Emerging market debt sees weaker tone; Dominican Republic sells $300 million bonds

By Reshmi Basu and Paul A. Harris

New York, March 13 - Emerging market debt traded with a weaker tone Monday, even though the market outpaced U.S. Treasuries.

In the primary market, the Dominican Republic sold a $300 million offering of 8 5/8% amortizing bonds due 2027 (B3/B/B-) at par to yield 8.623% in a drive-by Monday.

The deal priced in line with price guidance for a yield in the 8 5/8% area.

The offering will pay equal annual amortizations on April 20 of 2025, 2026 and 2027.

The deal went well and traded up in the secondary, said a sellside source, adding that the country only had approval for a $300 million offering and therefore could not upsize.

Morgan Stanley and JP Morgan were the bookrunners for the Rule 144A/Regulation S deal. Bear Stearns, Citigroup and UBS Investment Bank were co-managers.

Meanwhile two corporates out of Kazakhstan are set to tap the market this week.

Temirbank JSC (B1/B-) set price guidance for a $100 million offering of three-year senior bonds at 9½% area.

Pricing is expected to take place on Tuesday via Dresdner Kleinwort Wasserstein.

And JSC Kazkommertsbank set price talk for a minimum €200 million offering of five-year fixed-rate bonds (Baa2/BB+) at euro mid-swaps plus 160 to 170 basis points.

ABN Amro is the bookrunner for the Regulation S transaction. The deal will price off the issuer's $1.5 billion medium-term note program.

This is the first euro-denominated issue coming out of Kazakhstan, noted a source.

EM trades weaker

Emerging market debt traded flat to slightly weaker Monday as the asset class tracked higher Treasuries.

"It's all boiling down to a renewed Treasury watch," remarked Enrique Alvarez, Latin America debt strategist for IDEAglobal. Furthermore, he added, investors are becoming wary as the 10-year Treasury note is looking to pierce the 4.79% area. At session's end, the yield on the 10-year note stood at 4.77%, up from Friday's close of 4.76%.

"There's a technical gap up there between 4.82% and 4.87%." he said.

At late trading, the Brazilian bond due 2040 was spotted at 130.15 bid, 130.35 offered. The Russian bond due 2030 was quoted at 110 bid, 110.25 offered, down 0.38. The Philippine bond due 2025 was quoted at 127.75 bid, 128.25 offered.

Peru down on polls

Peruvian prices slid Monday as Sunday polls showed that nationalist Ollanta Humala was in a deadlock tie with Lourdes Flores in the country's presidential race.

During late afternoon, the Peruvian bond due 2012 was seen down 0.75 to 113.75 bid, 114.25 offered while the bond due 2033 was quoted at 115.35 bid, 116 offered, down 2 points.

And Colombian bond prices were somewhat lower Monday even as president Alvaro Uribe won a majority of seats in both houses of Congress after Sunday's parliamentary elections.

During the session, the Colombian bond due 2012 was spotted at 118.50 bid, 119.40 offered, down 0.10 while the bond due 2033 was unchanged at 141.50 bid, 142.50 offered.

Despite correction, market at tights

Recent sessions have seen a correction, ignited by a higher Treasury yields, noted the sellside source. "That's [Treasuries] the catalyst," observed the source.

"But everybody knew that the market was overdone. And it was just a question of what was going to bring it back a little bit."

While the market has seen a correction, it is still hovering at pretty tight levels. Before the correction, the market grinded to record tights on announced buybacks. Coming on top of each other, Brazil and Venezuela each said that they were going to call their Brady bonds. Then Mexico and Colombia each announced a tender and a related new issue.

"I think people forgot the fact that they were going to issue new paper to fund the tenders and that the tenders were conditional," noted the sellside source.

In the case of Mexico, they were not eliminating any dollar paper - just replacing one with another.

"The market got extremely tight. Brazil bonds due 2015 were trading at 157 basis points to 160 basis points over Treasuries. Traders on the high-grade trading desk were pricing household name high triple-B paper at those kinds of levels.

"It was just crazy," noted the sellside source.

On Monday afternoon, the Brazil 2015 was spotted at 184 bps bid.

"It wasn't that long ago that Mexico was trading at 184.

"And people don't expect Brazil to become investment grade for a while."

Meanwhile, there is not much news in the Latin American issue pipeline, noted the sellside source. There are rumors of perpetual deals, but it is yet to be seen how robust the perpetual market will be, given the wider Treasury levels, noted the source.

"The perpetual market slowed down back in September and October. That was when Treasuries had spiked. And we're at higher levels now than we were then.

"To investors who buy those it's a play on the idea that U.S. Treasuries aren't going very high," observed the source.

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