Brazil continues to gain on interest rate cut, expected soybean surplus a plus

By Reshmi Basu and Paul A. Harris

New York, March 19 - Brazil continued to trade higher Friday in a continuing reaction to Wednesday's unexpected interest rate cut.

The Brazilian benchmark C bonds closed bid at 98.5, offered at 98.44, up three-eights to a half a point on the day

"I think the market was pleased, and it rallied the local markets. And the foreign markets caught up with the local markets," said a trader

In an unexpected move Wednesday, Brazil's Central Bank cut its benchmark interest rate by 25 basis points to 16.25%, the first reduction in three months as the government faces increasing pressure to loosen its tight monetary policy despite inflation concerns.

"The reduction has been well received by the markets," said the trader.

"We had 97 handles most of yesterday. And the day before we had 96 handles. We've had a good week in Brazil in terms of the performance of the external market," he added.

Looking ahead, Brazilian bond prices will likely be helped by the positive mood in the foreign exchange market and expectations for a record soybean harvest.

"Now the sentiment in the currency market is Brazil had been encouraged by a continuing set of very favorable reports of the evolution of the Brazil trade surplus," said the trader. "Those external export numbers continue to be quite strong."

"We're just moving into that maximum season where you're going to get your big seasonal crop exports. Soybean prices have more than doubled in the last 12 months and Brazil is talking about a record crop.

"We're talking about a record harvest and a record shipment and some of the highest prices that they've seen in quite some time.

"The local sentiment in the commodity markets is very strong. It's been a powerful force of support for the currency and indirectly for fixed income markets," added the trader.

Smooth sailing seen for Latin America

Latin America is expected to continue to perform well since a rate hike by the U.S. Federal Reserve appears unlikely in the near term and the recent political scandals fade into the past.

"It's been a fairly quiet week for Latin America," said the trader.

"We had two real rounds of volatility. We had a sell off in the market that was fairly important in late January/early February when the Federal Reserve changed its language.

"Some leveraged portfolios and risk capital portfolios reduced balanced sheets and took to selling bonds," said the trader, who saw 10 point price moves in several Brazilian securities in that period of unrest.

The second round of volatility stemmed from Brazil's "Bingo-gate" in which an aide close to President Luiz Inacio Lula da Silva's chief of staff, Jose Dirceu, was accused of bribery in February.

"That's a couple of weeks behind us. While people are keeping one eye the scandal, the focus seems to have shifted back to the friendlier trade fundamentals and perception that any Fed hike is possibly still some months away," said the trader.

"And the two things seem to have helped this market move up again."

Another reason for the calm trading in Latin American names is the Inter-American Development Bank meeting next weekend and early the following week in Lima, Peru, explained the sell-side source.

"A lot of people are out of the market for that. In general you wouldn't price a deal during IDB because there are too many investors who are out at that, as well as issuers on the sovereign side," said the sell-side source.

Hutchison recovers slightly

Hong Kong's Hutchison Whampoa opened up slightly better Friday morning, following Thursday's five to 11 basis points gain on the day.

Hutchison's Whampoa 6¼% bond due 2014 finished three basis points tighter at 199 bps bid, 194 offered. Its 5.45% bond due 2010 stayed at a 213 bps bid, 209 bps offered. And the 7.45% bond due 2033 closed the session 5 bps tighter at 237 bps bid, 232 bps offered.

In Thursday's trading, the issues were 5 to 11 bps better.

Early Thursday, the telecom company reported its net profit for 2003 as whole was HK$14.38 billion, compared with HK$14.36 billion a year earlier.

Standard & Poor's confirmed its A- rating in reaction to the earnings report.

Sun Sage prices

Out of Korea, Sun Sage Mando BV (Ba2/B+) priced $200 million of senior secured notes due 2009 at par to yield 8¼% (BB).

The offering came at the high end of price guidance that put the yield between 8% and 8¼%.

JP Morgan and Deutsche Bank Securities are the bookrunners on the Rule 144A/Regulation S issue.

Proceeds from the notes will be used to fund a dividend payment to the sponsors.

Sun Sage Mando is a holding company for Korean auto parts manufacturer Mando Co.

Korea impeachment shock blows over

Also in Korea, the initial blows to the market over the impeachment of president Roh Moo-Hyun for allegedly breaking elections law have wound down, according to the sell-side source.

"Everybody viewed it as a sort of immature political event. It took place because the president openly supported somebody in an election, which is apparently against the law, but everyone does it", commented the sell-side source

"People are viewing the whole idea that the opposition would impeach the guy over it as being pretty ridiculous.

"I don't think anyone thinks it's going to stand."

Meanwhile be on the lookout for the upcoming deal from Malaysia's Titan Petrochemicals & Polymers Bhd., recommends the sell-side source.

Titan Petrochemicals starts its roadshow Tuesday for a $300 million offering of seven-year bonds (Ba3/BB). Marketing runs through Thursday.

"It's owned by the same group that owns Westlake Chemical and a lot of people know Westlake," said the sell-side source.

The deal is expected to price later the same week or early in the week of March 29.

Goldman Sachs & Co. and JP Morgan are running the books on the Rule 144A/Regulation S offering, which will have no registration rights.

The notes will come with four years of call protection.

Proceeds will be used to repay bank debt as well as to fund capital investment and working capital.

And expect the Russian pipeline to build up, according to market sources.

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