Posco enters growing Asian pipeline; Pakistan tumbles on economic and political volatility

By Paul A. Harris

St. Louis, Aug. 29 - The menu featured thin gruel for emerging markets players who found themselves working Friday ahead of the three-day Labor Day holiday weekend in the United States.

Some of the high quality paper tightened on the session, sources said. However the tightening took place against the backdrop of softer U.S. Treasuries, with 10-year government paper yielding 3.81% near the close, up from the 3.78% open.

In this context one source spotted Brazil's benchmark 11% bonds maturing in August 2040 trading at 132.05 bid, 132.15 offered, up a dime on the day.

Only a few market sources picked up their telephones during the abbreviated Friday session in the U.S. bond markets. Those few, however, made references to a September pipeline that were downright enthusiastic when compared to some of the funereal remarks heard just a week ago.

Korea deals expected

Posco Engineering & Construction, the construction arm of South Korean steelmaker Posco, is expected to bring a dollar-denominated offering of notes in early September, according to a market source.

The size of and structure of the deal remain to be determined.

Barclays Capital, Citigroup and HSBC have the books.

Turning from corporates to sovereigns, earlier in the week a trader who focuses on Asian names said that Korea is expected to show up with a benchmark-sized sovereign deal, perhaps as early as the first week of April. The trader expects Korea to issue five-year paper.

Other names heard Friday were Export-Import Bank of Korea (Kexim) and Korea Development Bank, however no sizes or syndicate names were mentioned. However both could show up in early September, a source said.

From elsewhere in Asia, Hong Kong's Kerry Properties Ltd. could be an early September primary market entrant, a source said.

And Singapore-based microchip testing and packaging firm, Stats ChipPAC Ltd., which postponed an expected $1 billion two-part offering of senior notes (Ba1/BB+) in June, is possibly angling to return.

Credit Suisse and Deutsche Bank Securities were joint bookrunners for the pulled deal.

Pakistan pummeled

Political and financial turmoil have taken their toll on the Islamic Republic of Pakistan's sovereign debt, according to David Spegel, global head of emerging markets strategy for ING Financial Markets.

Spegel saw the Pakistan 6 7/8% bonds maturing in 2017 at 60½ bid, 68 offered. Noting the wide bid-offer spread, the strategist said that the bonds were down 1¼ points on the day.

On Aug. 18, Pervez Musharraf resigned the presidency of Pakistan under impeachment pressure from the coalition government, giving way to what some in the West see as a power vacuum there.

Related to the political turmoil, earlier in the week Pakistani authorities adopted emergency measures to try to halt the slide in the Kurachi Stock Exchange, which has reportedly fallen 42% over the past 19 weeks as Musharraf's presidency was unraveling.

Argentina exchange doubts

Nor does David Spegel think much of stories heard earlier in the week that Argentina was about to reopen the 2005 restructuring of its defaulted debt to creditors who held out from the original exchange.

The strategist said that while Argentina's dollar-denominated discount bonds maturing in 2033 were unchanged on Friday at 74 bid, 75 offered, prices of the local bodens had eased on the day.

Shortly before the New York open a trader in Europe also professed deep suspicion regarding the "exchange," story, although the source had seen nothing very persuasive, one way or another, in the prices of Argentina's sovereign bonds.

"We see them tighten and then widen again," the trader said, adding that there was nothing particularly novel about the most recent manifestation of the "exchange" rumor, which, the source said, tends to surface from time to time.

"Argentina had quite a sell-off a few months ago, and caught a little bit of a bounce back up over the past two or three weeks," the trader said.

"But I would be surprised if this news about the Paris Club holdouts restructuring takes place. Argentina has no money to finance it.

"They really need funds but they cannot go to the eurobond market. People are not going to buy Argentine bonds."

The source said that even if Argentina disposed of all the holdouts, and thereby regained access to the markets, they could only do so at very high yields - 15% or even higher for 10-year paper.

"I don't think Argentina would want to do that," the trader said.

"People in Europe don't trust Argentina anymore. We hear that from our clients. Even the Argentine clients with whom we are in contact don't trust their country. They say that they are not going to be involved in Argentine bonds again."

Meanwhile a trader in the United States, speaking after the early close in New York, said that Telefonica de Argentina's dollar-denominated 9 1/8% notes due 2010 were among the most active bonds "out of the blue," with about $7 million traded on Friday.

"That's unusual activity, I would think, on a day like today with no news" the trader said.

He saw the Telefonica at 102.10 as a last round-lot trade versus 101.55 late Thursday.

Georgia, Ukraine rebound, Russian corporates under pressure

Meanwhile the trader in Europe who spoke before the New York open said that the middle of the European session was seeing a bit of strength in cash bonds, with sovereigns tighter through the whole curve.

However this source also mentioned that the tightening was merely taking place in the context of weakening Treasuries.

Asked whether there were signs of recovery in the debt of countries impacted by the Russian Federation's recent intervention in Georgia, ostensibly on behalf of the breakaway regions of South Ossetia and Abkhazia (whose independence Russia subsequently recognized) the trader said: "Late last week there was a bit of bounce back with Georgia and the Ukraine, which has also been suffering.

"And there was a bit more of a recovery this week.

"But the bigger names like Gazprom, Severstal, Sberbank, VTB and the other big players out of Russia remain under pressure because people expect a lot of new issues from these bigger players.

"They will form a new curve in the near future.

"That's why at the moment people are on the sidelines."

The source said that while there were big moves in Russian and regional equity markets over the conflict in Georgia, credit seemed to suffer somewhat less.

For example, the trader said, OAO Gazprom's Gaz Capital 8 5/8% notes due 2034 were at 104 bid, 104¾ bid, in the middle of the European Friday session.

"If you go back to May, and the post-Bear Stearns bailout period, there was a rally in equities that lasted nearly to the end of May. Afterwards there was a big sell-off in almost every bond in emerging markets.

"Longer ones, like these Gazproms, with big duration risk, traded at 117 at the end of May. So there was quite a sell-off until the end of June into mid-July period, whereupon summer was upon us and there was not much flow.

"When the war began in Georgia the bond only traded down a little: one to two percentage points.

"It didn't have a big impact on these bonds. It had a bigger impact on the equities."

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