Emerging market debt closes on a high note; Yukos woes boost oil credits

By Reshmi Basu and Paul A. Harris

New York, July 28 - Emerging market paper was up and down throughout Wednesday's session but ended with a positive note on strength in U.S. Treasuries.

"We're actually closing on the high of today, especially in Brazil - that's pretty much the only thing trading today," said a trader.

"Actually, it turned up to be a very positive day. U.S Treasuries are up. Stocks are up.

"People are feeling good and actually buying into the market," he said.

Durable goods numbers came in below expectation, giving a slight push to the market, according to the trader.

The Commerce Department said that durable goods orders rose 0.7% in June after two months of losses. Economists had expected a much stronger rebound.

In primary action, The Republic of Uruguay sold 7.359 billion pesos or the equivalent of $250 million of devaluation-protection notes (DPN) due 2006 (B3/B-), pricing them at par to yield 17¾%, according to a market source.

Originally, the DPN bonds were to be part of a two tranche Uruguay-peso denominated offering, consisting of both the DPN bonds and Unidades Indexadas (UI) bonds due August 2007.

The size of the DPN bonds was increased, replacing the UI tranche.

The deal came in line with price guidance of 17¾%.

Citigroup ran the books for the deal.

Coming up, the roadshow starts Friday in Asia for Sino-Forest Corp.'s $200 million minimum offering of seven-year guaranteed senior notes.

The Hong Kong and Singapore roadshows will take place July 30-Aug. 2. A roadshow will be held in London on Aug. 3, in New York on Aug. 4 and in Boston on Aug. 5. Pricing is expected to take place on Aug. 9 or 10.

The company is a Mississauga, Ont.-based producer of logs, wood chips, and engineered wood products from a plantation area of about 232,600 hectares in East Asia.

Adding to the pipeline, Kazakhstan's KazMunaiGaz plans to issue $250 million of eurobonds this year via ABN Amro and JP Morgan.

The company is a state oil and gas company.

Candiota resigns

Out of Brazil, Brazilian central bank Monetary Policy Director Luiz Augusto Candiota resigned at a press conference. He said that the allegations of tax evasion reported last Friday by local paper IstoE were untrue. But said his presence would blemish the Central Bank's reputation.

Rodrigo Azevedo, the co-head of Latin America economic research at Credit Suisse First Boston in Sao Paulo, will replace Candiota.

Despite the news, Brazilian paper was up. Its bond due 2040 was up 1.4 to 96.9 bid while the C bond gained 0.937 to 93.687 bid during Wednesday's session.

Russia dips

Meanwhile the Russian bond due 2030 was down 1.375 on the day to 90½ bid.

The problems afflicting Russian oil giant Yukos, which said it could be forced into bankruptcy last week, "should have little bearing on Russian paper," said a buyside source.

Last week, the government said it would sell core unit Yuganskneftegaz, which accounts for over 60% of Yukos' output, to recover an alleged $3.4 billion tax debt for 2000.

"It's recently been contained in two levels. It might affect Ukraine a little bit or Turkey by just a small amount," said the buyside source.

"The second level is a Yukos problem. The intensification of Yukos' problems unfortunately coincided with a Gazprom bond issue that was poorly received.

"The market did not digest the supply very well, so Russia is going through a bit of a bump.

'I don't think anyone is really worried at the fundamental level. At the macro level the country is still solid.

"And not that many people think [President Vladimir] Putin is taking a radical turn away from economic reform.

"So it's just a technical issue we have to digest and we have to get past it," he added.

Oil names may benefit

But Yukos' woes may be oil credits' gain, according to Alberto Bernal, head of Latin America research for think tank IDEAglobal.

Crude oil prices spiked to an all-time high $43.05 a barrel, after Yukos said the government ordered a freeze on production from its main Siberian Unit. The futures closed at $42.90.

The high oil prices are making Latin American oil credits more attractive, outweighing the political risk.

"It is having an effect. In the case of Ecuador, even though the country remains in a very difficult political situation, bonds are up significantly - almost 1% because of the high oil prices which implies a much more benevolent fiscal position for the country," said Bernal.

And bonds in Venezuela are up 0.8% despite a recall referendum on president Hugo Chavez scheduled for August.

Bernal noted that Venezuela had been budgeting for oil at $27 a barrel. At $42 for every barrel, there is significantly more cash.

"So it is an immediate effect. If oil collapses back to $30, you can be sure that the bonds of Ecuador and Venezuela will be suffering. For the time being, it is going up and up," he added.

Not 1994 repeat, says investor

The macro driver right now is still interest rates, although it seems the impact on emerging market debt will be more muted than it has been in the recent past, said the buyside source.

"The risk appetite question is a little bit less important. Now that the asset class has kind of normalized and people realize that the world is not going to end.

"The emerging world is not going to end.

"It's not going to be an implosion along the lines of 1998, 1994 or 1995 - the way people feared.

"We have to figure how much of a driver are interest rates going to be for emerging market debt.

"And of course, then there always a risk that something happens to one of the countries within the asset class," he added.

IMF delays loan to Argentina

The International Monetary Fund has delayed approval of a $728 million loan payment to Argentina, forcing to country to dig into its reserves to pay back lenders.

The $13.3 billion, three-year IMF agreement stipulates that the country's economic program be reviewed quarterly before further funds are released.

The IMF agreement also calls for Argentina to make "good faith" efforts to push ahead negotiations with creditors.

The country, which defaulted on almost $100 billion of debt in 2001, is in a tug of war with those bondholders, who contend that Argentina has not engaged in meaningful negotiations.

IDEAglobal's Bernal said he was surprised that the third review of progress has been delayed by so much.

"This means that the Argentine bondholders committee and the other series of committees of people that hold defaulted Argentine bonds have become much more relevant into the decision making process of the IMF.

"I thought the IMF and, by definition, the G7 and the U.S. administration were going to be more lenient with the Argentines this time around as they wanted to focus all the pressure in the next one [review] at which the number on the long-term primary surplus would need to be decided." Bernal told Prospect News.

The next examination will be a tougher discussion because it involves structural fiscal adjustment policies.

Furthermore, the IMF's decision not to approve the review is an important win for the bondholders committee because the IMF specifically said that it wanted the Argentines to sit down with the bondholders to talk about the debt restructuring, Bernal said.

The bondholders committee argues that the Argentines have not taken into account any of their complaints and interests.

And the IMF's delay is a political defeat to President Nestor Kirchner.

"I would not overextend the effects on his popularity but Kirchner seems to be losing the capacity to get support from the G7 and from the IMF.

"This is a very problematic issue for him because he needs the IMF to maintain some type of stability on the Argentine economy and on the capacity of the Argentine peso to hold its value.

"If Argentina doesn't pay its debts to the IMF and continues without paying its debts to the market at all, it would further ostracize itself from the international financial and economic institutions," Bernal said.

The review is expected to be postponed until September.

The Argentina bond due 2008 was down half a point to 27½ bid in trading Wednesday.

Mexican corporates lower

In secondary trading, Mexican corporate bonds took a fall in the last week.

Cable company Innova's bond due 2007 fell 1½ points to 101 bid, 103 offered from last Wednesday's 102½ bid, 104½ offered.

Railway company Grupo TFM's bond due 2012 was at 106 bid, 109 offered similar to last Wednesday's 106 bid, 110 offered.

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