. interest rates start to turn around, he noted.

"The market is overweight in Brazil and any softness in fixed income in general would lead investors to rush to take profits.

"That doesn't mean Brazil would face a massive spread widening, but 25-50 bps might not be unreasonable if 10-year U.S. rates back up by 25 bps or so," he added.

Earlier in the month, Brazil priced the original upsized €750 million of eight-year notes at 98.88 to yield 8.7%. The deal size was increased at pricing from €500 million and attracted more that €2 billion in orders. With the latest addition, the total size is now €1 billion.

In trading Wednesday, the Brazil C bond lost a quarter of point to 99 bid while the bond due 2040 fell 0.90 to 113 bid.

Venezuela's exchange

The Bolivarian Republic of Venezuela announced a maximum $1.5 billion 10-year global bond sale in exchange for select Brady bonds and for cash via Barclays Capital and Merrill Lynch (for full details see report on page 1 of this issue).

The exchange will be carried out through a dutch auction.

"They are trimming out amortizations that are coming due over the next few years, so that is good," said the sell-side source.

But the planned exchange has put pressure on the bond due 2013, said the source.

Meanwhile the Venezuela bond due 2034 added 0.10 to 100.10 bid.

Mexico prices $1.5 billion

Mexico priced $1.5 billion 30-year bonds to yield6.88% or 210 basis points more than U.S. Treasury bond.

Proceeds will be used to fund the nation's 2005 needs.

"Mexico hasn't been in the market with a broad dollar deal since the beginning of the year," said the sell-side source.

Bear Stearns and Morgan Stanley ran the deal.

Mexico's bond due 2008 lost 0.10 in trading to end the day at 115.05 bid.

Frothy market

As current spreads approach January levels, new paper is not cheap. According to the senior sell-side source, there are simply no supply worries in this market.

"I think people are cautious. But at the same time, everyone recognizes that right now what is difficult is getting the paper," added the source.

Some investors are concerned that with spreads so tight, a market correction is unavoidable.

"It's always easy to say that there is going to be a correction at some point, but the question is when," said the sell-side source

"I think right now, most investors in our market seem to feel like a market correction will be more driven by something external."

Some of the potential triggers include the performance of the U.S economy, economic data and investors' outlook on U.S. interest rates, said the source.

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