Emerging market debt slightly higher in illiquid session; Hynix sells downsized $500 million offering

By Reshmi Basu and Paul A. Harris

New York, June 24 - Emerging market debt prices edged slightly higher in light volume as U.S. Treasures rallied.

In the primary market, Seoul-based Hynix Semiconductor sold a downsized offering of $500 million of senior notes in dual tranches (B1/B+).

The size of the offering was decreased from $750 million.

The tranche was divided into $300 million of seven-year fixed notes and $200 million of seven-year of floating rate notes.

The portion of fixed notes priced at 97 to yield 10.491%.

Meanwhile the tranche of floating rate notes priced at par to yield Libor plus 650 basis points.

Citigroup, Deutsche Bank Securities, UBS Investment Bank and Merrill Lynch & Co. were the joint underwriters.

In the secondary, both tranches traded up. The new 9 7/8% fixed-rate notes due 2012 were spotted at 97½ bid, 98 offer. The floating rate notes due 2012 were quoted at 100¼ bid, 100¾ offered.

And Russia's Rosbank Finance SA priced $150 million of two-year bonds (Ba3//B) at par to yield 7 5/8%.

The issue priced at the middle of guidance. Talk was for a yield of 7½% to 7¾%.

Parent Rosbank will guarantee the notes.

Credit Suisse First Boston and Morgan Stanley were the lead mangers for the Regulation S only offering.

Brazilian paper firmer

Brazilian sovereigns were firmer during Friday's session, but trading was void of activity or liquidity, according to a Latin America debt strategist for Refco EM.

"Although Brazil is higher than its closing price yesterday [Thursday], there hasn't been much activity all across the board in emerging markets," he said.

During the session, the Brazil C bond gained 0.06 to 102.06 bid while the bond due 2040 added 0.40 to 119.30 bid. The Mexico bond due 2009 moved up 0.025 to 119¼ bid.

The illiquid market may be taking its cue from profit taking as well as other factors, added the strategist, saying that the drying up of liquidity is nothing new for a summer session.

"It could also be covering of some shorts in the last few days, the remainder of the [Brazil] corruption scandal or it could also just be investors going long," he remarked.

Meanwhile, the eruption of the political corruption in Brazil will leave long lasting scars for the government, given that it took the market by surprise, according to the strategist.

President Luiz Inacio Lula da Silva administration has been dogged by allegations that allies of the Workers' Party paid some lawmakers monthly allowances for support of government-backed legislation.

"I was more concerned about the degree of individuals involved in the scandal," he noted, which is a negative for the government.

"There are going to be some issues in the future that need to be addressed. And popularity will always take a toll in cases like this," he said.

However, the worst of the scandal may have passed, he added. Unless new information surfaces Brazilian bonds should be on the road towards recovery.

But even under pressure, the country's paper continued to trade at tight levels.

"We saw some pressure last week and two weeks ago," said the strategist.

"The market was resilient.

"There were rumors of European institutional investors coming into emerging markets, throwing in the towel in Europe," he added.

Bad news in countries like Italy and Germany may have prompted investors to come to emerging markets in the search for yield, the Refco strategist noted.

"And I think that's also firmed the prices in Brazil.

"Just new inflow of institutional money, not dedicated accounts, looking for yield and also taking the opportunity due to the fact that prices were lower," he told Prospect News.

Oil prices surge

Crude oil futures were up 42 cents at $59.84 per barrel on the New York Mercantile Exchange Friday, which gave a lift to Venezuela's paper. The Venezuela bond due 2027 rose half a point to 104½ bid during Friday's session.

High prices may help Venezuela, but some emerging markets will feel the pressure, according to sources.

"If oil prices remain this high or beyond, Venezuela should be the biggest winner," said an emerging market analyst.

"They're still working with a budget that assumes oil prices average about $25/bbl less than where they are now, so prospects for oil to remain this high or higher should bring fiscal risk down to zero and make investors begin to talk more about potential buybacks," he added.

The impact elsewhere will depend on whether the country is an oil producer or an oil consumer, said the strategist.

"Those countries that subsidize gas prices will tend to reflect a lesser impact in the economy," he added.

Venezuela is an oil producer and subsidizes prices, he said.

"There you are going to have the best scenario in terms of cash inflows," he noted.

Ecuador is also benefiting from the oil spike.

"But it's a dollarized economy so they are not taking advantage as much as Venezuela in that respect," remarked the strategist.

Furthermore, countries such as Brazil, which produces oil but consumes more, will see an inflationary impact as well as a slowdown in the economy once prices are passed onto consumers, observed the strategist.

"In Brazil, you have an environment in which you do not pass on to consumers increases in oil and tax prices, so there is an government intervention in between the upstream and downstream process and that protects the consumer."

That is a negative for companies and consumers themselves, the strategist said.

"The biggest losers may end up being in East Asia, where the commodities boom has forced China to engineer a cooling of the economy, which hurts other Asian exports into China. Korea and the Philippines appear to be the most at risk, but Thailand and others are also at risk," said the analyst.

"Also, if high oil prices push eurozone growth even further down, the Eastern European credits (excluding Russia) may also feel more pain from higher oil prices."

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