Emerging market debt up on Fed outlook; Arab Banking sells $300 million in notes

By Reshmi Basu and Paul A. Harris

New York, July 20 - Emerging market debt extended its rally Thursday, buoyed by expectations that the current monetary tightening cycle is coming to an end in the United States.

In the primary market, Bahrain-based Arab Banking Corp. said it sold $300 million in five-year floating-rate notes (/BBB+/BBB) at 99.782 with a coupon of three-month Libor plus 45 basis points.

The deal came off the issuer's $2.5 billion euro medium-term deposit note program.

Barclays Capital and BNP Paribas acted as joint lead managers.

The day before, Kazakhstan's JSC Kazkommertsbank sold $150 million of 10-year subordinated loan participation notes (Baa3/BB-/BB) at par to yield 8 5/8% via Dresdner Kleinwort Wasserstein.

Some market participants thought the deal looked cheap compared to the issuer's outstanding $100 million issue of subordinated bonds due 2014, according to a syndicate note obtained by Prospect News.

However, the 2014 issue is small in size, illiquid and expensive.

Nonetheless, current market conditions dictated that the new deal had to look attractive to investors, according to a source.

In addition, Kazkommertsbank did not want to miss one of the few recent windows of opportunity for issuers to tap the capital markets.

The order book for the new issue exceeded $200 million with 46 accounts playing. By region, the United Kingdom nabbed 43%, followed by Asia with 18%. Switzerland took 10% while Germany and Austria combined made up another 10%. U.S offshore accounts grabbed 6% and other Europe took in 13%. Meanwhile banks purchased 35%, followed by funds with 50% and retail with 15%. Asian private banks and big U.K. funds also played. However, a market plus is that not only did hedge funds play but real-money investors tagged along.

In secondary trading Wednesday, the deal was spotted at 100.50 bid, up 0.50 from the issue price.

EM rallies on Fed outlook

Emerging market debt continued to rally Thursday, extending the positive tone seen in the previous two sessions. Several factors worked to encourage the market, observed a trader.

"First, you had Bernanke. Then you had FOMC [minutes] and U.S. data," he added.

Wednesday saw spreads tighten on the back of dovish comments made by Fed Chief Ben Bernanke. He reiterated that U.S. growth is moderating and inflation remains under control in day two of his congressional testimony.

Meanwhile minutes from the last Federal Open Market Committee meeting revealed that members saw "significant uncertainty" as to the direction of interest rates going forward.

"With the economy slowing and some of the effects of past tightening still in the pipeline, members recognized the value of accumulating more information for determining what, if any, additional policy action would be needed," the minutes said.

The market interpreted that as a signal that a pause in rate hike policy is in play.

And then adding more evidence that the end is near, the Philadelphia Fed reported weaker-than-expected factory growth in the mid-Atlantic region in July. Slower economic growth will likely put a lid on inflation.

During the session, the bellwether Brazilian bond due 2040 added 0.20 to 127.25 bid, 127.35 offered. The Colombian due 2027 gained one point to 106 bid, 108 offered. The Ecuadorian bond due 2030 moved 0.40 to 100.10 bid, 100.35 offered. The Turkish bond due 2030 edged up 1.25 to 141 bid, 141.625 offered.

Meanwhile Lebanon bonds were slammed on the intensification in hostilities in the Middle East between Israel and Lebanon.

During the session, the sovereign's bond due 2008 fell 2.50 to 100.125 bid, 102 offered while the bond due 2011 lost 1.63 to 91.875 bid, 95.375 offered.

Lebanon's bonds were relatively unchanged on Tuesday.

But generally the market was quiet.

One sellside source noted there was "nothing really significant happening" in terms of market-moving events.

"The big news is that Panama is calling its Bradys, and the Petrobras cash tender."

Panama said Wednesday that it had redeemed all $351.6 million of its remaining Brady bonds. Part of the financing came from a $320 million one-year line of credit with Barclays Bank. On Thursday, Petroleo Brasileiro SA-Petrobras announced its subsidiary Petrobras International Finance Co.-Pifco set pricing in its cash tender offer for any and all of five series of its notes, which have a combined outstanding amount in excess of $1 billion.

The source said that there was also a rally in the Mexican peso market.

Brazil globals not a factor, surmises source

In other news, the Brazilian central bank issued a "Note to the Press," which contained several tables with the country's indicators, according to a market source.

The bank reported that:

• Total public sector external debt stood at $75.4 billion,

• Total National Treasury external debt stood at $63 billion,

• Loans from international organizations stood at $9.9 billion, and

• Total 'globals' outstanding stood at $53 billion.

This raises some interesting points, according to the source. Assuming that the average price of a global bond is 110, Brazil would only need about $68 billion to retire all its external debt.

Current reserves are around $65 billion. Additionally, the central bank has been buying large amounts of reserves on a daily basis. The simple math shows that external debt has lost some of its importance in Brazil, which means that spreads could be much tighter than they are at the moment, the source said.

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