Emerging market debt grinds to record low in lackadaisical session; Digicel issues new debt

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Feb. 22 - Emerging market debt saw a lukewarm session Thursday as it faced a sluggish U.S. equities market and another sell off in U.S. Treasuries.

Still, spreads pierced another record low as the spread on the JP Morgan EMBI Global Index narrowed by 4 basis points to 167 basis points versus Treasuries, outpacing the weak performance by U.S. Treasuries. On a dollar basis, the market was a tad lower.

The scarcity of new issues coupled with ample liquidity is helping insulate the market from negative headlines, such as Wednesday's release of higher than expected consumer price index data as well as hawkish minutes from the last meeting of the Federal Reserve.

Nonetheless, sources have described this week's market action as very slow, as the market suffers from the hangover effect from holidays in Asia, Latin America and the United States.

Digicel prices, spikes, falls back in trading

Meanwhile in the primary market, Digicel Group Ltd. took advantage of investors' appetite for paper.

The Caribbean wireless telecommunications network operator sold a $1.4 billion two-part offering of eight-year senior notes on Thursday.

It priced a $1 billion tranche of cash-pay notes par to yield 8 7/8% or Treasuries plus 415 basis points.

That priced at the tight end of revised guidance, which was lowered to 8 7/8% to 9% from initial guidance of 9%.

Meanwhile Digicel also sold a $400 million tranche of PIK toggle notes at par to yield 9 1/8% or Treasuries plus 440 basis points.

That tranche came at the tight end of revised talk, which was cut to 9 1/8% to 9¼% from initial talk of 9½%.

Should the issuer elect to make an in kind interest payment, as opposed to a cash payment, the coupon steps up by 75 basis points.

"It's a good company," commented a buyside source. "We played in the original deal," he added, referring to the July 21, 2005 deal, in which Digicel sold $300 million of 8 5/8% notes due 2012. On July 18, 2006 the company added another $150 million in a reopening.

"But it's gotta to be tough. It's got a lot of leverage on it [Digicel]," noted the source.

The new Digicel Group $1.4 billion offering was clearly the biggest development in emerging market corporate bonds on Thursday.

In early secondary trading, the "new issue was breaking already at 100 1/8," observed the buyside source. Another desk spotted the issue up at 100½ bid, 101 offered.

But by late afternoon, the issue had retraced those gains. The toggle notes were quoted at 99¼ bid, 99¾ offered while the 8 7/8% senior notes were spotted at 99 3/8 bid, 99 7/8 offered.

Another trader noted anemic aftermarket demand, quoting the $1 billion of 8 7/8% cash-pay senior notes due 2015 at 99.875 bid, 100.25 offered, and the $400 million of 9 1/8% PIK toggle notes due 2015 at 99.75 bid, par offered. A second trader saw both tranches wrapped around issue at that latter price.

Citigroup and JP Morgan were joint bookrunners for the Rule 144A and Regulation S deal. Credit Suisse and Lehman Brothers, Goodbody Stockbrokers and Davy Securities acted as co-managers.

Gazprom to hit the road

Adding to the pipeline, Russian state-controlled gas monopoly OJSC Gazprom (A3/BBB/BBB-) plans to start a roadshow for a multiple-tranche benchmark-sized offering of global bonds next week.

There will be simultaneous investor presentations held in both Europe and the United States. The U.S. leg of the roadshow will start in Los Angeles on Monday, Feb. 26, followed by Boston on Tuesday, Feb.27 and wrapping up in New York on Wednesday, Feb. 28. Meanwhile the European leg will remain in London for two days, starting Monday.

Credit Suisse and Morgan Stanley are joint bookrunners for the Rule 144A and Regulation S transaction.

Pricing is expected to take place following the completion of the roadshow, subject to market conditions.

Set to price Thursday morning during the New York session, Russian oil pipeline company OJSC AK Transeft is expected to issue $1.3 billion of seven-year loan participation notes (A2/BBB+).

Price talk has been set at mid-swaps plus 55 basis points.

Credit Suisse and Goldman Sachs are joint bookrunners for the Rule 144A and Regulation S notes offering, which will be issued via TransCapitalInvest Ltd.

Market participants have complained that the pricing of new deals has been crazy, however, the buyside source said those sentiments are somewhat exaggerated

"You can't let yourself get too caught up in it. It's not that bad. We're getting in a lot of money pretty quickly," he said, adding that he is sitting on more cash now than he did last summer but "at the same time, the cash isn't running away from us.

