Emerging market debt softer on U.S. stocks, U.S. rate concerns; ATF Bank sells downsized deal

By Reshmi Basu and Paul A. Harris

New York, Oct. 20 - Emerging market debt failed to move ahead Thursday despite positive news coming out of Brazil as it tracked a slumping U.S. equities market. The session was described as choppy by market sources.

In the primary market, Kazakhstan's ATF Bank (Ba1/B+/B+) priced a downsized offering of $200 million five-year senior unsecured bonds at 99.496 to yield 8¼%.

Deutsche Bank and HSBC were joint lead-managers for the Regulation S transaction.

Adding to the Asian pipeline, the Republic of Korea (A3/A) plans to start a European and U.S. roadshow for a benchmark-sized dual tranche offering of dollar-denominated and euro-denominated notes next week.

ABN Amro, Citigroup, Goldman Sachs and UBS Investment Bank are managing the sale.

This will be the country's first euro-denominated bond deal.

"More euro paper makes sense, given that Europe seems to be more natural in demand," noted a buyside source.

"Most Asians and Latins like the dollar market because it is more closely aligned with the U.S. economy and the dollar.

"We're expecting to see a lot more Asian issuance," said the buyside source. "But so far, we haven't seen nearly as much as we had expected."

Out of Ukraine, Bank Nadra talked its $100 million offering of three-year senior unsecured notes at the 9½% area on Thursday.

Dresdner Kleinwort Wasserstein and UBS Investment Bank are leading the Regulation S offering.

And the City of Kiev set price guidance for a $250 million offering of 10-year notes (B2/B+ expected) in the area of 8%. The deal is coming via Citigroup and Credit Suisse First Boston.

The buyside source said he is not a fan of Ukrainian credits.

"It seems like the political situation is getting worse. The economy is slowing down. And you're not seeing the reform push that you've seen in the past," he observed.

Meanwhile moving to Malaysia, air carrier Penerbangan Malaysia Bhd. issued price talk on its $1 billion two-part bond offering (A3/A-).

Pricing is expected to take place Friday in New York.

The company talked an approximately $750 million offering of 10-year bonds at mid-swaps plus 35 basis points, or an at 83 basis points spread to Treasuries.

Meanwhile Penerbangan talked an approximately $250 million offering of 30-year bonds at mid-swaps plus 96 basis points or at a 145 basis points spread to Treasuries.

CIMB Bhd., Citigroup and HSBC are joint bookrunners for the Rule 144A/Regulation S offerings.

And turning to Brazil, Vale Overseas Ltd., a wholly owned subsidiary of Brazilian mining concern Companhia Vale do Rio Doce (CVRD) concluded the roadshow Thursday for its benchmark-sized dollar-denominated offering of 40-year fixed-rate notes (issuer ratings Baa3/BBB).

The deal is expected to price shortly, subject to market conditions, the source added.

Late Thursday afternoon, sources told Prospect News that price talk had not surfaced.

One source said it was difficult to reach consensus because of the long tenor on the bond and because there is no Brazilian sovereign or U.S. Treasury to fix a spread of.

ABN Amro and HSBC are bookrunners for the offering.

EM flows at standstill

Flows into emerging market bond funds were at a virtual standstill for the week ending Oct. 19, according to EmergingPortfolio.com Fund Research. Inflows were at a measly $0.297 million. The funds lost 0.30% on a performance basis for the week.

Last week, the market saw its 15th straight winning streak snapped when it posted a loss of $24 million in flows.

Total year-to-date inflows into the market stand at $5.2823 billion.

Equities yank down EM

The equities market had a roller coaster ride of a day, opening higher and then closing much lower. Inflation concerns and speculation about higher interest rates continued to tug at investment sentiment. However, Thursday's session saw more uneasiness brought on by earnings concerns for Pfizer and eBay.

Wednesday's triple-point gain for the Dow Jones Industrial Average was reversed by a triple-point loss on Thursday. The Dow Industrials lost 133.03 points to settle at 10,281.10.

And that dive offset the good news coming out of Latin America.

Late Wednesday, Brazil's Copom lowered its Selic rate to 19% from 19½%, its biggest cut in nearly two years.

That move was expected to empower Brazilian markets, given that the market was anticipating a 25 basis point reduction. But the positive reaction lasted only for a brief period. Instead the Bovespa closed the session to a six-week low.

"What I'm kind of surprised by is how much the Brazilian stock market is down today [Thursday]," said the buyside source.

Brazilian bonds also ended the day lower after opening higher.

The reaction in Brazilian bonds is not necessarily easy to pinpoint, according to Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

But the sharp-sell off in the Bovespa, which was down by 3.82% and the dip in the currency created a not-so positive environment and that was compounded by U.S. inflation concerns, he added.

"We're still very much caught in counter-influencing elements in the U.S. The inflation talk is still there. And the Fed governors are continuing to talk the talk on inflation," he commented.

Adding to stress levels for the bond market, the sentiments about the U.S. economy appears upbeat, said sources.

"It also reinforces the case for higher rates going down the road. And I think ultimately that may be starting to sink into the markets like EM," noted Alvarez.

"And I think that's why you are seeing these roundabout turns in prices because ...we are at the tight range. We try to make some upside, but once things start sinking domestically, we turn around," remarked Alvarez.

"We're very much still glued to equity markets, particularly the U.S," he observed.

Across the board, Latin American equity markets fell, taking their cue from the United States. The Argentina's Merval Index was down 1.73% and Mexico's Bolsa Index slipped 1.1%.

Bonds slipped as equities fell. During the session, Brazil's portion of the JP Morgan EMBI widened by seven basis points to 379 basis points over Treasuries. The Brazil bond due 2040 was spotted down 0.15 to 119.10 bid,

Meanwhile Colombia's bonds moved higher as the country's constitutional court ruled in favor of a congressional law passed last year to allow presidents to serve more than one four-year term. That opens the door for president Alvaro Uribe to run for re-election.

The Colombian bond due 2011 gained a quarter of a point to 112 bid while the bond due 2033 added one point to 124 bid.

Fed seen tightening further

The Fed has sent a clear message that they will continue to be aggressive, remarked the buyside source.

"And people were hoping that the slowdown in the economy would mitigate that, but we haven't seen that much slowdown. Until you see that slowdown, the Fed will remain active."

Worries over a tighter monetary police have not caused the source to change his position. Instead he is focusing on spreads. And spreads have not widened out by that much, he said.

"There's still a valuation problem."

Furthermore, he added that there was no value in emerging markets, even in local currency deals.

"They have more yield, but I wouldn't say value."

He added that currency and dollar bonds basically trade with about the same total returns.

"But in down markets, you lose a lot more in currencies. And as the market tightens up, the yields are still more attractive in local currencies. But if you don't believe in emerging markets, you are going to lose a lot more money," he told Prospect News.

"I think it is just people reaching for yield."

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