Turkey up on S&P upgrade; United Overseas Bank prices; Venezuela underperforming despite calm

By Reshmi Basu and Paul A. Harris

New York, Aug, 17 - Emerging market trading continued to drag in typical August fashion but Turkey's debt firmed up in response to a ratings upgrade to the sovereign.

"Pretty slow out there," said a trader. "But it's a good feeling.

"Treasuries were up on CPI numbers," he added.

The Labor Department's consumer price index fell 0.1% in July compared with a 0.3% gain in June. Some analysts believe that the tame CPI numbers are another signal that the Federal Reserve will skip raising rates at its next meeting.

The Brazil C bond was up 0.125 to 96¼ bid at Tuesday's close. It widened two basis points to 551 basis points. The Brazil bond due 2040 was rose 0.40 to 103.20 bid.

Mexico's bond due 2026 widened three basis points to 239 basis points.

Turkey up on S&P upgrade

But Turkey was the big story in emerging market news, according to a buy-side source.

The country's debt gained during Tuesday's session on news of a sovereign upgrade from Standard & Poor's. The ratings agency raised the rating by one level to BB-.

"The sovereign upgrade reflects the progress Turkey is making toward durable macroeconomic stability, and the country's expected adherence to a strict macroeconomic program beyond 2004, which would result in further fiscal improvement, disinflation, a more sustainable public debt burden, and reduced vulnerability to market sentiment," said Standard & Poor's credit analyst Konrad Reuss, in a news statement.

"We believe that the risks on both the political and economic fronts are balanced," he added.

However the buy-side source disagreed with S&P's observations and added that the rating upgrade does little to influence his lack of position in Turkey.

One cause of concern is Turkey's high level of debt relative to its GDP, the source said.

"We're not involved. The debt level is extremely high and that is something we are worried about," he explained.

"The country base fully depends on the U.S. for support. As long as there is a terrorist alert, Turkey will be a friend of the United States - more than a friend, a partner.

"It is one thing when things are good - then everything looks good.

"But when they get bad, all of the sudden you see the money market rates start going up and you see a real blowout in debt situation," he added.

Another concern for the buy-side source is that Turkey has not been paying down its debt.

"They are really dependent on growth to get out of their debt situation."

Venezuela underperforming

The market's acceptance of the recall referendum results has come as a surprise to the buy-side source.

"I look at Venezuela the way I look at company with very weak management," he said.

"I'm surprised that the market is reacting well to the outcome."

Emerging market debt players like the removal of the uncertainty surrounding the recall - that coupled with high oil prices, said the buy-side source.

But he added that the bonds have not performed that well.

"According to JP Morgan, it's down 79 basis points yesterday [Monday on a spread basis]. And down 32 today. So it's down 30 since before the election

"The EMBI is up 40 since the election.

"I don't know if the benchmarks have done better, but on average it has underperformed," he added.

The Venezuela bond due 2027 was down 0.35 to 91½ bid in trading Tuesday.

Venezuela's debt had slipped initially on Monday but then rebounded and made up most of its lost ground - but still lagged behind emerging markets generally on the day.

On Sunday, the motion to recall President Hugo Chavez was rejected by 58% of voters, based on 94% of the ballots counted, according to the National Electoral Council.

Yukos legal problems

Elsewhere embattled Russian oil company Yukos suffered another legal loss. The Moscow City Court of Arbitration rejected an appeal by Yukos that sought to suspend government efforts to collect on its $3.4 billion tax bill from 2004. It then discarded a suit filed by Yukos to allow it to pay part of the tax bill with shares of Sibneft. The company's plan to merge with Sibneft failed after the arrest of Yukos's founder and chief, Mikhail Khodorkovsky.

But Yukos still owns 20% of Sibneft.

Because Yukos has been in the headlines for so long, the vital issue is that they continue pumping oil, said the buy-side source.

In the last five to 10 years, Russia has evolved, he added.

"And a step in the evolution is now that everything is handled by courts. Five years ago it would have been handled by thugs.

"For Russia to grow to the next level, you really have to strengthen the rule of the law," he added.

Russia's bond due 2030 widened 31 basis points to 329 basis points.

United Overseas prices

United Overseas Bank priced both parts of its two tranche bond offering, S$1 billion of Singapore-dollar denominated notes and $1 billion of U.S. dollar-denominated notes.

The S$1 billion upper tier 2 bonds priced at 99.755 to yield 68 basis points over the 10-year Singapore dollar swap offered rate.

The $1 billion upper tier 2 bonds priced at 99.929 to yield 114 basis points over 10-year U.S. Treasuries.

Both pieces are non-callable for 10 years and have a coupon step up in year 10.

"Not enough yield," said the buy-side source.

JP Morgan was the global coordinator for the deal.

JP Morgan, Citigroup and United Overseas Bank ran the books for the Regulation S only Singapore-dollar-debt offer. JP Morgan and Merrill Lynch ran the books for the Rule 144A/Regulation S U.S dollar-denominated tranche.

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