Emerging market debt widens on Thailand coup; Hungary to tap 2012 notes despite violent protests

By Reshmi Basu and Paul A. Harris

New York, Sept. 19 - Emerging market debt saw lower prices Tuesday amid reports that Thailand's military launched a coup against the country's prime minister Thaksin Shinawatra. The news added more uncertainty to a market that has already been somewhat rattled by political noise out of Ecuador and Hungary.

By session's end, the JP Morgan EMBI Global index had seen its spreads widen by seven basis points versus U.S. Treasuries.

Early in the session, there were news reports that tanks were heading into Bangkok, triggering a slide in the country's local currency and also prompting a sell-off in U.S. equities as well as emerging markets.

Since January, Thaksin has come under fire amid charges of corruption. In January, his family sold their shares in telecommunication firm Shin Corp for $1.9 billion. Mass protests erupted on objections that not only had the family escaped paying taxes but had also turned over an important asset to Singaporean investors.

Amid calls for his resignation, Thaksin suspended parliament in February, calling for a swift election in April. While his party Thai Rak Thai won 57% of the vote, the election was not without controversy, as the opposition chose not to take part.

"This has been a protracted constitutional problem with elections earlier this year which were reportedly postponed for administrative reasons," remarked a trader who focuses on Asian fixed income.

"The military finally decided they'd had enough, and stepped in."

Meanwhile Tuesday's coup took place as Thaksin was in New York for the United Nations General Assembly.

"The session was a wild ride, but became relatively calm as the headline flow got more and more benign throughout the session: the military is reported to have met with the king, so it appears that the situation is not as messy as it could have been," observed the trader.

In Asia, the market was visibly weaker, but then there quite a bit of negative news out there, he noted.

"The Philippine five-year CDS [credit default swap] got as much as 5 bps wider before closing 3 wider."

Meanwhile the trader added that the Thai five-year credit default swaps traded at a spread of 36 bps before the coup news, and widened out to as wide much as 70 basis points before some buyers stepped in at the almost doubled level.

The swaps closed around 50 bps, 14 bps higher, which the trader described as a pretty dramatic move for a relatively low yielding name.

In trading, Thai bonds were 5 to 15 basis points wider.

Elsewhere in the region, the Philippines bond due 2031 lost 0.25 to 103.50 bid, 103.87 offered. Vietnam saw its spreads widen by 12 basis points.

Latam sees mild spillover effect

News of the coup had a mild collateral impact on Latin America, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Latin America saw a positive start to the session as the producer price index data in the United States came in softer-than-expected. But then as the news of the coup broke out, high-beta credits in the region backed off just a little bit from their unchanged levels while other credits were insulated from the pressure, noted Alvarez.

"Overall, you had a very minor contagion," he added.

There were a few sellers in Argentina and Brazil, which underperformed the market.

In trading, the Argentinean discount bond due 2033 lost 0.55 to 97 bid, 97.30 offered. The bellwether Brazilian bond due 2040 gave up 0.05 to 130.15 bid, 130.30 offered.

Whether there is further contagion effect will depend on how Asian markets react Wednesday, noted sources.

Alvarez said it will be important to see what type of impact Thailand's domestic market has on the broader Asian markets during the overnight session.

"If anything goes wrong there and we see too much downward pressure, I think it will trickle into EM," said Alvarez, adding that the effect will be minimal for Latin America.

"It will be something that runs it course over the next couple of days," he predicted.

Hungary to price despite unrest

In the primary market, the Republic of Hungary is expected to reopen its floating-rate notes due 2012 to add €500 million on Wednesday, despite violent protests in Budapest.

Price guidance has been set at three-month Euribor plus 24 to 26 basis points, revised up from initial guidance of the low 20 basis points area.

Meanwhile, orders stand at more than €500 million.

An emerging market analyst said that there will be appetite for the issue, given that the market is taking the protests in stride.

BNP and Dresdner Kleinwort are lead managers for the transaction.

On Tuesday, the country saw its portion of the JP Morgan EMBI index kick out by eight basis points.

Protests began Monday amid calls for the resignation of prime minister Ferenc Gyurcsany after state radio on Sunday broadcasted excerpts from the tape of a meeting in which the leader said his government had achieved "nothing" and admitted that the leadership had "lied morning, noon and night."

Three issuers price deals

In other primary news, three issuers tapped the market.

Brazil's Banco Cruzeiro do Sul SA sold $125 million of five-year amortizing notes (Ba3) at par to yield 9 3/8% via Dresdner Kleinwort.

Also out of Brazil, petrochemical company Braskem SA priced a $275 million offering of fixed-rate senior unsecured notes due January 2017 (/BB/BB+) at 99.154 to yield 8 1/8%.

The issue came in line with price guidance, which was set at the 8 1/8% area on Monday.

Proceeds will be used to fund the company's tender for its $275 million of 12½% notes due 2008.

ABN Amro and Citigroup managed the Rule 144A/Regulation S sale.

Out of Thailand, Krung Thai Bank Ltd. priced a $200 million issue of 7.462% perpetual hybrid tier I securities (Ba1/BB+/BBB-) at a 210 bps spread to mid-swaps.

The spread is on the wide end of the mid-swaps plus 200 to 210 bps price talk.

The securities, which were sold at par, become callable after 10 years. If they are not called the coupon changes to a floating rate that pays three-month Libor plus 310 bps.

Merrill Lynch & Co. ran the books for the Regulation S transaction.

Ecuador down on polls

In other news, Ecuador's politics were its own worst enemy. Tuesday's polls showed that Rafael Correa, former finance minister and friend of Venezuelan president Hugo Chavez - who has turned up the populist campaign rhetoric - advancing to a statistical tie heading into the Oct. 15 presidential election.

He gained two points to 19%. Former vice president Leon Roldos fell two points to 20% while conservative Cynthia Viteri lost two points to 13%, according to a Cedatos Gallup poll.

The country saw its portion of the EMBI index widen by 9 basis points.

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