Venezuelan paper scores on bond exchange; SEC seen giving Argentina the green light

By Reshmi Basu and Paul A. Harris

New York, Sept. 28 - As investors were locked out of Venezuela's oversubscribed new issue of $1.5 billion bonds due 2014, they turned to the secondary market to bid on Venezuelan paper.

As the book on the new 10-year global issue closed and investors realized they would miss the allocations, "they went back to the secondary market and were buying the '13s, and that bounced back the prices of the '13s compared to where we saw it yesterday [Monday]," according to a Latin American debt strategist at Refco EM.

Soaring oil prices increased the attractiveness of Venezuela's offering of new 10-year bonds, as well as helping its paper firm in secondary trading.

The Venezuela bond due 2013 closed 112 ¾ to 113, up 1.35. The bond due 2027 was bid at 99.10, up 0.90 and traded at 463 basis points over the 30-year U.S. Treasury. And the bond due 2034 gained a point to 99 bid.

The Latin American country is offering $1.5 billion of 10-year bonds via Barclays Capital and Merrill Lynch. Some will be offered in exchange for existing Brady bonds, the remainder will be sold for cash.

The country announced Monday that the spread for the global bonds will be 520 basis points.

Argentina exchange moves forward

Also in Latin American action, the U.S. Securities and Exchange Commission is expected this week to give its approval to Argentina to proceed with its proposal to restructure $100 billion in defaulted debt.

"Now, there's also rumors that they [Argentina] will improve the offer by six to seven cents," said the Refco strategist.

"The feeling out there is a little bit more positive. Holders of bonds are becoming tired of Argentina. They want the restructuring to take place," he noted.

Furthermore, there is one story that investors should be watching to see how the Argentina restructuring might play out, according to the debt strategist. That case involves the court decision regarding the debt restructuring by Argentina's Mendoza province of over $250 million of bonds.

"A judge has stopped the restructuring process that has been approved by the Mendoza province and that is definitely a negative for the restructuring process," the strategist said.

"What he is telling us is that a judge that does not agree with what Argentina is doing can stop the whole process by freezing the whole swap - in this case, the Mendoza province.

"So that is a negative and we have to watch that development in the next few days and what type of ramifications it has on the whole process," he said.

Fitch upgrades Brazil

However there was little reaction, at least initially, to news Tuesday morning that Fitch Ratings had upgraded Brazil's long-term foreign and local currency ratings to BB- from B+.

"The weight of the Fitch decision was pretty much priced into the market," the strategist said.

But he added that at the end of the day, the story did give a slight lift to Brazilian paper.

During Tuesday's session, the Brazil C bond gained a quarter to 98.625 bid while the bond due 2040 was bid at 111.55, up 0.30.

Fitch's move came after similar actions by Moody's Investors Service and Standard & Poor's. Moody's raised Brazil to B1 from B2 on Sept. 9 while S&P raised the sovereign to BB- from B+ on Sept. 17.

The upgrade news continues to be positive, according to a buy-side source.

"We've run so far so fast. And I was expecting to see better growth than the market expected and now that's occurred.

"I don't know what's driving the market higher, although the locals continue to be very strong buyers."

The market also appears to be paying little attention to the midterm elections in Brazil, according to the strategist.

"Analysts are forecasting a continuation in strength of the government.

"It would be a negative if we saw a loss of support by the Lula government. But I don't think that's the case," he commented.

Meanwhile, Brazil's central bank president Henrique Meirelles has estimated the country's economic growth will fall in the range of 4 to 4½% in the next four years, said the strategist.

"Opposite to that, you see that local economists arguing that the central bank is going to have to increase interest rates to 17% by the end of the year.

"On one hand, the country is showing signs of growth. But on the other hand, the higher inflation is also pushing the central bank to take more drastic measures.

"I don't think that's going to derail the economic process that's taking place right now, but it's going to definitely affect the speed of the recovery," he commented

Issuers' market

As yields stay low and many argue should stay that way, the market is tilted in favor of issuers.

"The market is pretty well priced, and that helps bring out the supply. It's a good time to be an EM issuer," said the buy-side source.

Although many investors are anticipating a market correction, the question is what will bring about the change, he said.

"I would expect to see it us get cheaper in the emerging markets, but I don't know what the catalyst would be."

Hit and run deals from sovereigns that swoop in are the type of supply that would place pressure on the market, he noted.

Halyk Bank is attractive

In the pipeline, the new deal from Halyk Bank of Kazakhstan shows promise, according to the buy-side source.

The $200 million five-year senior notes (Baa2/B+) are expected to price this week via Credit Suisse First Boston and JP Morgan.

"It's higher grade, higher quality. I like the Russian story, but this is a way for me to add a high-grade name.

He adds that the issuance is a way to diversify some of his Russian holdings.

"And it looks like it's going to be relatively attractively priced."

Oil poses long-term threat, says strategist

Crude oil prices reached $50 during intra-day trading Tuesday, breaking historical highs. Analysts said prices could shoot up even more, given the rise in global demand, tight supply and potential disruptions to output in Iraq and Nigeria.

While certain countries will benefit from the oil spike, eventually there will be an overall cost in terms of production and deterioration on consumption, according to the Refco strategist.

"The same argument that you hear in the U.S. applies to Latin America, to a lesser extent."

The overarching issue is that if the United States' growth slows down because of high oil prices, the whole world will follow. And this will in turn diminish the export market for emerging markets, he commented.

"On balance, I think high oil is good for emerging markets," for countries such as Venezuela, Russia, and Nigeria, said the buy-side source.

"But I don't believe there is an oil conspiracy to keep the price high. I think it's more about strong demand.

"But something has to break, either growth has to accelerate or oil has to come down," said the buy-side source.

"Oil doesn't cause the economy. The economy causes oil. And markets can be wrong. Even if oil is in the $30s, that pretty high levels.

"I think growth is good but I don't think $50 oil is good."

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