Titan Petrochemical dead; Poland moves to the left

By Reshmi Basu and Paul A. Harris

New York, March 31 - Emerging market debt traded nearly flat during Wednesday's session despite anticipation of April's amortization windfall.

The JP Morgan EMBI Global index rose 0.19% on the day while its spread to Treasuries widened three basis points.

"April is a big month for amortizations," said a trader. "Those payments will be reinvested into the market."

Late in the day, Brazil's benchmark C bonds were seen at 97.50 on the bid side, up about 0.125. The Brazil bonds due 2040 were at 106.60 bid, "up about a quarter," a source said.

The Brazilian component of the EMBI closed up 0.19%. Its spread to Treasuries was flat from Tuesday's session.

Meanwhile after several rumors of resurrections with fatter yields on Tuesday, the deal from Malaysia's Titan Petrochemicals & Polymers Bhd was pronounced dead.

Titan Petrochemicals postponed its $300 million seven-year notes non-callable for four years (Ba3/BB-) on Monday, according to an informed source.

While Titan blamed current market conditions for the failure of the offering, the deal was not sweet enough for investors' tastes, according a buy-side source.

"But the deal was not to our liking. We wanted a higher yield," said the buy-side source.

An informed source told Prospect News that the books were still open over the weekend as investment bankers in Asia were working to get the deal priced.

"Their book was sufficient to get the deal done, but it would have required more flexibility from the company on the pricing side," said the informed source.

"And they decided that to wait and continue to reduce leverage and come back a little later."

Some market sources had told Prospect News that price talk had widened to the 9% area but the informed source said that price talk had remained at 8½%.

Rumors of a more enticing deal had surfaced Tuesday, structured as a 6-year bullet with a 9% yield.

"The issue seemed to be that the U.S. accounts, which aren't big buyers of international bonds to begin with, were not ready to put their arms around a petrochemical company in Malaysia," said the informed source.

"There were certainly one or two guys who did have a pricing issue."

Goldman Sachs & Co. and JP Morgan were the bookrunners on the proposed Rule 144A/Regulation S (no registration rights) issue.

"In emerging markets Malaysia is a great credit. People love it. It's highly rated," said the informed source.

"But Titan is pretty credit-intensive, even for Malaysia. You have to factor in the complexity surrounding China: what does it mean for the market?

"Let's face it China is a big black box for a lot of investors."

Furthermore, many on the high-yield side say the last time they bought anything out of Asia was before the Asian crisis, said the informed source.

"And a lot of that stuff is either still in restructuring or is trading at 10 cents on the dollar.

"People will tell you that they will get involved in another Asian deals when some of that distressed paper trades at par," noted the source.

Early Wednesday, Standard and Poor's downgraded Titan to BB-.

Hutchison trading slows

In other Asian news, trading was thin in Hong Kong telecom Hutchison Whampoa after conflicting news surfaced that NTT DoCoMo Inc. will be ending its investment in Hutchison's 3G U.K. holding. Hutchison on Tuesday announced a big restructuring of the company.

Its 6¼% bond due 2014 closed at 190 bps bid, 186 offered. That was seven basis points better than Monday's close of 197 bps bid, 192 bps offered. Its 7.45% bond due 2033 closed at 232 bps bid, 227 bps offered, five bps better than Monday's 237 bps bid, 233 offered. Its 5.45% bond due 2014 was bid at 207 bid, 203 offered, 4 bps better than Monday¹s 211 bid, 206 offered.

Will Poland see capital flight?

Many believe that the proposal by Poland's president Alexander Kwaznieski to replace unpopular Prime Minister Leszek Miller with leftist Marek Belka is a sign that the country is moving towards the left.

As Poland moves away from economic reforms and grips a more populist agenda, risk will increase on the social, political, and economic level, according to Jephraim Gundzik, president of Condor Advisers, an investment consulting company.

"From the political side, the center-right government of Poland is under a massive amount of pressure over its attempt to administer austere fiscal policies," said Gundzik.

As Poland's budget deficit stays at deadly levels or threatens to worsen, the unstable governing coalition does not have the support to implement fiscal austerity to control the budget deficit, according to Gundzik.

"There is very little possibility that it can be controlled enough to prevent the country's public sector debt from reaching the constitutional limit next year.

"The budget deficit is going up and up. The public sector debt stock is going up and up.

"You have a left-wing socialist-type of government waiting in the wings to pick up the pieces when the center-right coalition collapses," said Gundzik.

"It is pretty unlikely that a leftist government will toe the common line to get Poland's fiscal house in order and adopt the euro. The social dislocation associated with such policies could be enormous."

Gundzik told Prospect News that he estimates that there is about €15-€17 billion of foreign portfolio investment in Poland, most of that in the domestic bond market.

Investors have been lured by the so-called interest-rate conversions trade. This strategy has had success in Portugal, Greece, and Ireland.

And according to Gundzik, investors are in denial because the conversion idea is become so ingrained in their minds by the massive success of trades on previous E.U. entrants.

"Poland is whole different animal. It is nothing like any of those other countries because of its socialist communist past.

"It has a huge social welfare system and massive un-restructured industrial and agricultural sectors. Restructuring that has occurred in Greece and Portugal pales in comparison," said Gundzik.

"People are expecting Poland's long-term interest rates to decline to the European level," said Gundzik.

However, the conversion trade does not take into account the enormity of the public sector debt and the debt stock.

"There is no feasible way to control it. The government is going to change to a leftist government, so the conversion trade is going to blow-up.

"At some point, €16 billion is going to turn into capital flight. And the relationship to reserves, that is almost 70% of the country's reserves," said Gundzik.

And the crisis will spill into other Central European countries, the analyst predicts.

"Poland stands out as the highest risk country. Probably a confidence crisis in Poland would trigger capital flight in surrounding countries - most prominently Hungary where the stock of foreign portfolio investment is equivalent to about 170% of the country's foreign exchange reserves," said Gundzik.

"Contagion from Poland may spare the Czech Republic and would definitely spare Slovakia" since the stock of foreign portfolio investment in these countries is much lower.

Since joining the European Union on May 1, trading levels have been tighter, according to an informed source.

"Poland trades more like a European sovereign than an emerging markets sovereign," said the informed source.

"It was slightly wider today. But it's not the only investment grade credit in our market that was wider. For example it's not substantially different than Mexico," said the informed source.

Poland's bond due 2014 closed the session at 104.25 bid, 105.25 offered, up 0.25. But it was five basis points wider on a spread basis.

Deals price from Korea and Tunisia

Korea Highway Corp. sold $500 million 10-year-notes at 99.018 to yield 5.001% (A3/A-).

Citigroup, Deutsche Bank Securities and JP Morgan were the bookrunners on the Rule 144A/Regulation S issue.

Meanwhile, the Central Bank of Tunisia priced an upsized €450 million notes due 2011 at 99.563 to yield 4.824%.

The offering was originally expected to be €300 million.

Citigroup and Merrill Lynch & Co. were the bookrunners on the Rule 144A/ Regulation S offering.

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