Emerging market debt sees light flows; LG Electronics, Public Bank price upsized deals

New York, June 10 - Emerging market debt saw higher prices as the recent political scandal in Brazil simmered down.

Meanwhile in the primary market, Korea's LG Electronics sold an upsized offering of $600 million of five-year bonds (Baa3/BBB-) at 99.494 for a spread of Treasuries plus 130 basis points.

The deal was increased from $400 million.

Citigroup, Credit Suisse First Boston, Lehman Brothers and Korea Development Bank ran the Rule 144A/Regulation S issue for the Seoul-based electronics maker.

In May, LG Electronics delayed its $600 million dual tranche offering of $300 million in five-year and $300 million in 10-year bonds due to market volatility.

Also Friday, Malaysia's Public Bank Bhd. priced an upsized offering of $400 million of 12-year subordinated bonds (Baa1/BBB+) at 99.383 to yield a spread of mid-swaps plus 85 basis points.

Barclays Capital and Citigroup were the managers of the Regulation S issuance.

EM debt firmer

During the session, emerging market debt prices were firmer in light trading volume, said sources, who added that the summer slowdown began to kick in.

There was no follow-though in response to Federal Reserve chairman Alan Greenspan's congressional statement Thursday. Sources said the statement made zero impact on emerging markets Friday.

"The [U.S.] Treasury market took a dive yesterday [Thursday] after his comments," according to a Latin America debt strategist for Refco EM.

"Emerging markets isolated themselves a little bit from the comments," he added.

Another debt strategist said the speech may have deflated the excessive euphoria in Treasuries.

"But that was tied to this story of a global slowdown. If you step back, global slowdowns are bad for emerging market debt," he noted.

Brazil rebounds as rumors fade

Earlier in the session, Brazil saw a sell-off due to rumors that central bank president [Henrique] Meirelles was going to be let go by president Luiz Inacio Lula da Silva, said the Refco strategist.

"When the rumor was denied by the government, the market came back and lifted," he said.

Overall during the session, the Brazil C bond rose 0.188 to 101½ bid while the bond due 2040 rose 0.65 to 117.30 bid.

Over the past week, Brazil debt prices have ticked down on political corruption charges facing the Lula administration.

Lula's government has been accused of bribing lawmakers to win support for government-backed policies in Congress. While the political scandal appears to have quieted down in the near-term, Lula's ability to push through legislation will be hampered, particularly as an election year approaches, explained the second debt strategist.

"I think it will probably delay any other substantive legislative progress because from experience we've seen with the Brazilian congress is that they don't do two things at once very well," he said.

"Brazilian fundamentals are not too bad at the moment in that the economy is slowing down but it is slowing down because of high rates.

"It's slowing down on the domestic side not the export side," he explained.

"And inflation may be peaking, so net-net, it may be possible that you have an environment for rate cuts," he remarked.

For the month of May, Brazil's inflation slowed as the IPCA consumer price index inched up 0.49%, less than the 0.87% hike in April, according to the government's IBGE statistics institute. Currently, the country's benchmark interest rate stands at 19¾%.

"The problem is that you've got this opportunity cost," remarked the strategist.

"And it's really a problem for Brazilian living standards. Until you get more of the reforms passed, the microeconomic Brazil cost can't be reduced very much."

That translates into a worrisome scenario because every time they go over 3% growth, "they start to print inflation like they did last year," he warned.

"They are stuck with that until they make the economy more efficient and that requires hurting some very privileged groups within society. Some of that includes the public sector," he replied.

Until that happens, Brazil will not see a better macroeconomic performance that will allow its dent to have a better trade up, the strategist remarked.

Nonetheless, he said that investors will be patient as long there is a 19¾% overnight interest rate and current account surplus.

"You've got an election in 2007. We got about another year and then after that, nothing is going to go on because it's all going to be about politics," he added.

"In some sense, maybe the election year is starting."

Lack of clarity in Philippines

Meanwhile, the story in Philippines is just plain murky, according to the strategist.

President Gloria Arroyo faces an onslaught of charges. Her spokesman released recordings, which he called a well-orchestrated scheme to bring down her administration, of illegally tapped phone conversations of Arroyo, which suggested she cheated to win last year's close election.

For instance, there were conflicting stories as to whether the peso market was up and running on Friday, the strategist observed.

"I was hearing that the peso market was closed, but we didn't see anything about it in the Philippines' paper. That seems odd.

"We find the situation locally confusing," he replied.

During the session, the Philippines bond due 2025 lost a quarter of a point to 110½ bid.

Also in the secondary market, oil producers such as Ecuador and Venezuela saw better prices as oil prices remain high.

The Ecuador bond due 2030 climbed 1½ points to 82 bid. The Venezuela bond due 2027 rose 0.55 to 100.90 bid.

New supply coming

Both strategists agreed there was appetite for new corporate supply scheduled to come over the next few weeks.

"There's been very little sovereign issuance," remarked the second strategist.

"And there has been continued net new cash coming into emerging markets debt funds. I think there's money lying around."

Emerging market bond funds have seen five straight weeks of inflows. Funds had inflows of $89 million during the week ending June 8, according to EmergingPortfolio.com Fund Research.

These funds now have $3.245 billion of inflows year-to-date.

Furthermore, the name of the issuer and the credit quality will be the factors in determining how hungry investors are, according to the Refco strategist.

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