Brazil underperforms; KDB names banks for $500 million bond offering

By Reshmi Basu and Paul A. Harris

New York, Aug. 23 - Brazilian bond prices slacked off Tuesday, a day after firming up on Brazilian finance minister Antonio Palocci's announcement that he would stay. Palocci became a central figure in a corruption scandal Friday.

But despite Brazil's weak showing Tuesday the overall market moved higher.

In the primary market, Korea Development Bank mandated JP Morgan, HSBC and Merrill Lynch & Co. to manage its $500 million global bond offering, according to a market source, who added that the deal size could grow.

The issuance is expected to have a maturity of five years to 10 years. The deal is expected to launch in early September.

Meanwhile, there are potentially several deals coming out of Indonesia, a sellside source confided. The X-factor, in regard to those deals, the source added, is a recent set of changes in the Indonesian government's withholding taxes.

"At the beginning of 2005 the government changed the withholding tax rules, and it seems like they are changing them again," the source said.

"It seems as though potential issuers don't know what to do. When you don't know whether you are going to have to pay a 10% or 20% tax on top of your coupons - that is a big uncertainty. Most issuers are waiting to have that resolved."

Brazil sees sell-off

Investors reduced exposure Tuesday in apprehension of Wednesday's congressional hearing of testimony from Rogerio Buratti, a former aide to Palocci, who said Palocci was paid off when he was mayor of the Sao Paulo State city of Ribeirao Preto.

There was even a story on Valor Online Tuesday, who reported earlier that Buratti would not be able to testify because he disappeared. Later Valor reported that he was found.

In a press conference held on Sunday, market-friendly Palocci denied any allegations of wrong-doing. He also added that Brazil's economic policy would not be changed.

That assurance helped Brazilian bonds see a sharp rebound Monday, but the story has since been digested.

"There's more testimony coming so it's back to watching politics," said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

"Yesterday [Monday], you had some short covering," he added.

In Tuesday's session there may have been some quick profit-taking or maybe some shorting, remarked Alvarez.

"It's really tough to say because there really is not much volume out there.

"It's politics again. And politics remains the driving force in Brazil," he noted.

During the session, Brazil bond due 2040 fell a quarter of a point to 117½ bid.

Ecuador stabilizes

Ecuador's debt was mostly firm before slipping a little at the end of the session - but a big improvement on its recent performance.

Standard & Poor's said it may cut Ecuador's CCC+ long-term sovereign credit rating on concerns over the country's ability to pay its debts due to increased political risk.

S&P placed the rating on CreditWatch with negative implications.

"The rating could be downgraded if the current impasse results in greater financial stress for the sovereign," S&P said in the release.

The market had no immediate reaction to the news, but towards the end of the session prices were slightly softer, said Alvarez.

The Ecuador bond due 2030, which saw a substantial drop last week, was down only half a point at 86¼ bid, 86¾ offered.

"A half point bid-offer on a bond like that is not bad. It's an indication that it's not in free fall," said the sellside source.

Talks have started between protest leaders and president Alfredo Palacios' government. Last Friday, Ecuadorian bonds fell after protests by striking workers in two oil-rich provinces shut down the export of crude oil.

"Last week they implemented a state of emergency," said the sellside source.

"And I think they are trying to buy oil from Venezuela in order to meet their shipments."

Watch out for Pat

Among other negative headline news relating to Latin America, reports that television evangelist Pat Robertson asserted on his 700 Club TV show that the United States should assassinate Venezuelan president Hugo Chavez because of Chavez's extremism and close relationship with Fidel Castro had some emerging markets players scratching their heads on Tuesday.

However the typical response seemed to be that neither Pat Robertson nor the U.S. government, which has recently carped about Mr. Chavez's stance on the cooperative war against illegal drugs, have registered any kind of negative impact on Venezuela's bonds.

"As long as oil prices are in the $50 and $60 ranges people don't care about the headline noise," the sellside source said.

"People feel as though the U.S. government is not going to do anything about Chavez. And the guy has money coming out of his ears. He can afford to do whatever he wants to do."

While Robertson's comments were inflammatory, there was no impact on bond prices, said Alvarez.

"In general, Venezuela trades primarily off of sentiment towards risk-taking in emerging markets," replied Alvarez.

"Then it has a minor component related to crude oil prices. Today [Tuesday], it really hasn't reacted to anything," he said.

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