Emerging markets hold strong tone; Severstal prices $1.25 billion notes; Philippines bonds jump

By Aaron Hochman-Zimmerman

New York, July 22 - Emerging markets took advantage of sinking oil prices, rising equities and a generally sunny outlook to pull out the stopper from the primary pipeline.

Russia's OAO Severstal led the new issuers by pricing $1.25 billion of loan participation notes to yield 9¾%.

Another Russian corporate was not far behind as OAO Gazprom priced its own $500 million deal.

In trading, while Latin America faced a more typical summer's day, Asia was on the move as the Philippines' benchmark bonds due 2030 jumped 1.125 points on a better-than-expected budget report from the government.

While equities were improving, volatility made a steady path downward on Tuesday to end lower by 1.87 at 21.18, according to the VIX index. The index is a frequently used measure of market volatility.

Meanwhile, as a sector emerging markets tightened by 4 basis points to a spread of 284 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

CIS lights up primary

Issuers from the Commonwealth of Independent States crashed through the summer doldrums on Tuesday by pricing a combined $1.75 billion, with more deals on the way.

OAO Severstal (Ba2/BB/BB) was the marquee issuer as it priced $1.25 billion five-year senior loan participation notes at par to yield 9¾%.

The deal matched its talk at 9¾%, which was revised from the 10% area.

ABN Amro, BNP Paribas and Citigroup acted as bookrunners for the deal.

Proceeds will be used to finance a $1.25 billion five-year loan.

Severstal is a Cherepovets, Russia-based steel producer.

OAO Gazprom (A3/BBB/BBB) was responsible for the remainder of the issuance as it priced $500 million five-year loan participation notes at par to yield 7.51%.

The deal priced with a spread of mid-swaps plus 310 bps.

Morgan Stanley was the bookrunner for the deal.

Gazprom is a Moscow-based government-run oil firm.

Still waiting in the pipeline is Russia's Home Credit & Finance Bank, which plans to offer at least $250 million three-year loan participation notes. The deal is expected at par.

ABN Amro, Calyon and ING will act as bookrunners for the deal.

The notes will be putable in August 2010.

Also, the bank plans to offer an exchange to holders of its 9½% notes due April 2010.

The base exchange offers a one-for-one exchange with a yield pick up of 2% to 2½%.

The special exchange, for investors buying the new bonds, offers a one-for-one exchange with a yield pick up of 2¾% to 3¼% for half of the amount of the current holding.

Home Credit and Finance Bank is a Moscow-based lender.

Also from the CIS, Alfa Bank Ukraine's (Ba3/B+) dollar-denominated three-year senior bonds were talked in the 12% area.

Credit Suisse and HSBC will act as bookrunners for the deal.

The bonds are putable after one year and come from a $2 billion medium-term note program.

Alfa Bank is a Kiev-based commercial and retail bank.

Emerging Europe stays strong

Trading in emerging Europe was overshadowed by the primary, but still investors were busy with higher volumes and a consistently better tone.

In Ukraine, during a press conference in Kiev, German chancellor Angela Merkel expressed her confidence in Ukraine's future as a member of NATO.

Still, her remarks were tempered by the West's dependence on Russia's oil.

"This is an agreement to deepen relations considerably - trade, economic relations and legal structures," Merkel said, according to Der Spiegel.

"This is not to be confused with the possibility of entering the European Union. But it is a move closer to the E.U. within the context of the neighborhood policy we have with several countries," she said.

Elsewhere in Turkey, both sides in the case against the ruling AK Party are now waiting to hear the decision from the constitutional court, which will determine the fate of the AKP.

Both sides have rested and a date for the ruling is expected at any time.

Russia, Venezuela joint oil venture

In Russia, a group of energy firms agreed to jointly develop oil fields in Venezuela, according to reports.

The United Kingdom's joint venture with Russia, TNK-BP, as well as Gazprom and Venezuela's PDVSA signed the agreement while Venezuela's president Hugo Chavez was on an official visit to Moscow.

"The Chavez, Russia back-patting was sort of expected," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"The worrisome aspect is what else the Russians are willing to sell him," he said about the possible sale of military hardware.

Chavez has expressed interest in buying, among other things, Russian helicopters for his air force.

The Venezuelan bonds due 2027 slipped 0.3 point to 92.2 bid, 92.6 offered.

Meanwhile, the British half of TNK-BP decided to recall 60 employees from Russia as trouble continues with what BP called "visa complications."

