Emerging market debt rebounds across the spectrum; Russia's Gazprom stirs interest

By Reshmi Basu and Paul A. Harris

New York, April 22 - Emerging markets recovered Thursday as the U.S. Treasury yield curve moved back down.

"There are so many mixed signals out there," said a trader. "Right now the strategy is to come up with a strategy."

The JP Morgan EMBI Index rose 0.56% during Thursday's session. Its spread to Treasuries tightened by seven basis points.

"Everything is pretty much in positive territory," added the trader. "But then tomorrow, some new data could throw things off."

Also rising, Brazil's benchmark C bond was up 1.44 to 93.687 bid, 93.812 offered. The 2040 bond was at 97.7 bid, 98 offered, up 2.45 on the day.

On Wednesday, Federal Reserve Chairman Alan Greenspan said that inflation appeared to be in order, downplaying an imminent rate hike by the Fed.

International Monetary Fund acting head Anne Krueger echoed those sentiments saying that global rate increases would be "gradual" at a news conference in Washington on Thursday.

Aggressive selling seen, says fund manager

Nonetheless, investors have been preparing for rising rates - and that has led to vigorous selling, particularly of credits issued in the last three years.

"We've been seeing a process of guys shedding risk in general on the trades that have worked for the past one to three years," said a fund manager.

"Guys are trying to figure out how I'm going to make money. What's the next trend?

"The first months of this year, trades that have been working in the past one to three years, have been aggressively pared back with waves of selling with each time a threat of rate hike increases," added the fund manager.

Weak credits will be particularly vulnerable as U.S. interest rates climb, said an emerging market analyst.

"It all depends on how high U.S. rates go - if 10-year U.S. Treasuries top out in the 4.25% - 4.5% range, there should be continued inflows into EM, though maybe not as heavy as we saw earlier this year," said the analyst.

"If rates go to 5% or higher, though, the liquidity available to EM is going to start to dry up.

"Good deals, especially from investment-grade EM issuers, would still be able to get done, but it would get a lot more difficult for the B and BB issuers to come to market," he added.

Gazprom's $1 billion issue attracts lookers

Gazprom set price guidance for its $1 billion bond due 2034 at 8¾% and to sweeten the deal added a10-year put.

It is the first time Gazprom is playing up to such a wide audience.

"Russian corporates are one of the few areas in credit markets where there still is some value, so I would expect it to do well," said the fund manager.

"People are afraid of the political risk, but I think they are over-afraid," he added.

"At the end of the day, Putin knows that if he loses the favor of Western investors, he won't be to raise the money necessary to rebuild the infrastructure which is key to Russia's longer term future."

The Rule 144A/Regulation S issue is expected to price Friday via Credit Suisse First Boston and Deutsche Bank Securities.

Gazprom's existing dollar-denominated bond due 2007 was down in trading to 108.75 from Wednesday's close of 109.60. A market source said the downturn was possibly related to the new deal.

ATF, Petrobras Energia prices

In primary action Thursday, ATF Bank priced a downsized $100 million of eurobonds due 2007 at 99.353% to yield 8¾%.

The deal was reduced from a planned size of $150 million.

ING Financial Services ran the Regulation S deal for Kazakhstan's fourth largest bank.

Buenos Aires-based Petrobras Energia Participaciones SA priced a $100 million add-on to its 9 3/8% notes due 2013 at 101.497 to yield 9.15%. Deutsche Bank was the bookrunner.

And adding to the pipeline is Moscow-based Gazprombank with a $500 million seven- to 10-year bond offering (BB-).

Citigroup and Dresdner Kleinwort Wasserstein are the bookrunners on the Rule 144A/Regulation S deal.

Korean deals price tight

Korean corporates have been coming to market at tight levels, as illustrated by Kepco, Korea East-West Power and Kexim.

The driver behind these low spreads may be the region's liquidity.

"In Asia, liquidity conditions are pretty abundant," said the fund manager. "It's also quasi-sovereign risk.

"The credit spectrum is divided into three parts: the low yielders with low risk, the medium- to high-yielders with improving fundamentals and the high yielders with questionable fundamentals.

"Typically, in the latter two categories, they get sold down. And then once the dust settles, the credit or countries that are improving their fundamentals are the ones that you first buy back," explained the fund manager.

"Companies that have shakier fundamentals that guys have been buying because they have been reaching for yield, those are the ones that don't come back.

"Kepco is so tight [because] risk is perceived as so low. Its spread to Treasuries isn't going to vary too much," he added.

Korea Electric Power Corp. (Kepco) priced its $300 million 30-year notes on April 20 at 93 basis points over Treasuries. That was at the tight end of talk of 93 to 95 basis points, which had been tightened after the deal was initially shopped in the range of 95 to 100 basis points.

Other Korean corporate deals that have priced tight are Korea East-West Power Corp's $250 million of seven-year notes which priced on April 14 at 112 basis points over Treasuries.

And on the same day Export Import Bank of Korea added $150 million to its 4 1/8% non-callable notes due 2009 and $200 million to its 5¼% non-callable notes due 2014.

The 4 1/8% notes priced at 86 basis points over Treasuries, broadly in line with talk in the area of 87 basis points over Treasuries.

The 5¼% notes priced at 91 basis points over Treasuries, again broadly in line with talk in the area of 92 basis points over Treasuries.

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