Emerging market debt firmer in illiquid market; Turkey worries

By Reshmi Basu and Paul A. Harris

New York, March 29 - Emerging market debt was a little firmer Tuesday as yields on U.S. Treasuries declined on a weaker-than-expected consumer confidence reading.

The monthly consumer confidence index fell to 102.4 in March from 104.4 in February in the United States. Although the decline was higher than expected, it came in line with the market's view that surging oil prices are giving a headache to consumers.

The yield on the 10-year note stood at 4.58% by the end of trading, down from Monday's close of 4.63%.

Overall, emerging market debt moved higher as U.S. bond yields contracted. The Brazil C bond was up 0.448 to 97 7/8 bid while the bond due 2040 moved up 0.90 to 109 bid. The Ecuador bond due 2030 gained 0.15 to 87 bid. The Mexico bond due 2009 rose 0.60 to 117.60 bid.

Turkey's dollar-denominated 8% bond due 2034 seen early at 96 bid, 97½ offered, which translates to a yield of 8.54%, according to a market source who added that the bond was off sharply from 98¼ bid at the beginning of the week.

"Turkey needs to refinance in the next 24 months," the source commented.

"As it looks for new creditors and with its spreads widening, Turkey faces higher coupons on new issues, which will result in higher debt service in the long-term."

Overall there was not a lot of liquidity or volume in the market Tuesday as investors are returning from vacation, said a Latin America debt strategist for Refco EM.

However, Tuesday's firmer session does not signal the end of the recent sell-off, said the strategist. More bad times lie ahead.

"In my opinion, I think we are going to have the potential of more lower prices in the following weeks," he said.

"I think the performance of the Treasuries and the continuing increase in interest rates will take a toll on emerging markets in the next couple of weeks," said the strategist.

Colombia, Venezuela political turmoil

According to strategist, the market has ignored the reelection attempt by Colombian president Alvaro Uribe, who took office after winning the presidential election in August 2002.

In November 2004, the Colombian House of Representatives voted 113 to 16 to pass legislation that would allow him to run for re-election. The Constitutional Court must now decide if the measure can be allowed.

"There's an interesting story developing and the market has ignored that," said the strategist.

"If the Constitutional Court declines the reelection, you will see prices go down."

The court is expected to rule in the next couple of weeks.

During Tuesday's session, most of Colombia's bonds were unchanged, according to a market source. The Colombia bond due 2009 fell 0.15 to 107 bid while its bond due 2030 gained one point to 102¼ bid. The bond due 2010 was unchanged at 108 bid, the bond due 2012 was also unchanged at 105½ bid. Colombia's 2012 and 2013 bonds were unchanged at 106¼ bid and 95 bid, respectively. The 2024 bond and 2027 bond were unchanged at 89 bid and 102¼ bid, respectively.

On Tuesday, President Hugo Chavez rejected U.S. allegations that his left-leaning government is threatening the stability of Latin America at a summit with the leaders of Colombia, Brazil and Spain.

"In Venezuela, there has been the usual confrontation that is becoming more and more outspoken between the U.S. and Venezuela. That could also generate some downward pricing in the country," said the strategist.

Despite the growing political rift, higher oil prices helped the country's debt during Tuesday's session. The Venezuela bond due 2027 added 1.05 to 97¼ bid.

Inside look at Korea's Dacom

On the new issuance front, Diane Keefe, portfolio manager of the Pax World High Yield Fund, told Prospect News that she has owned Hanaro Telecom, but sold it, and that she has taken a close look at the Dacom deal.

The company is in the market with $300 million of five-year notes (expected ratings Ba3/BB-), in a debt refinancing deal via Credit Suisse First Boston.

Keefe specified that she will not be playing Dacom.

"Their market position is good," the Pax World High Yield Fund portfolio manager said.

"Dacom has a lot of fiber optic network in Korea, which has the highest broadband penetration in the world, I believe, with something like 78%.

"Dacom has a complicated capital structure, though, in that it has less than 100% of a lot of its holdings. Its largest shareholder has a bunch of related businesses.

"The problem with Korea, on a macro basis, is that there are too many chaebols that, when one of their businesses is lagging, their other businesses give money to that business.

LG Group is the largest shareholder of Dacom. LG Group is made up of networking, consulting and wireless businesses.

"And Dacom itself has a bunch of businesses that it owns between 50% and 80% of. Whenever you have more than 50% you can consolidate the numbers. But you don't own the whole thing.

"I think that's a little messy for this market environment. It will be interesting to see if and where it gets done," remarked Keefe.

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