Emerging markets spreads inch wider; Venezuela's 2027 benchmark drops 1½ points; Brazil 2040 weak

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 26 - Emerging markets credits continued to navigate choppy waters on Tuesday, according to sources. Risk spreads were incrementally wider.

Among individual credits, notable movers were Venezuela's benchmark dollar-denominated bonds maturing in 2027, which dropped by 1½ points as two oil giants pulled out of the country, while Brazil's dollar-denominated sovereign maturing in 2040 - the benchmark of the asset class - widened by 3 basis points.

Risk aversion

In the secondary arena, emerging market bonds continued to struggle, as investors remained wary about exposing themselves to too much risk, given the recent meltdown in the subprime loan market in the United States, the problems of hedge funds caught on the wrong end of that market's troubles - two Bear Stearns funds in particular - and caution ahead of this week's scheduled meeting of Federal Reserve Board policymakers.

The general retreat in emerging bonds came against a backdrop of virtually steady U.S. Treasury issues, as Washington's benchmark 10-year notes continued to yield 5.08%, the same as Monday and well under the levels above 5.30% that the 10-year yield hit around mid-month.

While price declines were seen pretty much across the board in the EM world, the average risk spread of emerging debt over comparable Treasuries was only slightly wider on the session, with the widely followed EMBI+ index compiled by JP Morgan & Co. at 167 basis points.

While that's the widest the EM risk gauge has been since the end of March - and is nearly 20 bps wider than its all-time tight levels in the upper 140s, seen earlier this month - it was still only about a basis point or two over Monday's closing levels. But that gradual creeping up to current levels is taken as a sign of continued weakness in the emerging sphere.

Pulling out of Venezuela

The key loser Tuesday was Venezuela, in the wake of the news that global oil giants ExxonMobil Corp. and ConocoPhillips have decided that the hassle of having to deal with that nation's bombastic and unpredictable strongman, Hugo Chavez, isn't worth whatever profits they may realize from joint-venture operations there with state-run Petroleos de Venezuela SA. The two companies separately announced that they were pulling out of Venezuela after being unable to agree with Venezuela on new terms for operating their Orinoco River basin joint-venture projects - with the oil majors suddenly reduced to the status of junior partners, following the state takeover of those projects on May 1.

A New York-based trader in Latin American issues quoted Venezuela's 9¼% dollar-denominated benchmark bonds due 2027 down 1½ points on the session to 106.75 bid, 107.25 offered.

"Vennie was quite a bit weaker," he opined, seeing the yield on those bonds ballooning out by 14 basis points to around the 8.55% area.

Another source saw the spread 12 bps wider, and also quoted the bonds' price at 106.75, calling that a 1¼ point fall.

He said that a combination of factors was at work - ExxonMobil and ConocoPhillips' respective decisions to pull out of Venezuela, "plus the whole market feels like crap. And Vennie is one of the more vulnerable credits because of the maniac who runs it."

He also said that PDVSA's bonds "traded very weak today, off a significant amount. Its 5¼% benchmark bonds due 2027 were being quoted at a yield of 9.12%, a 19 bps widening. A source saw those bonds easing to 75.75 bid, 76.375 offered, while its 2027 and 2037 bonds were trading somewhat lower as well, in a 64.75-65.75 context.

The Venezuelan oil company's bonds were hurt by the ExxonMobil and ConocoPhillips news, as investors wondered what the pullout of the two oil giants would mean to the projects they were involved in operationally, as well as whether their exodus might lead to a technical default on PDVSA's bonds, and pondered what would become of specific project-finance debt incurred in connection with their former joint ventures.

Although ExxonMobil and ConocoPhillips are out, operationally, they remain in talks with Venezuela on the compensation it will pay them for having seized their stakes in the projects. The two companies - plus four other international oil operators who did manage to come to new working agreements by Tuesday's deadline - invested more than $17 billion in the Orinoco projects and hold some $4 billion in outstanding project-finance debt, but Venezuela's energy minister, Rafael Ramirez, said that PDVSA would not be assuming those obligations.

Apart from Venezuela, the first trader also saw Argentina's bonds "pretty weak, much wider on the day." Like Venezuela, Argentina is considered one of the riskier credits in the region.

"Everything generally was very, very weak, with not very good bids," he said - even the widely traded benchmark 11% dollar bonds due 2040 of Brazil, one of the best-regarded credits in the region, were off, down 30 cents at 130.90 bid, 131.10 offered, with the yield 3 bps wider.

Beyond Latin America

Outside of Latin America, a trader saw "some volume" in Magnachip Semiconductor Ltd.'s 8% notes due 2014 although he saw the Korean computer chip manufacturer's bonds end about unchanged at 75 bid, 77 offered.

At another shop, a trader saw those bonds down a point on "no news" at 75 bid, 76 offered.

Yet another source saw the bonds open around the same 75 level seen late Monday, and then gradually drop 2 points in trading to just above 73.

The source also saw the company's 6 7/8% notes due 2011 actually firm on the day, to 89 bid, a pickup of about 2 points.

Global new issuance becalmed

In the primary market, two banks completed deals, as a third announced plans for an upcoming offer on a quiet emerging markets day.

Thailand's PTT Bank PCL priced along with Vostochny Express Bank from Asian Russia.

Banco de Credito del Peru announced plans for a new issue.

Asian banks make sales

Vostochny Express Bank sold 5.4 billion ruble in two-year bonds at par to yield 9 7/8%.

"It's trading up in the secondary," said a source close to the deal. The notes are currently trading in the area of 100.35, the source said.

The sale came tight of the original talk in the 10% area, which was later revised to 9 7/8%.

The book was split almost evenly between investors from Europe and the offshore United States.

ABN AMRO and Standard Bank brought the deal to market.

Vostochny Express Bank is a Khabarovsk, Russia-based commercial and investment bank.

PTT Bank PCL sold its ¥36 billion 10-year unsubordinated, unsecured samurai notes (A2) with a coupon of 2.71%.

The spread was mid-swaps plus 55 bps.

Daiwa SMBC, HSBC, and JP Morgan are the joint bookrunners for the Bangkok, Thailand-based retail and investment bank.

Peruvian bank proposes new offer

Banco de Credito del Peru expects to issue $500 million in new bonds.

Standard Chartered will be the bookrunner for the Lima, Peru-based commercial and investment bank.

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