"We're being disciplined and we're passing on the deals that we don't think we're getting paid for."

"We're just trying to find the best companies we can at the best prices."

Crude oil aids exporters

Elsewhere, bonds of Venezuela and Ecuador were seen to have firmed, as world prices for crude oil - a key export supporting the economies of both Latin American countries - surged past $61 per barrel, its highest close so far this year, on a larger-than-expected decline in distillate product inventories in the United States.

Ecuador's bonds prices, on average, were seen up 0.95 on average during the session, while Venezuela's were up 0.57 on the day.

Ecuador's bonds are up more than 18% from the levels they held at the end of last year, spurred by the recent decision by the new government of president Rafael Correa to continue to service the country's debt, rather than repudiating it; after much uncertainty, Quito last week announced that it had in fact made the scheduled Feb. 15 coupon interest payment of $135 million on its benchmark 10% notes due 2030. Earlier, there had been market fears that the coupon payment might not be made at all, or that it might be delayed until sometime in the 30-day grace period after the initial Feb. 15 deadline as a political gesture to demonstrate the administration's hardline stance.

Despite tough-sounding election campaign rhetoric criticizing the country's more than $11 billion of debt as "corrupt" and "illegitimate," and threats even after he was elected and inaugurated from Correa and from his economy minister, Ricardo Patino, to restructure the debt in such a way that investors would lose at least 60 cents on the dollar and use the money instead to fund social welfare spending, the two politicians also, at times, made conciliatory noises towards the market, indicating that they would allocate budget money towards debt service and that they preferred a "friendly," consensual restructuring, rather than cramming one down the investors' throats.

Venezuela - whose bulging treasury, fattened by massive oil revenues makes it a key Latin political and economic player - said on Thursday that it would provide Ecuador with as much as $500 million of "financial cooperation" assistance this year and next, which could take the form of buying newly issued Ecuadorean bonds. Alternatively, Caracas could also extend credit to Ecuador.

Correa is considered an ideological ally of Venezuela's leftist strongman Hugo Chavez. The move to help Ecuador is the latest gesture of support Chavez has made to his friends in the region, including the left-leaning leaders of Argentina, Bolivia and Nicaragua, as well as Ecuador. Venezuela and Argentina are planning to sell $1.5 billion of BonoSur dollar-denominated bonds next week, with the two countries scheduled to split the proceeds from the sale. The Argentine portion of the bond will mature in 2015, although details on the Venezuelan half of the issue won't be released until Monday.

Generally speaking, observers saw emerging market spreads against U.S. Treasuries continuing to tighten to record low levels, helped by a sizable retreat Thursday in Treasuries, which fell for a second straight session. The 10-year 4 5/8% bond's yield rose almost 4 basis points to 4.73%, while the price fell 9/32 to 99 5/32.

No threats within EM

Looking ahead, there are few threats within the emerging market asset class that have the potential to derail the positive sentiment. Instead negative price drivers will come from the external front, such as central bank monetary policies and politics, remarked the buyside source.

Geopolitical risks include the escalating confrontation between Iran and the United States regarding its uranium enrichment program.

"In EM, you have the Ecuadors of the world, but I don't think that's going to turn to a systemic issue."

"Russia and the U.S. are talking back and forth. Nigeria is always a hot spot. Pick the Middle East. There's Syria, the Palestinian issue continues to flair up...Lebanon has been quiet for awhile but you never know," he added.

Furthermore these risks are difficult to price for the market.

"They can definitely cause discontinuous if they are perceived as being more than a regional issue," noted the buyside source.

MagnaChip solid despite lawsuit

MagnaChip Semiconductor Ltd. bonds remained solid despite legal action against the Seoul, South Korea, company. Pixelplus Co., Ltd. filed the defamation and tortious business interference lawsuit on Thursday.

Pixelplus alleged in a press release that MagnaChip communicated "with the company's clients that the company allegedly engaged and would continue to engage in the claimed infringement of MagnaChip's patents and that the company allegedly is not a reliable or suitable company with whom those clients should maintain or start a business relationship." Pixelplus is seeking monetary damages, plus interest, against MagnaChip.

MagnaChip issued its own press release in response to the lawsuit, calling the allegations baseless.

Despite the lawsuit, a trader said MagnaChip's notes were steady: its floating-rate notes went home at 91.5 bid, 92 offered and the 6 7/8% due 2011 notes were pegged at 88 bid, 89 offered. The 8% bonds due 2014 were placed at 73.5 bid, 74.5 offered.

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