Emerging market debt edges higher on no price drivers; Air Jamaica sells $200 million 10-year notes

By Reshmi Basu and Paul A. Harris

New York, June 28 - Emerging market debt drifted higher Tuesday, unmoved due to a lack of price drivers as the summer doldrums set in.

In the primary market, government-owned Air Jamaica Ltd. sold an upsized offering of $200 million in 10-year notes (expected B1/B) at par to yield 9 3/8% via Bear Stearns.

And following in the footsteps of Poland, the Republic of Hungary also tapped the Japanese yen market. Hungary priced ¥75 billion in a two-tranche deal (//A-) of five- and seven-year samurai bonds.

The deal, increased from ¥50 billion, was comprised of ¥30 billion in five-year bonds and ¥45 billion of seven-year bonds.

The five-year tranche priced at par with a coupon of 0.62%.

Meanwhile the seven-year tranche priced at par with a coupon of 0.96%.

Daiwa Securities SMBC and Mizuho Securities were the lead managers.

On June 8, Poland priced ¥75 billion of seven-year bonds at 16 basis points more than Yen Libor.

Meanwhile in the secondary, Seoul-based Hynix Semiconductor's downsized offering of $500 million in dual tranches of senior notes (B1/B+) has performed well, according to a trader.

The tranche, which priced last Friday, 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 last Friday at 97 to yield 10.491%.

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

The trader said the fixed-rate tranche has traded as high as 99¾ bid, 99 7/8 offered.

"It was the most difficult high-yield deal that has gotten done since the market had its major sell-off," he said.

"It's a recovering credit. It was a big size. It's a name that some people just say 'No' to, outright. It had a couple of iterations. It got reduced in size. But on balance you have to give them credit for having gotten it done.

"And it has also done pretty well in the aftermarket," he noted.

The trader added that the original proposed amount of $750 million would be difficult to launch for a credit like Hynix.

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

EM firmer

Overall, emerging market debt ticked higher although the market generally lacked direction, said sources.

"It was an okay day today [Tuesday]," said a buyside source. But, the source added: "It was really quiet. I can't think of anything that was a market driver."

The source said that the market's recent lull has more to do with the summer seasonal break than this week's Federal Open Market Committee meeting.

"I don't think people are paying a lot of attention to that [FOMC]. It's just quiet in general," replied the source.

Late in the day, the Brazil C bond was spotted up 1/8 of a point to 102 1/8 bid while the bond due 2040 gained 0.15 to 119.35 bid. The Ecuador bond due 2030 was quoted up a point to 83¼ bid. The Venezuela bond due 2027 was down a quarter of a point to 104.55 bid.

Philippines' saga

President's Gloria Arroyo's saga has been one of the main drivers behind the direction of the country's bonds in the last week, said the trader.

On Monday, president Arroyo admitted that she had spoken to an election commissioner about the May 2004 poll, calling it a "lapse in judgment." But she denied allegations that she cheated her way to office on national television.

Arroyo has been battered by allegations that she rigged last year's presidential election. Along with the election probe, the president has been beaten down by allegations that two family members benefited from an illegal gambling racket.

"It's a funny combination because you have some fundamental improvement in the Philippines," said the trader.

"And you have these stories about the gambling issues with Arroyo's husband and her husband's son.

"But it's taking place against a constructive backdrop, with low rates and people looking around for high yielding plays. So it's a big fight between a fundamentally improving situation versus this headline risk and some political risk," he told Prospect News.

"But the backdrop is supportive for these big high yielding issues."

The buyside source noted that in the morning Tuesday Philippines' paper was better bid in response to the apology. However the price action was slight, given that investors, for the most part, are sticking to a game plan, which was undeterred by the apology.

The source added investors' strategies depend on how they see the story ending.

In the near term or medium term, if investors believe that the problem may escalate into something worse for Arroyo then they would be underweight, said the source.

"If you are confident that it's going to blow over and they are not going to ask her to resign, then you are long in the Philippines," added the source.

"I think at this point in time, people have made up their minds in the past couple of weeks."

The trader added that some money has gone into Philippines in the past week to 10 days, which is adding to the technical backdrop.

The Philippine bond due 2030 was down to a low trade around 102 this time last week, according to the trader. Since then, the bond has touched as low as 101¾ bid.

The bond was spotted at 104 bid on Tuesday.

"There has been some pretty steady buying across the time zones," observed the trader.

Good July technicals, says buysider

Meanwhile, the month of July may promise to be a fertile month from a technical standpoint, noted the buyside source.

"There will be a lot amortization and coupon payments in July and not a lot of supply, so all of this cash is going to have to be put back to work into the asset class.

"I think we're going to have a good technical month in July," predicted the source.

EM positive on high oil

As oil reaches $60 per barrel, oil exporters will obviously benefit but there is a downside, according to the buyside source, such as the impact on the economy in the United States.

"We like high oil prices, but I think they are probably reaching unsustainable levels.

"And far as emerging markets are concerned, anything above $45 is good. Sixty is great but if the downside of $60 is going to be a recession in the U.S., I don't think we need the $60."

For oil consumers in emerging economies, negatives such as inflationary pressure have yet to seep through. The majority of countries on the JP Morgan EMBI Index are oil exporters, remarked the source.

"In terms of market direction, if oil prices are high then it's going to affect almost 50% of the index in a positive way, that's probably why overall the market is acting with a better tone."

The effect for oil consumers is minimized by the fact that they are searching for alternative energy sources, noted the buyside source.

"They have some hedges against it. It's certainly not a plus. But it's not as negative as it could be."

Russian banks tap primary

On Monday, Moscow-based Vneshtorgbank became the latest of a slew of Russian banks to tap the primary market in recent weeks, in Vneshtorg's bank with $1 billion of 30-year bonds (Baa2/BB+/BBB-) priced at par to yield 6¼% via Deutsche Bank.

Russian banks are taking advantage of the quiet market as well as the current positive tone to issue new securities, said the buyside source.

"They found a window. They are trying to come to a market where they think there will be demand."

Nonetheless, the source is skittish about the Russian banking sectors, choosing not to play in the new issues.

The vast number of banks in Russia, which includes many small banks, is a concern for the source.

"I think the regulatory system is not strict enough in order to police all the little banks."

Reforms such as consolidation, reduction in the number of some 1,300 banks and stricter capitalization ratio requirements are necessary, remarked the buyside source.

The source pointed out to the confidence crisis, which pushed Russia's banking system onto the brink of a nervous breakdown last July. Guta Bank, unable to meet its depositor requirements, stopped paying its customers on July 6, 2004. That action ignited a bank run.

State-run Vneshtorgbank purchased the small bank, which helped fix the crisis.

"End of the story," remarked the source. "People kind of forgot about it, but I think there is something lingering over Russia.

"Except for a few names, the banking sector is something that needs to be monitored."

Last Friday, both Rosbank and JSC Import Export Bank (Impexbank) issued new paper. Rosbank Finance SA priced $150 million of two-year bonds (Ba3//B) to yield 7 5/8%. And Impexbank sold $100 million of two-year bonds (B1/B-/B-) at 9%.

On June 16, Home Credit and Finance Bank LLC, via its special purpose vehicle Eurasia Capital SA, sold $275 million of three-year loan participation notes (Ba3/B-) to yield 8 5/8%.

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