"We are taking this action reluctantly. These technical experts have played a huge part in making TNK-BP one of Russia's most successful oil companies in the past few years," said Lamar Mckay, BP's executive vice president.

LatAm edges higher

Latin America held fairly steady as the summer doldrums took hold of the sector, said Alvarez.

In Uruguay, an upgrade to BB- from B+ helped the credit, but only to a limited extent.

"This credit has been an underperformer for most of the year," Alvarez said, mostly because of the high inflation rate of the peso.

Recently natural gas deposits were found off-shore, but the timing of the upgrade is still "curious," he said, as major trading partner Argentina continues to face economic troubles.

The peso was seen trading at 19.155 to the dollar.

The 7 7/8% Uruguayan sovereigns due 2033 were better by 0.5 point to 101 bid, 102.5 offered.

The 8.28% Argentine discount bonds due 2033 were better by 0.1 point to 76.6 bid, 77 offered.

Also in Latin American, Brazil's 7 1/8% bonds due 2037 were unchanged at 109.5 bid, 109.75 offered.

Asia gains on late rally

Asian trading saw a "pretty good bounce" in the afternoon as oil was hit again and equities picked up the rally pace, a trader said.

"We walked into a poor backdrop," he said about "lower equity futures, concern over earnings ... overall the tone was pretty negative."

However, by the end of trading high-beta credits looked about 10 bps tighter and lower-beta credits looked about 5 bps tighter, he said.

Meanwhile, the Asian Development Bank issued a report predicting growth in East Asia will drop to 7.6% in 2008 and 2009 from 9% in 2007.

"Rising inflation is a serious threat to the region's sustained, strong growth as high import costs of food and fuel threaten to trigger a price/wage spiral, unleashing more inflation," said Jong-Wha Lee, head of the ADB office of regional economic integration in the report.

Elsewhere in the Philippines, better-than-expected budget numbers and a short squeeze in cash propelled the credit on Tuesday, the trader said.

The central bank added to the optimistic tone as it claimed that its 50 bps rate hikes will only have a limited impact on the country's growth, the Manila Times reported.

The increases will help stave off price pressure and will encourage economic expansion, said bank governor Amando Tetangco in the report.

"Any growth sacrifice over the near term is not expected to be large. In fact, appropriate rate hikes could reduce the long-term cost to output growth from prolonged inflation which will be very corrosive to growth," he said.

The peso was seen trading at 44.484 to the dollar.

The Philippine sovereigns due 2030 added 1.125 points to 126 bid, 126.5 offered.

In Indonesia, business income tax will be set at a flat rate of 28% in 2009 and 25% in 2010 after a bill before the House of Representatives is enacted in August, according to the Jakarta Post.

At the current rates, businesses earning less that 50 million rupiah pay 10% in taxes, business which earn between 50 million and 100 million rupiah pay 15% and those that earn over 100 million rupiah pay 30%.

For personal income taxes, the taxable income level will begin at 15.86 million rupiah per year, compared to the current 13.2 million rupiah per year.

Still, like many countries in the region, tax revenues are limited by a government's ability to collect what it is owed, the trader said.

The Indonesian bonds due 2017 were better by 0.375 point at 98.25 bid, 99 offered.

In corporates, South Korea's MagnaChip Semiconductor "bounced a little," another trader said, after Monday's poor showing.

The 8% notes due 2014 were better by 2 points at 32 bid, while its 6 7/8% notes due 2011 and floating-rate notes due 2011 were both up 1 point at 54 bid.

Vietnam cuts fuel subsidies

In Vietnam, the government raised fuel prices as part of its program to cut subsidies for oil.

Prices of gasoline went up 31% while home heating oil was raised by 36%.

"The issue with the subsidies is that it's going to affect the consumer or it's going to affect the government's balance sheet and they have to protect their balance sheet," the trader said.

However, optimistically the trader said that "we've had the shocks on higher oil prices" and further drops for oil are likely in the near term.

Meanwhile, "A question increasingly being asked is whether Vietnam is on the verge of a financial disruption, perhaps similar to the 1997 collapse in Thailand, which ignited the Asian financial crisis," according to the new study by the Asian Development Bank.

"Although Vietnam's fundamentals appear in better shape than Thailand's, it remains critical that authorities continue to act decisively to correct economic imbalances," the report said.

Vietnam's sovereigns due 2016 were unchanged at 95 bid, 97 offered.

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