Emerging market debt softer on U.S. stocks; Bank Soyuz issues new debt

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Feb. 9 - Emerging market debt closed out the session on a softer note, hampered by lower U.S. equities.

In the primary market, Russian commercial banking company Bank Soyuz sold a $125 million offering of three-year loan participation notes (B1/B-) at par to yield 9 3/8%.

The deal priced in line with guidance for a yield in the area of 9 3/8%.

ING was the bookrunner for the deal, which was priced via SB Funding Ltd.

Returning to the broader secondary market, spreads for emerging market debt narrowed marginally over the week just completed. After achieving yet another milestone of historical tights early in the period, the market lost steam and by the end of the week spreads on the JP Morgan EMBI+ Index had tightened by one basis point versus U.S. Treasuries.

The Asian trading day Friday was mixed as a heavy dose of fresh supply put technical pressure on the market.

On the sovereign side, Mexico and Indonesia witnessed a pick-up in flows as the latter saw more volume for its new global bonds due 2037 sold on Wednesday.

During the Asian session, the long end of Indonesia's curve outperformed while the spread between the 2037 bond and the country's global bond due 2035 widened, according to one source.

Elsewhere, the Philippines' bonds due 2019 and 2025 rallied.

On the corporate front, Indian banks were softer as investors digested a $700 million dual tranche offering from State Bank of India.

Spreads for the sector kicked out by 1 to 5 basis points, according to a market source.

Brazil's new deal firmer

Turning to the New York session, a trader in Latin American debt said that Brazil's new 10.68% real-denominated bonds due 2028 were continuing to do well amid a generally quiet market on Friday.

"They're tighter relative to the other secondaries that are out there than when they came. In general, local markets have all fallen off the last day or so - they've softened a little bit, although we're talking just a basis point or two."

Brazil's benchmark global bond due 2040 was seen down 0.125 on the session, to 132.563 bid, as investors took profits off recent gains.

Latin America softer on equities

The trader said that the Latin debt markets have been "just a little softer, in line with equities. There's been no news in our market, but obviously, U.S. equities have had not a wonderful day or two in the last day or so - especially today [Friday]," with Wall Street falling Friday on a broad front as oil prices spiked briefly above $60 a barrel and the presidents of the St. Louis and Dallas Federal Reserve districts each warned that interest rates may go higher if inflation does not subside.

"We've had a big supply of new issuance in just the first week of the month," the trader noted, "as a lot of people have been getting their issuance out before the market goes into its annual semi-slumber as you get into Carnival season at the end of [the upcoming week], when Brazil pretty much shuts down."

On top of that, the trader noted, the Chinese New Year falls around the same time, stilling markets in Asia, "so our [emerging] market will get quieter as we get closer" to those two events.

"The local market gets very illiquid as you get close to it - so you want to do it when you still have full liquidity in the local market. It's not that everything stops - but it certainly gets quieter as those things are happening. And nobody wants to have to be worried about settling a deal in the middle of their samba parties."

Investors gear up for Bernanke

Another factor that will chill the market in the upcoming week: U.S. Federal Reserve chief Ben Bernanke has a date on Capitol Hill to give the Fed's semiannual congressional testimony under the Humphrey-Hawkins Full Employment Act, which will have financial market players all over the world hugging the sidelines waiting to see what he has to say about the state of the economy.

Investors will also be watching to see what happens this week in Ecuador, which has a $135 million interest payment due this coming Thursday on its 10% notes. Newly installed president Rafael Correa and his finance minister, Ricardo Patino, have been keeping the financial markets guessing as to their intentions - one day denouncing the country's more than $11 billion of foreign debt as "illegitimate" and saying they may not pay it, or at least may not pay it in full, the next day sounding a more conciliatory note and speaking of a "friendly" debt restructuring.

But the trader said that even if Ecuador does not make that payment on the 15th, "they have a 30-day grace period before it would trigger a default. Some people think that even if they do intend to pay, they may decide to wait, and use the grace period - just to make the political point that servicing the debt isn't their top priority. So there are all kinds of scenarios that could play out."

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