Emerging market debt extends losses for second session; Uruguay sells $500 million equivalent UI bonds

By Reshmi Basu and Paul Deckelman

New York, June 21 - Emerging market debt gave up gains for a second straight session Thursday amid light trading volumes. High beta credits Argentina and Venezuela turned in the worst performances of the day.

The market shrugged off a firm performance by U.S. equities as another sell-off in U.S. Treasuries spooked investors' appetite for risk.

Uruguay sells UI bonds

In the primary market, it was a busy day as several issuers sold new paper.

Uruguay became the fourth sovereign this week to tap the market, following on the heels of the Ukraine, Brazil and Morocco.

The South American nation sold a $500 million equivalent offering of peso-denominated 30-year inflation-linked bonds (B1/B+/B+) at par to yield 3.70% over inflation.

The deal is denominated in pesos while the principal will be paid in dollars. Interest will be payable at a 3.70% annual rate, adjusted to reflect the Uruguayan inflation from the issuance date through the relevant interest payment date.

ABN Amro and Deutsche Bank were joint bookrunners for the SEC-registered offering.

Morocco sold €500 million of 10-year bonds on Wednesday, Brazil reopened its global bond due 2028 to add R$750 million on Tuesday and the Ukraine sold $500 million in global bonds due 2012 on Monday.

Asian corporates offer debt

From Asia, Majapahit Holding BV, a financing subsidiary of Indonesia's state-owned electric utility PT Perusahaan Listrik Negara (PLN), sold a $1 billion offering of 10-year and 30-year senior unsecured notes (B1/BB-).

The issuer priced $500 million of the 10-year notes at 99.127 to yield 7 3/8% or a spread of Treasuries plus 222.6 basis points more than Treasuries.

The second tranche was comprised of $500 million in 30-year notes, which priced at 98.586 to yield 8% or a spread of Treasuries plus 273.2 basis points.

UBS Investment Bank was the bookrunner for the Rule 144A and Regulation S deal. Danareska acted as joint lead manager.

Jakarta-based PLN and its subsidiaries will guarantee the offering.

From the subcontinent, the State Bank of India sold a $225 million offering of perpetual hybrid tier 1 bonds (Baa2/BBB-) at par to yield mid-swaps plus 137 basis points.

The deal came at the middle of guidance, which was set at mid-swaps plus 135 to 140 basis points.

The issue will be non-callable for 10 years. If the bonds are not called, the coupon steps up by 100 basis points.

Citigroup and JP Morgan were the lead managers for the Regulation S deal.

Elsewhere, Singapore-based shipping group BW Group sold a $500 million offering of senior unsecured fixed rate bonds (Baa3) at 99.46 to yield a spread of 55 basis points more than mid-swaps.

HSBC and Morgan Stanley ran the books for the Rule 144A and Regulation S deal.

DP World sells two-part offering

Coming out of the Middle East, Dubai port operator DP World (A1/A+) sold an upsized offering of $3.25 billion in a two-part sale of sukuk bonds and conventional bonds.

The issuer priced $1.5 billion of 10-year sukuk bonds at 99.765 to yield a spread of Treasuries plus 115 basis points. That priced in line with revised guidance of the 115 basis points area, which was tightened from 115 to 120 basis points over Treasuries.

The second tranche was comprised of $1.75 billion of 30-year conventional bonds, which priced at 99.911 to yield a spread to Treasuries of 160 basis points. That came in line with talk of the 160 basis points area.

The deal has been upsized twice from an initial offering of $2 billion.

Bookrunners for the Rule 144A and Regulation S deal were Barclays, Citigroup, Deutsche Bank, Dubai Islamic Bank and Lehman Brothers.

The Dubai, United Arab Emirates-based port operator is entirely, but indirectly owned by the government.

Also, BBK, formally known as the Bank of Bahrain & Kuwait, sold a $275 million offering of 10-year bonds (A3//BBB+) at 99.827 to yield a spread of Libor plus 79 basis points.

The deal is non-callable for five years. If the bonds are not called, the coupon steps up by 50 basis points.

Citigroup and SCB were the lead managers for the issue, which was priced off BBK's euro medium-term note program.

BBK is a bank that is based in Bahrain and is equally owned by Bahrain and Kuwait.

EM tracks Treasuries lower

Back to trading in the secondary market, investors felt jitters coming from Treasury trading, with the benchmark 10-year U.S. bond's yield seen about 4 bps higher at 5.18%, as debt markets in general retreated amid concern that multi-billion-dollar losses at two troubled hedge funds run by Bear Stearns Cos. may widen.

But with Treasuries continuing to struggle, the relative degree of risk between Treasuries and emerging bonds was not too much changed, with the widely followed EMBI+ index compiled by JP Morgan & Co. seen only about 2 basis points wider at 155 bps, still not too far above its all-time tight levels in the upper 140s, hit earlier this month before Treasuries started to slide.

Latin America eases

A New York-based trader in Latin American debt said that "once again, it's been a Treasury move," with the bonds in his sector taking their cue from U.S. government paper.

"Treasuries got smoked, again, and everything else fell down the line."

He characterized the session as "kind of chaotic, all over," with "people selling things they could get out of." He said that "not everything [was] wider, not everything [tighter] - it was just all over, a mess, and it was crazier because of the Treasury move.

The biggest underperformer he saw in the market was Venezuela, whose volatile 9¼% benchmark global bonds due 2027 widened out about 5 bps and closed around 109.

He saw Brazil's 11% benchmark bonds due 2040 - generally considered the most liquid and widely traded EM issue - 1 bp wider on the day, their yield rising to 6.06% while the price eased to 131.15, down about ½ point on the day.

Argentina's 8.28% bonds due 2033 were 1 bp tighter on the day, closing at about 100.20, he said, not far from where they had finished on Wednesday, yielding 8.25%.

Elsewhere in Latin American activity, Mexico's bonds - up earlier in the session on a U.S. economic report showing a gain in manufacturing activity last month, a sign of U.S. economic health that bodes well for Mexico's export economy - retreated later on investor nervousness ahead of Friday's meeting of the country's central bank officials. There was speculation that the central bank - which previously had been seen possibly cutting interest rates - will now hold off on further rate cuts in order to fight inflation.

That pushed the price of the country's 10% peso-denominated bonds due 2036 down about ¼ point to just above 127, while the bonds' yield rose 2 bps to 7.68%.

Asia trading off

In Asian trading, Philippines benchmark government bonds were seen off ¼ point, with the 2031 issue quoted at 111.75 bid, 112 offered and the 2032s at 97 bid, 97.25 offered.

The five-year credit default swaps contract was seen to have widened to about 95-99 bps, a few bps over the CDS' recent all-time tight levels.

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