Emerging markets recovers on Bernanke's sanguine outlook; Gazprom to sell bonds Thursday

By Reshmi Basu and Paul Deckelman

New York, Feb. 28 - Emerging market debt erased some of its losses Wednesday, following the previous session's bearish performance triggered by a sharp decline in China's equity markets.

Meanwhile in the primary market, Russian state-controlled gas monopoly OJSC Gazprom (A3/BBB/BBB-) announced initial price talk for its benchmark-sized two-part offering of global bonds.

Guidance for the euro-denominated tranche of 10-year bonds was set at mid-swaps plus 125 to 130 basis points.

Meanwhile talk for the dollar-denominated tranche of 15-year bonds was set in the area of Treasuries plus 195 basis points.

Credit Suisse and Morgan Stanley are joint bookrunners for the Rule 144A and Regulation S transaction.

Pricing is expected to take place on Thursday. Books were scheduled to close Wednesday.

Emerging market debt rebounded Wednesday, after posting losses on increased risk aversion the previous session. On Tuesday, speculation that the Chinese government would implement tightening measures sent the Shanghai Composite Index on a nose dive. That, coupled with the release of soft U.S. economic data, made for a bearish session for emerging markets as U.S. stocks posted their sharpest decline since September 2001.

On Tuesday, the JP Morgan EMBI+ index saw spreads widen by 21 basis points versus U.S. Treasuries. But on Wednesday, spreads tightened by 12 basis points, keeping in line with the recovery seen in U.S. stocks, after Federal Reserve chairman Ben Bernanke said the U.S. economy was set for moderate growth.

The Fed boss' assessment was backed up by data showing the American economy grew at a 2.2% annual pace in the fourth quarter. While that was well below the 3.5% which Washington had previously projected, it lends support to the idea that the Fed will likely hold off on any further interest rate hikes.

The market also shrugged off news that new homes sales have seen their sharpest decline in 13 years.

EM's better tone

While emerging market bonds were seen having a somewhat better tone to them Wednesday, the EM debt bounce back was limited, since emerging debt had not really sold off on Tuesday; while widening out versus surging U.S. Treasuries, it had not especially underperformed any other asset class Tuesday, according to traders.

Among individual issues, Brazil's benchmark 2040 bonds - which on Tuesday had fallen by ¾ point - snapped part of the way back, up 0.312 to a bid level of 133.625.

Ecuador's bonds, after widening out 42 bps on Tuesday, got back 31 bps in Wednesday's trading, as investors apparently shrugged off the prospect that the country's congress could slash the amount it would allocate to debt service by between $200 million and $250 million - this taken from an amount that is already about $1 billion less than it spent in 2006.

While such a political move again raises the nagging specter that Quito - which has criticized its $11 billion debt burden as being largely "illegitimate" and which has made noises about restructuring it on terms unfavorable to investors - might again seek to pursue such a course, some voices in the market caution against over reaction.

Deutsche Bank said in a research note that "we expect the government to continue servicing debt and avoiding making any reference to debt restructuring plans at least until the results of the second audit to external debt is completed," likely in the second half of the year, "and a debt restructuring proposal is ready."

Still no points of entry

Following Tuesday's bearish performance, few appeared surprised that the market would bounce back so quickly. But that recovery may be fleeting as the market works through a confluence of factors such as a potential slowdown in global growth as well as the escalating confrontation between Iran and the United States.

"I think some consolidation was expected here," remarked a buyside source.

"It's still pretty fragile to me."

Tuesday's sell-off across emerging markets was expected to be short-lived, noted many sources.

But many had hoped that the selling pressure would create some much-needed points of entry. But those hopes disappeared Wednesday as the asset class continued to hover at tight spreads.

"There isn't panic yet, but there's definitely no real opportunity to enter," noted the buyside source.

Buenos Aires postpones deal

Nonetheless, there was a casualty from Tuesday's volatility. The Province of Buenos Aires (B3/B+) shelved its $425 million offering of fixed-rate senior notes due 2028, citing market conditions.

The deal was expected to price Wednesday. Initial price guidance had been set in the area of 9½%.

Barclays Capital and Deutsche Bank were lead managers for the Rule 144A and Regulation S sale.

In other primary news developments, ProCredit Bank AD, Serbia plans to sell a €100 million to €150 million offering of five-year loan participation notes (//BB-).

Price talk has been whispered at mid-swaps plus 200 basis points.

Deutsche Bank is the lead manager for the Regulation S deal, which will be issued via ProCredit Finance BV.

Based in Belgrade, Serbia, ProCredit Bank is a development-oriented full-service bank

Pricing is expected to take place at the end of this week. By Wednesday morning, the book stood at around €300 million.

And Russian integrated oil company TNK-BP has mandated ABN Amro, Barclays Capital and Citigroup to manage the sale of a dollar-denominated offering of benchmark-sized bonds.

The deal will be structured as a Rule 144A and Regulation S sale.

Investor presentations are expected to take place the week of March 5.

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