Emerging market debt weak on increased risk aversion; Brazil, Ecuador down; $17 million inflows

By Reshmi Basu and Paul A. Harris

New York, Sept. 21 - Emerging market debt traded lower Thursday on increased risk aversion, which has been set off by a host of worries such as lower U.S. equities and political noise in Brazil and Ecuador.

In recent sessions, investors' appetite for risk has been tested by political troubles in countries such as Ecuador, Hungary and Thailand.

Then on Wednesday, Brazil joined the fray with news that the country's Supreme Electoral Court had opened a probe into whether president Luiz Inacio Lula da Silva played a role in an alleged scheme to purchase documents meant to discredit the opposition party.

The fresh corruption scandal broke out just 10 days before the Oct. 1 presidential election.

But by no means will it jeopardize Lula's re-election bid, according to market sources. However, the concern is how this latest scandal will impact Lula's ability to preside in his next term and whether or not economic and fiscal reforms will be sacrificed.

Lula has since attempted to distance himself from the scandal by replacing his campaign manager.

"The attempt to buy documents to damage any rival candidate is abominable and is not part of my political history," Lula remarked in a television interview Thursday.

Moreover, it is difficult to pinpoint how much the new scandal can be blamed for the downturn in Brazil's debt prices Thursday, given the overall weakness in the asset class, noted sources.

During the session, the bellwether Brazilian bond due 2040 lost 1 point to 128.60 bid, 128.95 offered.

Nonetheless, the culmination of political woes along with weaker equity markets is forcing investors to rethink their positions, noted one source.

"It seems like the whole market is under a little bit of pressure today [Thursday]," noted a trader.

"I guess risk aversion has set in. Equity markets are weaker. U.S. economic data today [Thursday] may have pointed to a slower economy," he added.

U.S. stocks came off Thursday on renewed concerns over U.S. growth, following a report that showed that factory activity contracted in the Mid-Atlantic region for the first time since May 2003.

Ecuador down on Palacio comments

Ecuador served up more jitters for investors Thursday.

Reuters reported that president Alfredo Palacio told investors in New York that an external debt renegotiation is "absolutely necessary." He added that he wanted to change maturities on bonds in order to make the debt cheaper.

On that news, Ecuador emerged as the underperformer of the session, noted a second trader.

Ecuador has already come under pressure over recent days from ongoing election jitters. This week, polls have showed that finance minister - and friend of Venezuelan president Hugo Chavez - Rafael Correa has advanced to a statistical tie heading into the Oct. 15 presidential election.

Correa has shaken confidence on Wall Street with his populist stance. Among many of his market unfriendly declarations, Correa said as president he would consider an Argentinean type-default and may renegotiate the debt again.

Leading into the election, the populist rhetoric is expected to become even more pronounced, according to a market source, who added that Ecuador will likely continue to under-perform the market.

In trading Thursday, the Ecuadorian bond due 2030 gave up 1.55 to 92 bid, 92.90 offered.

EM sees $17 million inflows

In other news, emerging market dedicated funds saw $17.27 million of inflows for the week ending Sept. 20, reported EmergingPortfolio.com Fund Research. The previous week the asset class saw $107 million leave.

Krung Thai pulls deal

In the primary market, volatility in the trading prices of Thailand assets trailing the bloodless coup that toppled prime minister Thaksin Shinawatra earlier this week prompted Krung Thai Bank to withdraw the $200 million of 7.462% perpetual securities that it priced on Tuesday, according to market sources.

A trader who focuses on Asian fixed-income securities told Prospect News that the withdrawal entails a complete unwinding of a substantial number of trades in the hybrid securities.

The deal was priced the same day that Thailand's military removed Shinawatra from office.

Merrill Lynch & Co. led the sale of the securities, which were rated Ba1 by Moody's Investors Service, BB+ by Standard & Poor's, and BBB- by Fitch ratings.

Meanwhile, Ukraine's Bank Khreschatyk has postponed its offering of dollar-denominated three-year loan participation notes pending the completion of a formal budget review by the City of Kiev, that bank's majority shareholder.

The review will take into consideration a proposed capital increase for Bank Khreschatyk, the source added.

Deutsche Bank was the lead manager for the notes (B2//B), which were in the market with guidance of 9%.

In other news, two issuers priced deals Thursday. Brazil's Banco Itau SA priced a $200 million offering of seven-year bonds (Ba2/BB-) at a spread of six-month Libor plus 50 basis points via Dresdner Kleinwort.

And Qatar's Ras Laffan Liquefied Natural Gas Co. Ltd. sold $1.55 billion of senior secured bonds (A1/A/A+) in two tranches.

One tranche was comprised of $750 million in 10-year bonds, which priced at par to yield 5.832% or a spread of Treasuries plus 113 basis points.

The second tranche was made up of $800 million in 21-year bonds, which priced at par to yield 6.332% or a spread of Treasuries plus 148 basis points.

Lehman and Goldman Sachs were bookrunners for the Rule 144A/Regulation S transaction.

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