Emerging market debt higher on S&P upgrade for Brazil; South Africa sells $1 billion 15-year bonds

By Reshmi Basu and Paul Deckelman

New York, May 16 - Emerging market debt strengthened Wednesday after Standard & Poor's upped ratings on Brazil's external debt to one notch below investment grade.

Meanwhile Venezuela was the session's out-performer after local news outlets speculated that president Hugo Chavez will ditch his plan to exit the International Monetary Fund and the World Bank.

And Ecuador turned in the worst performance of the day following news of the resignation of central bank general manager Mauricio Pareja.

In primary news, the Republic of South Africa priced $1 billion of 5 7/8% global notes due May 30, 2022.

The notes priced at 99.635 for a yield of 5.912% based on the U.S. 4½% Treasury note due May 15, 2017 plus 120 basis points.

Of the total, $444.456 million with be sold for cash and $555.544 million will be issued to existing noteholders under an exchange offer that expired on Tuesday.

Under the exchange, holders of $477.423 million of the republic's 9 1/8% notes due May 19, 2009 and $78.121 million of its 8½% notes due June 23, 2017 will receive an equal amount of the new notes.

Barclays Capital Inc. and Citigroup Global Markets Inc. are joint bookrunners.

In trading, the 2009 bond gave up 0.13 to 107.50 bid. 107.75 offered while the 2017 bond was unchanged at 124 bid, 124.50 offered.

More pipeline news

Also on the primary front, Thai petrochemical producer IRPC PCL plans to start a roadshow for a dollar-denominated offering of 10-year notes this Thursday in Singapore.

Following Singapore, the roadshow will move to Hong Kong on Friday and London on the following Monday.

Barclays Capital and Citigroup are joint bookrunners for the Regulation S transaction.

Adding to the pipeline, Russian state-controlled gas monopoly OJC Gazprom plans to sell a two-part offering of pound- and euro-denominated eurobonds via ABN Amro, Morgan Stanley and Societe Generale.

Local paper up on Pimco view

In secondary trading, locally-denominated emerging debt got an impressive endorsement on Wednesday as Bill Gross - manager of the world's largest bond fund, Pacific Investment Management Co.'s $100 billion Total Return Fund - touted local currency bonds, and the underlying currencies themselves, as being likely to give investors the biggest paybacks of any asset class this year.

In a commentary on the Newport Beach, Calif.-based investment giant's website, Gross said that there was opportunity in such high-growth EM economies as Brazil, Russia, India and China. Brazil's real-denominated bonds, for instance, have gained over 26% so far this year.

He contrasted that with what he called the "unexciting" returns available in the bonds in the non-emerging sector.

Besides the bonds and currencies of the burgeoning emerging sector, Gross also is bullish on commodities - which have in many cases been the catalyst for rallies in the EM currencies and bonds. Oil, for instance, has boosted the currency and bonds of another widely followed EM issuer, Venezuela.

Venezuela higher

That country's dollar-denominated bonds, meantime were seen solidly higher on Wednesday as rumors made the rounds that president Hugo Chavez would find a way to back away from his earlier threat to pull Venezuela out of the International Monetary Fund.

Chavez's declaration last month that Venezuela would leave the 185-member international lending body - which he considers a tool of Washington and a straitjacket on his nation's economy - caused its bonds to fall, since such a step would trigger technical defaults on many of the country's bonds.

Venezuelan officials scrambled to do damage control after their fiery president's assertion, trying to reassure the international debt community that Caracas would not default on its debts and would meet all of its obligations.

On Wednesday, the speculation was that Chavez would remain in the IMF to avoid the default.

"There were all sorts of rumors and headlines about 'Vennie," a New York-based trader in Latin American issues said. "Nothing was confirmed - Chavez wasn't going to pull out of the IMF, then Chavez was going to but he's not going to default on his bonds, and then he still was [going to leave the IMF] but he didn't care about the bonds."

Even as market buzz was that Chavez would scrap his plans to leave the international body, finance minister Rodrigo Cabezas said that withdrawal was "a political decision that is already made" - but he added that "there won't be any need" to declare a technical default and that the means exist to avoid such an outcome. He reiterated the previous pledge that Venezuela would leave its debt-servicing plans in place this year.

The trader saw the Venezuela benchmark 9¼% bonds due 2027 finish at 119.5 bid, 120.5 offered.

At another desk, those bonds were quoted at 119.60, up more than ¾ point, their biggest gain in over a week, while the yield on those bonds tightened by 8 basis points to 7.37%.

Also helping to push the Venezuelan paper higher was the announcement by Merrill Lynch & Co. that it was raising its weighting in Merrill's model bond portfolio to overweight, citing the recent sell-off in the bonds on the IMF-related default speculation which now gives them room to advance back up. At the same time, it said, some of the factors contributing to the recent headline risk seem to have abated somewhat.

Merrill Lynch was especially positive on the country's 2014 and 2025 bonds.

The giant investment bank at the same time cut its recommendation on Argentina's debt to "market weight."

Brazil higher on upgrade

The other big story coming out of Latin America, the trader said, was Standard & Poor's raising Brazil's ratings, upping the sovereign credit rating one notch to BB+, and the long-term local currency rating two notches to BBB, citing government efforts to reduce vulnerability to interest rate and to foreign exchange rate volatility.

That pushed Brazil's bonds, stocks and currency all upward, with the yield on the benchmark zero-coupon real-denominated bonds due 2008 tightening by 8 bps to 11.43%.

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