Emerging market debt climbs on Treasury rally, Mexico's swap offer; two corporates tap market

By Reshmi Basu and Paul A. Harris

New York, Nov. 10 - Emerging market debt gained Thursday, propped up by a jump in U.S. Treasuries and by Mexico's announcement of a debt swap.

In the primary, two corporates tapped the capital market.

Out of Asia, Korea National Housing Corp. sold €400 million of five-year floating-rate notes (A3/A) at 99.81 to yield Euribor plus 29 basis points, according to a market source.

The deal was the biggest floating-rate issue ever sold by a Korean corporate, according to a source.

Citigroup, Deutsche Bank, HSBC and Morgan Stanley were joint bookrunners for the Regulation S transaction.

Out of Mexico, Controladora Mabe SA de CV (Mabe) sold $200 million of 10-year notes (/BBB-/BBB-) at 202.2 basis points more than Treasuries via Citigroup and ABN Amro.

Pipeline developments

Meanwhile, two deals out of Asia have been sitting in idle, waiting to tap the market.

Malaysia's Megasteel, a subsidiary of Lion Corp. is expected to price $450 million in a two-part notes offering via Credit Suisse First Boston.

"We've heard that it has been delayed for a couple of days in order to allow people to do more credit work," said a trader, who focuses on Asia.

"They have tightened some of the terms and documentation, so people are still going through the nuts and bolts," he noted, adding the deal will try price during the week of Nov. 14.

Additionally, the five-year tranche is apparently a lot more popular than the 10-year portion, he said.

Also in a holding pattern is a $300 million offering from Sateri International. Credit Suisse First Boston and Merrill Lynch are managing the deal.

The trader noted that investors were becoming more cautious, adding that the company originally talked about doing a seven-year callable and a perpetual issue. The perpetual was quickly dismissed due to lack of interest, he noted.

Indonesia's Tanoto family owns the viscose and dissolving pulp producer.

EM up on Treasuries

Emerging market debt closed out the abbreviated trading week on a positive tone, buoyed by a Treasuries rally Thursday.

During the session, Treasuries gained in response to the third and final installment of the government's quarterly refunding. On Thursday, the Treasury sold $13 billion of 10-year notes to yield 4.578%. Indirect bidders, which include foreign central banks, took a record 55.6% of the notes.

This helped turn around the Treasury market, which was backed up Wednesday by the scarcity of indirect bidders involved in the second leg of the government auction.

At late trading, the yield on the 10-year note stood at 4.57%, improved from Wednesday's close of 4.65%.

That relief helped emerging markets trudge higher, according to market sources.

Meanwhile, the market has seen a positive impact from the new supply hitting the market.

"We've had supply in a couple of spots, and it seems to have gone pretty well," said a trader.

"There is a Mexican debt buy-back going on at the moment, and net-net it seems like a positive force for market sentiment," adding that the market has a lot of resilience at the moment.

Latin America higher

Latin American credits also jumped higher Thursday, feeding off the momentum set by Brazil and Mexico, the region's two biggest issuers.

Brazil on Wednesday saw a substantial book size for the reopening of its 2015 bonds, noted to Enrique Alvarez, Latin America debt strategist for IDEAglobal. That helped propel market sentiment.

Also, lending support was news coming out of Mexico, he added. The government announced it plans to offer investors peso-denominated bonds in exchange for dollar-denominated bonds.

During the session, Mexico's debt surged on the news. The Mexico bond due 2010 added three quarters of a point to 110.90 bid, 111.40 offered. The bond due 2033 was quoted at 115 bid, 115½ offered, up one point.

Overall, the upward movement was concentrated in liquid names and double B credits, observed Alvarez. The Brazil bond due 2040 added 0.55 to 121.30 bid, 121½ offered. The reopened bond due 2015 gained 0.30 to 101.60 bid, 101.80 offered.

Elsewhere Venezuela had a "discrepancy where you had the mid-part of the curve up and the long duration elements off," added Alvarez.

Asia performing well, says trader

In the last couple of days, Asia has been performing well, according to the trader, adding that prices snapped back very quickly after the Treasury volatility seen during the week of Oct. 31 week.

Even though Wednesday saw a weak Treasuries market as well as bit of a slippage in swap spreads, there was not that much pressure on the sub-investment grade price-based credits, he said.

"We saw decent spread tightening in the Philippines and Indonesia. That has pretty much continued through Thursday morning," he observed.

On the other hand, he noted that the high-grade side had been more defensive, since the General Motors Corp. news may have been felt a little more there.

"But people are very wary right now about the direction of swap spreads, and the effect it has on Asian high grade, which is relatively tight anyway," he observed.

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