Emerging market debt in limbo ahead of Friday's jobs data; investors await Peru's sovereign

By Reshmi Basu and Paul A. Harris

New York, July 6 - Emerging market debt prices were stagnant ahead of Friday's release of non-farm payroll numbers in the United States while fallout from political scandals in Brazil and the Philippines continued to snatch investors' attention.

In the primary market, Brazilian steel maker Companhia Siderurgica Nacional SA launched an upsized offering of $500 million in perpetual preferred shares (B1/BB-/BB-) with talk at 9½%.

The issue was increased from $150 million in size while price talk on the issue was lowered from the 9 5/8% area.

The deal is already 10-times oversubscribed, said sources.

Credit Suisse First Boston and Deutsche Bank Securities are joint bookrunners for the Rule 144A/Regulation S offering.

Out of Asia, Indonesia's PT Bank Niaga set talk on its $100 million offering of 10-year lower-tier II subordinated notes (B2//B+) at 8% to 8¼%.

Pricing is expected to take place by the end this week.

Citigroup and CIMB Bhd. are the bookrunners.

Next, Korea's Shinhan Bank set price guidance for an offering of $350 million in 10-year bonds (Baa2/BBB-) at Treasuries plus 134 basis points area or mid-swaps plus 90 bps area.

"The Shinhan deal seems to be generating pretty decent demand," said a trader.

"If that deal goes okay it should continue the solid tone of the market."

ABN Amro and Banc of America Securities are the lead managers for the Regulation S transaction.

Also, the trader added, Gajah Tunggal's proposed offering of $250 million in five-year bonds has attracted interest because people are expecting a 10%-plus yield.

Credit Suisse First Boston and ING AG are running the deal for the Indonesian tire company.

Investor wait for Peru's plan of action

Investors are anxiously awaiting details of Peru's plan to tap the capital markets, said a buyside source.

On Tuesday, finance minister Pedro Pablo Kuczynski announced that Peru would prepay up to $1.55 billion in order to buyback Paris Club debt

"We don't know a lot. We just know that they are going to issue about $350 million in the local market and about a billion in the U.S. dollar market," said the buyside source.

The source added that the local auction is scheduled for Thursday, which is organized by the government. The maturity for the bond is expected to be 2017.

"Foreign investors can participate through any broker that does business in Peru.

"There will be a clearing yield and depending on the investor's level one can get filled on the order or not," said the source.

However, details on the external debt issue has not been disclosed, added the buyside source.

"People think that it may be 2025 or 2020 to try to fill the gap on the curve."

The source added that a $1 billion issue could probably be used to increase the liquidity of existing issues such as the 2015 bonds and 2016 bonds.

"But apparently, for some reason, issuers don't like to reopen. But we're probably looking at a '20 or a '25," replied the buyside source.

In other developments, there are discussions that the Colombia's global peso 2010 and 2015 bonds will be added to Electronic Negotiation System (SEN), according to an analyst note.

The SEN is a system monitored by the Republic Bank and where all local TES (Treasury bonds) are posted.

The analyst said that this would give more liquidity to these bonds as well as provide more price support.

The analyst added there was some local demand on the news.

Also the World Bank approved a loan to the Ukraine in the amount of $251.26 million. Local representatives said that Ukraine can get as much as $2 billion over the next two years.

Head of government debt management office Galina Pahachuk recently stated that if Ukraine received the loan; it will not need to issue a eurobond this year, according to a market source.

Quiet session ahead of Friday

Wednesday's session was extremely quiet as the market closely tracked the U.S. Treasuries market, said sources. Treasuries pared down earlier losses in the session so that the 10-year note's yield ended at 4.07%, improved from 4.11% at Tuesday's close.

Just like the Treasury market, emerging markets appears to be in a holding pattern ahead of Friday's numbers as investors are unwilling to add risk.

"Everything is staying a little bit in a range here right before... the big day on Friday," remarked a second trader.

"We're just hanging in then, following Treasuries all day.

"There wasn't enough flow to have players," the trader commented.

However, the buyside source added that the job numbers will likely be a non-event, given how quiet the market is.

In light volume, the Brazil bond due 2040 added 0.05 to 118.10 bid at session close.

The Turkish bond due 2030 lost 1/8 of a point to 142 5/8 bid. The Venezuela bond due 2027 added 0.30 to 104.40 bid.

And the Russian bond due 2030 was spotted unchanged at 111 bid in late trading.

Meanwhile, Brazilian bonds saw some activity earlier in the day as the Treasury said it was considering buying back the C bond.

The trader said the announcement resulted in "a little flurry in Brazil this morning."

"And Brazil C's pretty much closed off where they ended yesterday [Tuesday] at 101 7/8 bid," he added.

Meanwhile, investors remain watchful as to how the "bribes for votes" scandal plays out.

"Brazil is still trading somewhat heavy," noted the second trader.

"It's probably going to stay in this 117½ [to] 118½ range until Friday. And then we see what happens."

Philippines's VAT blow

Trading for Asian names was also quiet, said a second trader, adding that Philippine bonds did not lose ground during the session.

"The bonds stabilized at these lower levels," noted the first trader.

"We're not a million miles off of the lows but it has held. There has not been that much selling today [Wednesday]."

On Friday, the Supreme Court issued an injunction against beleaguered president Gloria Arroyo's key value-added tax reform measure.

The court ruled to suspend the collection of the VAT, citing legality concerns.

"It's not good considering all the troubles that we went through to get it in the first place," noted the buyside source.

"They really need that in order to increase their revenues; otherwise the fiscal situation is not that good."

In addition, Arroyo has been dogged by allegations that she fixed last year's close presidential election.

"Arroyo is very compromised by the whole situation," replied the first trader.

"If she does make it though, her ability to effect reforms is obviously hampered a great deal."

The first trader also added that over the past two weeks the Philippines' bonds have lost four points.

"They [the bonds] have held up pretty well," said the buyside source, citing that much of the initial resilience stems from investors' stance that the story will blow over and that Arroyo will not be forced to leave office.

The buyside source, who is neutral in the country on fiscal concerns, is surprised that the bonds have fared relatively well.

"It is surprising that people would discount a political story that easily, but we've been through these in the past," noted the source.

Nonetheless, the buyside source warned that it is naïve to assume that Arroyo will not be impeached or forced to resign, citing the 2000-2001 impeachment trial of former Philippine president Joseph Estrada.

Estrada was impeached on four charges of corruption, bribery, betrayal of public trust and culpable violation of the constitution.

"It's hard when the overall environment is fairly benign," remarked the buyside source.

"Unless you are really concerned about the Philippines, you are not going to sell."

The buyside source predicted more volatility ahead for the bonds, but added that there is a potential to buy on weakness.

"If you feel overall feel good about the Philippines and you are willing to withstand the volatility because you are getting into the only high-yielder in Asia, it's probably a good entry," said the source, but warned that the story is far from over.

Lastly, rumors of a new issue from the Philippines seems unlikely to be well founded, said the first trader.

"I don't think anything is going to happen near-term until all of this is cleared up."

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