Emerging market debt softer on profit taking; Turkey sells $500 million add-on

By Reshmi Basu and Paul A. Harris

New York, Nov. 18 - Emerging market debt ground higher Thursday as Russia scored big on an upgrade by Fitch.

"The market is a little bit soft," said a buyside source. "But it seems to have come back as the day wore on.

"Although I don't really know how soft it really got.

"Nigeria is marked down big time today [Thursday].

During Thursday's session, the Nigeria par bond fell 4½ points to 91 bid.

Also down was paper from Malaysia, Singapore and South Africa, he said.

The JP Morgan EMBI Global index tightened two basis points to 391 basis points.

Mimicking recent sessions, trading volumes continue to be light, according to a Latin America debt strategist for Refco EM.

"There is uncertainty as to where we are going next. An environment of increasing interest rates does not favor bonds," said the strategist.

"The market has rallied in the past few couple of days, so it's taking a little breather.

"Some profit taking in Brazil but not a lot of activity," he added.

The spread on the C bond and Brazil bond due 2040 widened one basis point to 431 and 459 basis points, respectively. The bond due 2034 fell ¾ of a point to 92¾ bid while the bond due 2006 slid 0.20 to 107.80 bid.

Ecuador and Venezuela also lagged behind the market.

Venezuela fell on rumors of a new issuance, said the buyside source.

"$500 million is the rumor," he said.

The Venezuela bond due 2027 was down 0.95 to 103¾ bid. The Ecuador bond due 2030 slipped 1.1 points to 85½ bid.

Russia's paper up on Fitch upgrade

Russia's sovereign debt gained on an upgrade from Fitch Ratings.

The rating agency said it raised the Russian Federation's long-term foreign and local currency ratings to BBB- from BB+.

"An exceptional macroeconomic performance, helped by high oil prices and broadly prudent fiscal policy, is continuing to lead to marked declines in its public and external debt ratios, a massive accumulation of foreign exchange reserves and a build-up in its oil stabilization fund," said Fitch's Edward Parker, in a statement.

In response the Russia bond due 2030 was up 1.18 to 102.93 bid.

"The biggest news today [Thursday] was the Russia upgrade by Fitch," noted the buyside source.

"Those assets have been on fire. Merrill Lynch said they were going to put Russian corporates into their high yield indexes - so that's a big change right there," he noted.

Fitch upgrades Peru

Fitch raised Peru's long-term foreign currency rating to BB from BB-. An upgrade by Moody's may soon follow, said a source.

"Peru in the past 12 months has registered very important economic growth, favored by the export sector," said the Refco strategist.

"Peru has lagged in terms of price in the market - maybe that creates a little bit of support and allows prices to move higher."

The country's bonds were better bid after the upgrade. But the news wasn't enough to stop the bond due 2012 from losing ground on the day. It finished at 114¼ bid, down 0.10.

Turkey retaps 7¼% bonds due 2015

The Republic of Turkey reopened its 7¼% bonds due 2015 (B1/BB+) to raise $500 million.

The add-on priced at 102 to yield 6.97% or Treasuries plus 285.9 basis points.

Citigroup and Morgan Stanley were lead managers for the Rule 144A/Regulation S sale.

Thursday's unexpected retap occurred much to the resentment of an investor, who was looking to sell the original paper.

On Sept. 30, Turkey priced $1 billion bonds due 2015 at 98.573 to yield 7.45%.

"I was actually looking at it this morning, looking at selling this issue

"I'm not a big fan of Turkey," said the buyside source.

"I bought some of it when the new deal came and now I'm thinking it's getting kind of rich - maybe I'll sell it. And then they announce this new deal, so that maxed out the prices today [Thursday].

"And even worse, now I can't even sell tomorrow [Friday] cause it looks like I'm flipping the deal. I'm kind of stuck," he added.

Where are the Rule 144As?

Looking ahead, the pipeline is thin - and even thinner for U.S investors looking to pick up some paper.

"That's been the most frustrating thing for me is that a lot of the stuff has been offshore. That's really limited who can look at it," the buyside source said.

However, he did note there has been a slew of activity this week.

"We've kept ourselves busy. We've had Turkey. We've had Panama. Mexico too.

"It's not like high yield where it's five drive-bys a day. High yield seems to be getting to the point of indigestion. EM does not," he noted.

On Tuesday, Panama sold $600 million bonds due 2015 (Ba1/BB) at 99.301 to yield 7.35%, or a spread of 314 basis points more than comparable Treasuries via Morgan Stanley.

And Mexico opened the week with €750 million of bonds due 2020, priced at 99.561 to yield 5.646% or a spread of mid-swaps plus 142 basis points via Credit Suisse First Boston and Deutsche Bank.

This issuance wrapped up Mexico's funding needs for 2005 and the first quarter of 2006, a sign that emerging markets has an appetite for more paper, said the buyside source.

Gruma details emerge

Despite the lack of deals in the U.S. market, details emerged on an offering from Gruma SA de CV.

The Monterrey, Mexico, flour and tortilla company will issue $250 million in perpetual bonds (BBB-/-/BBB-) during the week of Nov. 29.

Merrill Lynch is running the Rule 144A/Regulation S offering.

Proceeds will be used to refinance debt and for general corporate purposes.

Argentina to conduct roadshow

At the end of the month, the government of Argentina will conduct a roadshow explaining its restructuring proposal over $100 billion defaulted debt to the global investment community

"After that you have three weeks for those who are interested in the exchange to tender the bonds. But we are still a little bit far from that," said the Refco strategist.

"The market is waiting to see the roadshow. There is still some uncertainty in terms of valuations."

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