Brazil prices $750 million global, Russia down on second coming of Aries, banking sector problems

By Reshmi Basu

New York, July 7 - Brazil tapped the capital markets for the second time in less than three weeks Wednesday with a $750 million 10-year global bond that it priced to yield 10.8%.

While the Brazilian issue was a surprise to most, some believe that it does not pose a long-term threat to the emerging market paper.

"It didn't have a very bad effect on the market, given that again it's a small size issue - also $750 million," said a buy-side source.

"This is viewed actually as a smart move by the Brazilian side as it is a good time to come to the market.

"Yes, the market sold off a little bit but it was not disastrous.

"Once the deal is launched and starts trading, it probably will do well," added the buy-side source.

"I don't know if supply is as high as much as demand is low," said another buy-side source.

The second buy-side source added that in the short-term the new issuance is a negative but now Brazil will be able to move ahead.

"The thing about this deal is that when they are done they will only have $750 million to go, so they will be 90% done," said the second buy-side source.

"And that goes a long way to improving the technicals on the sovereign market.

"After that, what do you have to do - a little Peru, a little Colombia," he added.

In Wednesday's offering the Republic of Brazil priced $750 million 10-year bonds (B2/B+) at 98.192 to yield 10.8% in the late afternoon. Deutsche Bank and Morgan Stanley ran the books.

The previous deal, priced June 21, was a floater. In that offering, Brazil sold $750 million of five-year bonds with a Libor plus 575 basis points coupon at 99.245 to yield Libor plus 593 basis points.

Despite the positive sentiments about the latest deal, in Wednesday's trading the Brazilian bond due 2013 was hit hard. The new $750 million notes were talked at 10.80%, putting downward pressure on the bonds due 2013.

"The 13s really cheapened up to that level," said the second buy-side source.

By the close, the bond due 2013 was bid at 97.35, down 1.15 during Wednesday's trading.

"It's a 10-year and obviously it will affect the part of the curve where it's coming," said the first buy-side source.

"But overall, the impact on the whole Brazilian curve is not that bad."

Nonetheless, the second buy-side source said there was no advantage of the new bond over the bond due 2013.

"I'm not buying it because I don't think it's as cheap as other parts of the curve like the floating-rate issue they did," he added.

"I don't think it's coming particularly cheap."

The Brazil bond due 2040 was down 0.9 to 95.35 bid while the C bond was bid at 921/2, down 0.687 during Wednesday's session.

Russia down on banking, supply worries

Russian debt was weak Wednesday as investors worried about problems in the banking sector and the prospect of a quick follow up to the €3 billion and $2.4355 billion Aries Vermogensverwaltungs GmbH repackaging of Russian Paris Club debt by Germany.

Russia's Central Bank chief Wednesday said its banking sector was solid despite the ongoing problems. It was announced Wednesday that Russia's second largest commercial bank Vneshtorgbank will step in to save troubled Guta Bank.

"The banking system is getting better and worse," said the second buy-side source, noting that Russia is cleaning up banks but there are still many problems.

"And [trading] appears to be very illiquid for Russian corporates and the Ukraine.

"The Russian [and] one step removed Russian story appears to be hurt," he added.

Also, investors were upset when Germany announced that it is looking at issuing more of Paris Club securitized debt.

"In the long term, Germany's plans to issue are negatives," said the first buy-side source.

Initially, Germany said it would not issue more securitized Paris Club debt for another six months but now it is looking at "as soon as possible" and investors are worried about another dumping of new securities.

"That makes you think after six months have passed they are going to try to throw another five billion at the market. That has a lot of people nervous," said the buy-side source.

Initially, the dollar tranche of the Aires traded very well but now it is seeing some profit-taking, the source said.

"That was up about 2 to 2.5 points on the break. It's come off now a little bit - maybe 3-3½ on news that more of it is to come.

"It did trade up immediately after being issued," said the buy-side source.

"It was oversubscribed. You would think that people who didn't get their allocations would go into the secondary market and try to fill that out.

"We'll see how well that was placed in the next few weeks, if it was more hot money or longer term-oriented investors.

"My guess is that it was more fast in and out money," said the buy-side source.

The Aries bond due 2014 was bid at 101 7/8 bid in trading Wednesday. It priced at par on July 1.

But markets remain firm

Nonetheless the performance of Aries and emerging markets debt overall prompted the second buy-side source to believe the market is currently robust.

Although some believe that the market has been saturated with new securities in the last month, with such deals as Germany's securitization of Russian debt worth $6 billion and Brazil's recent issuance of $750 million floaters - plus Wednesday's $750 million.

"If you think about all the new money put out there - if you go back over the two-week period - you have $7 billion of sovereign issuance," the source said.

"We haven't really impacted the index that much on a spread basis. That tells you that the market is not in that bad of shape."

Export Import Bank of India prices

Meanwhile in primary action, state-owned Export Import Bank of India priced $250 million bonds due 2009 (Baa3/BB) at 99.447 to yield 185 basis points over U.S. Treasuries or 5.503%.

This is the south Asian nation's first government-backed issuance since the Congress party took office in May.

Deutsche Bank and Citigroup ran the Regulation S deal for the state-owned bank.

3 deals start marketing

And three issuers hit the road or set dates to do so.

Turkey's Petrol Ofisi started a roadshow Wednesday in Istanbul for its $200 million five-year bond offering (/B/B+).

The roadshow will move to Athens on Thursday, followed by London on Friday, next in Boston on Monday, and finish off in New York on Tuesday.

JP Morgan is running the books for the Rule 144A/Regulation S deal.

The Hong Kong Government started a roadshow for its HK$20 billion of U.S. dollar-denominated and local-currency bonds Wednesday.

And Thailand's PTT Public Co. Ltd. will kick off a roadshow for its $400 million 10-year bullet global bond offering (Baa1/BBB) starting Friday, according to a market source.

The roadshow will start in Singapore on July 9, next in Hong Kong on July 12, then stopping in London on July 13, followed by New York on July 14, and then wrapping up in Boston on July 15.

Deutsche Bank, Citigroup and JP Morgan are running the books for the Rule 144A/Regulation S deal.

Price talk was heard from the Republic of Cyprus. The minimum €500 million 10-year deal is expected to yield 12 to 14 basis points more than mid-swaps.

The deal is expected to price later this week after Wednesday's completion of the roadshow in London.

Credit Suisse First Boston and UBS Securities are the bookrunners.

Also, Korea's largest overseas bank Korea Development Bank (KDB) has sent out requests for proposals on a potential $1 billion bond offering.

The deal would be part of KDB's plan to raise $2 billion in the capital markets in the second half of this year.

Finally, China Development Bank (CDB)'s planned bond deal will be offered as a $500 million U.S. dollar-denominated tranche and a €500 million euro-denominated tranche, according to a market source.

CDB has mandated six investment banks for the bond offering.

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