Emerging market investors await Argentina's debt issue, scramble for Venezuelan paper

By Stephanie N. Rotondo and Paul A. Harris

Portland, Ore., Aug. 18 - Emerging markets trading activity focused on South America on Wednesday in a shift from Tuesday, when China was at the center of investors' attention.

"We continued to see money being put to work in small amounts," a trader said, adding that inflows were in "dollar- and local currency-denominated instruments."

Still, the trader said that bond prices remained tight. A recent "rally in [U.S.] Treasuries" had resulted in "highs in a lot of assets, except for Argentina and Venezuela."

"Issuance is very quiet," he said.

But a recent issue from Venezuela was certainly attracting attention. The sovereign issued $3 billion in bonds due 2022 on Monday, and since then the debt has gained about 5 points. Even J.P. Morgan Chase & Co. analysts considered the notes to be an attractive investment.

As for Argentina, the country is reported to be planning a new issue in early September. Until then, however, a trader said he expected the emerging markets to remain "pretty quiet."

The Argentinean debt might find rabid investors, as well, especially as many market watchers are deeming the securities a better bet than those of Greece.

Venezuela notes 'very sought after'

On Monday, Venezuela issued $3 billion of 12¾% notes due 2022. At that time, demand for the debt was three times as much as the offered amount.

Since issuance, the bonds have been "very sought after," a trader said.

The trader said the bonds had gained "5 points over the last few days," seeing them trading with an 85½ handle.

"A lot was placed locally with importers and local agents," the trader continued.

The yields on the debt were discounted, he added, noting that the discount made the bonds "very attractive to overseas guys."

"That's going to continue," he opined, remarking that the bonds were "absorbed very easily" into the market.

And, he said, "there is room to move higher."

In a note to clients, JPMorgan strategist Ben Ramsey said the new issue was "too compelling to overlook," recommending investors shift to an overweight position on the debt.

Ramsey said the bonds were "attractively priced in the international market" and that the 2022 paper was "by far the highest-yielding asset" among Venezuelan debt.

However, there is still some risk involved in investing in Venezuelan securities, considering the recent law that went into effect on Tuesday.

President Hugo Chavez signed the Capital Markets Bill on Tuesday, which would ban private brokerages from trading local currency or dollar-denominated securities issued by the public sector.

"With this we are leaving behind the rot of capitalism," Chavez said in a phone statement to state television. "Venezuelans can now save, but not save in the rotten brokerages of the bourgeoisie that take the money to the United States."

Chavez has blamed brokerages for his country's current financial woes.

Argentina hopes to issue debt

A market source said that Argentina planned to issue new debt in early September.

The trader said he had heard of the new issue via local Argentinean newspapers. Sure enough, La Nacion had reported Tuesday that the country was intending to sell debt internationally.

The issue would mark Argentina's comeback into the international credit markets after a failed attempt in June. It would be the first issuance seen from the South American country since it defaulted in 2001.

In June, the government of Argentina had planned to sell about $1 billion in new bonds, but economic concerns in Greece and Europe resulted in interest rates too rich for the government's blood.

With the proposed September issue, the country is hoping to get interest rates of less than 10%.

And, it is possible that Argentina will get what it wants. Based on current credit-default swap levels, Argentina debt is now less risky than Grecian debt. It is expected that the trend will continue, as Argentina's economy is expected to grow by nearly 10% this year, according to Morgan Stanley, while Greece's gross domestic product could decline by 4%.

"It is definitely a longer-term trend," said Aryam Vazquez, an emerging markets economist at Wells Fargo, in a Bloomberg report. "The economy is growing, and the growth outlook is very robust. But more importantly, the fiscal situation is very strong. Their financing needs aren't even a concern now, and that clearly is not the case with Greece."

A good bid in Asia

In Asia, everything traded well, according to a trader in Singapore, who focuses on Asian fixed income.

Lately Asian sovereigns have been very firm, as supply continues to significantly lag demand.

The supply-demand imbalance has also dragged some of the higher quality high-yield corporates higher, the trader remarked.

"We have had decent supply in July and August, but nothing like the U.S.," the source commented, referring to the history-making issuance in the U.S. junk bond market during the summer.

"Still, it was a significant amount of supply, for this market," the source added. "And the deals are trading well."

A Wednesday bid from a decent-sized buyer of China property lent a good tone to that sector, the trader added.

Also Indonesian and Philippine corporates traded well during the session.

E-Land deal sidelined

A deal which E-Land Fashion China Holdings Ltd. kicked off in mid-July has been sidelined, the trader said.

The Shanghai-based women's apparel company marketed a $200 million offering of three-year senior unsecured notes (Ba2/BB-) via bookrunner Morgan Stanley.

The proceeds were to fund capital expenditures and to expand E-Land Fashion's network.

The market is hearing that E-Land might give it another go in September, the trader added.

However, there were a lot of questions on the credit, when the deal was being marketed in July, the source specified.

The same questions would likely surface again, should E-Land choose to have another try in September, the trader added.

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