Brazil opens December with a bang; Indonesia's Adaro sells $400 million five-year notes

By Reshmi Basu and Paul A. Harris

New York, Dec. 1 - Emerging market debt moved higher Thursday as Brazilian bonds soared to an all-time high.

In the primary market, Indonesia's Adaro Finance BV sold an upsized offering of $400 million in five-year bonds at 99.005 to yield 8¾%.

The deal was more than four times oversubscribed, according to an informed source. Additionally, he said both high yield and emerging markets accounts evenly played in the deal.

The issue, increased from $300 million, priced at the tight end of price guidance. Guidance was set at 8¾% to 9% for the offering of senior secured bonds.

Goldman Sachs and JP Morgan were joint managers for the Rule 144A/Regulation S transaction.

Meanwhile indicative price guidance surfaced on Gazprom's euro-denominated seven-year bond offering. One source said indicative guidance was at mid-swaps plus 112 to 125 basis points. Another source said guidance was set at 120 basis points to 125 basis points.

ABN Amro and Credit Suisse First Boston are managing the sale.

Brazil scores new high

On Thursday, spreads for Brazilian bonds pierced another record low. That is now a feat it has accomplished twice in less than one week. Only last Friday, the Brazilian component of the JP Morgan EMBI+ index grinded to historic lows. Bonds prices also closed on dollar highs, noted sources.

"Brazil is performing great," observed a trader.

"Bonds are up ¾ of a point to a point. Spreads have tightened across the board," he added.

During the session, the Brazilian bond due 2040 gained 0.90 to 124 bid, 124.15 offered.

Nonetheless, sources are astonished by the move, as the overall market outperformed U.S. Treasuries. Ahead of the U.S. job numbers, the yield on the 10-year bond inched up to 4.51% from 4.50% Wednesday.

The Brazilian performance was "off the charts," according to Enrique Alvarez, Latin America debt strategist at IDEAglobal.

"You have to wonder what's really sparking this," he observed, adding that there does not appear to be any clear drivers that would ignite such a euphoric state.

But both the trader and Alvarez did note positive performances by Brazilian local markets, particularly equities. The Bovespa index posted a record high, up more than 2% during the session.

"In general, maybe there's been some new money again put to work in the market," surmised the trader. He added that the uptick in equities may be indicative that there is an investor base still willing to put their money on emerging economies.

Moreover, Thursday's rally may be feeding into the traditional year-end rally, added the trader.

"Just a run-away market in terms of debt instruments," remarked Alvarez.

Separately, Brazil's congress voted to kick out representative Jose Dirceu, the former cabinet chief under president Luiz Inacio Lula da Silva, after a committee report said that he knew about the "bribes for vote" scandal. The news had little impact on bond prices.

Venezuela up

Elsewhere Venezuelan bonds moved higher, even as controversy over this weekend's legislative elections surfaces. A fourth Venezuelan opposition party has pulled out of Sunday's congressional election amid clashes over electronic voting machines. Half the opposition parties have withdrawn.

For the moment, the market does not seem too worried about the situation, but political noise may increase down the road. President Hugo Chavez's government has made it clear that it wants to push through constitutional reforms, such as removing limits on the number of times the president can be re-elected.

"By the same token, the interaction with the U.S. has become much worse," noted Alvarez.

"Mudslinging in now an everyday thing," he said, adding that Chavez has openly blamed the Pentagon for manipulating domestic political parties.

However following Brazil's lead, the Venezuelan bond due 2027 added half a point to 116 bid, 116½ offered.

Ecuador was another country that was pushed higher, despite unwelcome fiscal policy coming out of its congress.

Late Tuesday, the country's congress approved the 2006 budget, which would shift $440 million, including $397 million earmarked for debt service, to social spending.

Alvarez added that the market has not priced this news; instead the country is riding Brazil's coattails.

During the session, the Ecuadorian bond due 2030 added ¾ of a point to 92¾ bid, 93½ bid.

"As long as Brazil is in control of the market and sentiment continues to be quite positive as it was this afternoon [Thursday], I don't think you will see a correction," Alvarez remarked.

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