Emerging markets ease lower; Digicel prices downsized $300 million; credit looses equity grasp

By Aaron Hochman-Zimmerman

New York, March 6 - Emerging markets slid lower on Friday but showed more evidence that levels were not too closely tied to equities.

In recent months credit has not traded as fiercely as equities, but the stock markets were able to dictate bonds' direction.

By the end of the week, it became more obvious that the bond side was "very divorced from what's going on on the U.S. side," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

On the primary side, investors watched offerings from Mexico's Cemex SAB de CV and Jamaica's Digicel Ltd. stagger toward the finish line.

Digicel managed to price a downsized $300 million deal at 89.679 with a coupon of 12% to yield 15%.

Cemex did not fare as well.

The cement producer announced without further detail that it will continue to market its dollar bond deal in the coming week.

From the major markets, volatility slid lower by 0.84 to 49.33, according to the VIX index. The index is a frequently used yardstick of market volatility.

Overall, the emerging markets sector was only pushed wider by 2 basis points to a spread of 695 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Usually an EMBI+ spread wider than 700 bps strikes "somewhat of a grim note," said Alvarez, "so it's something to watch for next week."

Digicel prices, Cemex holds

After initial struggles and doubts, Digicel finally priced a $300 million deal, downsized from $435 million, on Friday.

The five-year bonds priced at 89.679 with a 12% coupon to yield 15%.

The yield matched the talk at 15% while issue price came cheap to its talk at 90.

The bonds feature three years of call protection with the first call at 112.

Citigroup, JPMorgan, and Credit Suisse acted as the joint bookrunners for the deal.

Digicel will use the proceeds to acquire an equity interest in a sister company.

The sister company is expected to purchase $50 million to $75 million of the recent issue, subject to a six-month lock-up.

"Wouldn't call it a successful issue but at least it will trade next to existing bonds," a market source said.

"That is a company that is cooked," a strategist said.

"One golden rule: never buy a bond at new issue at or over 14%, because that bond will trade down," the strategist said.

Meanwhile in Mexico, Cemex "continues its ongoing refinancing efforts, including, depending on market conditions, the previously announced debt financing in the international capital markets," the company said in a statement to the press.

LatAm drops away from stocks

Latin American "equities are making a lot of noise," said IDEAglobal's Alvarez, but "the flow-through effect is not there."

"Currencies are up on the day, which is noteworthy because they tend to side with risk aversion in the U.S.," he said.

On the sovereign side, levels were "off somewhat," he said, but there was not a big rush to defensive positions over the weekend.

Credit seemed "quite divorced" from the action in both local and major market equities, he said.

Meanwhile in Argentina, more labor disputes flowed out into the streets of the capital, the Buenos Aires Herald reported.

Well-known labor leader Pablo Moyano led a group largely comprised of Teamsters angered by an alleged three-month delay in salary payments by garbage collection companies, the report said.

"Argentina is losing some ground as the domestic specter is still pretty foggy," he said.

The 8.28% Argentine discount bonds due 2033 sank 1.375 points to 25.375 bid, 27.05 offered.

Also, Venezuela's 9¼% government bonds due 2027 lost 0.3 point to 54.2 bid, 55.05 offered, while Brazil's 5 7/8% bonds due 2019 fell 0.25 point to 93.5 bid, 94.45 offered.

Emerging Europe lower

In emerging Europe, reports surfaced that this week's chapter of the Russia-Ukraine gas saga may have ended happily.

"According to information I have, Ukraine has repaid its debt," said Czech Republic foreign minister Karel Schwarzenberg, according to the RIA Novosti News Agency.

"I believe that tomorrow we will report we have fully met our commitment to Russia," said acting finance minister Igor Umanskyi in the report.

Western Europe again began to worry about the security of its gas supplies through Ukraine after Kiev's gas firm NJSC Naftogaz Ukrainy asked Moscow's OAO Gazprom to allow it to purchase less gas in 2009 than previous agreements stipulated.

Before Gazprom made a decision, Naftogaz headquarters were raided by Ukrainian federal police investigating the alleged siphoning of $880 million in gas.

As the gas fight seemed to cool, across the Black Sea in Turkey, tensions with the International Monetary Fund were as high as ever.

"It's not certain whether there will be a signing with the IMF" after local elections on March 29, said Nurettin Ozdebir, head of the Ankara Chamber of Industry, according to the Hurriyet Daily News.

Ozdebir said that prime minister Recep Tayyip Erdogan may be hesitant to enter into an agreement before the results of a repatriated tax amnesty period.

The government expects to collect nearly $11.5 billion, he said.

"If that money comes in, then I think the government will see it as a replacement for an IMF accord," he said.

Slow Asia holds

Asia quietly held its ground against the waffling equities.

In the Philippines, commercial lending expanded 18.8% in January compared to January 2008 and from 17.5% in December, the central bank said in a statement.

Loans for production rose by 22%, while loans for consumption rose by 16.4%.

The peso was seen trading at 48.775 to the dollar.

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