Emerging market debt widens as U.S. markets slide; Ecuador slammed

By Reshmi Basu and Paul A. Harris

New York, Nov. 27 - Emerging market debt moved lower Monday as U.S equities tumbled on the back of U.S. dollar weakness. Meanwhile Ecuador led the decline on the unexpected results from this Sunday's presidential election.

In the primary market, there were further details given regarding Korea's two-part offering of $1 billion equivalent offering of senior unsecured notes (A3/A/A+).

The issue will be comprised of 10-year dollar-denominated and 15-year euro-denominated global notes.

The country intends to price the two-part deal by Thursday, following the completion of investor presentations.

Barclays Capital, Citigroup, Credit Suisse and Korea Development Bank are joint bookrunners for the issue, which have been registered with the Securities and Exchange Commission.

Adding to the pipeline, Nakilat Inc, a wholly-owned subsidiary of Qatar Gas Transport Co, plans to sell $1.1 billion of senior and subordinated bonds.

The issue will be comprised of $850 million of 27-year senior bonds (Aa3/A+/A+) and $250 million of 27-year subordinated bonds (A1/A-/A-).

The senior bonds will bear an average life of 22 years while the subordinated bonds will carry an average life of 18 years.

Lehman Brothers and Credit Suisse are bookrunners for the Rule 144A/Regulation S (without registration rights) transaction.

In local news, the Republic of Colombia announced it would swap COP22.3 trillion of local inflation-linked UVR and fixed-coupon bonds coming due in 2007 to 2012 for longer-dated bonds.

EM edges lower, Ecuador plunges

Emerging market debt saw lower prices Monday as high-yielding credits sold off on the back of a slide in U.S. equities. Additionally, some sources noted that the market is still digesting the recent onslaught of new issues.

"The [overall] market tracked U.S. markets down. But there was not much volume," observed a trader.

Elsewhere, Ecuador saw its bonds slammed by news that leftist Rafael Correa had unexpectedly taken the lead over market-friendly Alvaro Noboa in Sunday's presidential run-off election.

While on the campaign trail, Correa spooked Wall Street with his hard-line stance regarding debt restructuring. And as he appeared set to take over the reigns of the Andean nation, Wall Street was once again running scared.

In trading, the country's bond due 2012 gave up 2.50 at 99.50 bid while the bond due 2030 shed 5 points to 93.50 bid.

At session's end, spreads had kicked out by 68 basis points versus U.S. Treasuries while returns slid 4.51%, according to the country's portion of the JP Morgan EMBI Global index.

Furthermore as a result of Correa's surprising victory, many participants readjusted their strategies. Bear Stearns cut its recommendation to underperform from outperform.

"We do think that the market may give president Correa some "breathing space" to see what news/comments/ideas flow out of Carandolet," wrote Alberto Bernal, fixed income analyst at Bear Stearns, in a research note.

He added that Correa's win did not bode well for such things as dollarization, the financial system, trade, growth or structural reforms.

"Correa's win is also bad news for 'governability,' since Dr. Correa has no real representation in the legislature.

"Therefore, despite the 'reactionary' nature of changing our recommendation after the event, we are willing to take the hit as we see no other possible option but to recommend high caution in this credit (we change our recommendation to underperform), despite the juicy carry that Ecuador's debt pays the investor," Bernal noted.

Meanwhile JP Morgan remained marketweight, citing the country's high oil revenues and the unlikelihood that the country would default in 2007. But the firm did concede that the country will hit some rough patches as Correa will likely push ahead with a controversial agenda amid an opposition-dominated congress.

Outside of Ecuador, the rest of the emerging markets asset class tracked U.S. financial markets lower as the U.S. dollar tumbled.

Overall, the JP Morgan EMBI Global index was down 0.28% while spreads widened by 4 basis points. Argentina saw its spreads widen by 10 basis points.

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