Emerging market debt slips on softer equities; Turkey plans to price 2014 retap at 7.95%

By Reshmi Basu and Paul A. Harris

New York, July 12 - Emerging market debt saw spreads kick out Wednesday on the back of softer U.S. equities. However, the Republic of Turkey emerged as the story of the session as the sovereign looked to reopen its 9½% global bond due 2014 to add $500 million via Citigroup and HSBC, a move that caught many market participants off guard.

In what was expected to be a drive-by, Turkey set price guidance for the retap at the 8% area.

One analyst observed that the deal was priced to get done, noting that one could arrive at that conclusion by just looking at secondary trading levels. For instance, if the bond were priced at 8%, the reoffer price would be around 108.33, according to the analyst note

Prior to the announcement, the 2014 bond was trading at around 109½ bid, 110 offered. After the announcement, the bond was spotted at 108¾ bid, 109½ offered.

Perhaps even more troubling to the analyst was that the primary and secondary discount were quite big, an indication of the lack of appetite for Turkey's risk.

Nonetheless, Turkey hoped to price the deal on Wednesday, instead of waiting for spreads to come in, remarked sources.

Market participants appeared divided as to whether or not Turkey was wise to tap, considering current investor sentiment.

Since mid-May the expectation of higher global rates has redirected investors' focus to those credits that suffer from large current account deficits such as Turkey. As a result, Turkey's spreads have widened on concerns over its ability to access financing in a more risk-averse world.

"It's just not something that you do on a quiet summer day, particularly given recent negative sentiment toward Turkey," noted a buyside source, who did concede that country had little choice since the asset class will likely see more volatility in August and September.

"If you take that scenario, it was a smart move to try and move now," the source added.

An emerging market analyst agreed, noting that Turkey was playing it safe by issuing now.

"The markets had recovered somewhat, the outflows from EM funds have probably slowed or even stopped, and investors had cash to put to work," he said.

"And with geopolitical risk rising across the Middle East, it's smart for Turkey to pay up a little to get a deal done rather than waiting and betting that geopolitical risks don't escalate further.

"Obviously there have been plenty of takers that got done wide to the curve, but it looks like it's been a mix of fast money and dedicated accounts, so at least this deal hasn't been completely dominated by hedge funds," he added.

The deal was at least three times oversubscribed. After the market close, the buyside source said that the reopening was expected to price at 7.95%, but had not seen any official launch terms. The source added that there are rumors that the allocations were not "that nice" and that there was "padding of the orders."

As expected, the long end of the Turkey's sovereign curve, particularly the Turkish bond due 2030, was pressured by the new supply. The long-end was about ½ to ¾ point lower, observed the buyside source.

During the session, the 2030 bond gave up 0.88 to 140 bid, 140.50 offered while the 2014 bond lost one point to 108.75 bid, 109.75 offered. Post announcement, the 2030 bond was as high as 140½ bid, 1043/4, but as the day progressed, bids were taken away.

Three corporates set talk

In other primary news, Jamaican wireless operator Digicel Ltd. plans to retap its 9¼% senior notes due 2012 (B3//B) to add $150 million.

Citigroup and JP Morgan are the lead managers for the Rule 144A/Regulation S transaction.

The extra issuance will bring the total size of the deal to $450 million. On July 21, 2005, the issuer priced the original $300 million offering of seven-year senior notes at par to yield 9¼%.

Also Russia's MDM Bank OAO set price guidance for a benchmark-sized offering of dollar-denominated lower tier II notes (Ba3/B- expected) at 9¾% to 10%.

The deal will be structured as a five-year bullet.

Goldman Sachs is the bookrunner for the Regulation S transaction.

Books are open and pricing is expected to take place this week, subject to market conditions.

And out of Kazakhstan, JSC Kazkommertsbank set price talk for a $200 million offering of 10-year subordinated loan participation notes (Baa3/BB-/BB) in the area of 8¼% to 8½%.

The deal will be non-callable for five-years. If not called, the coupon will step up.

Dresdner Kleinwort Wasserstein is the bookrunner for the Regulation S transaction.

Meanwhile rumors are circulating that the Philippines will tap the market sooner than later, according to a trader who focuses on Asian fixed income.

The Philippines is expected to issue up to $1 billion of global bonds in order to complete its $3.1 billion 2006 financing target. Citigroup, Deutsche Bank, JP Morgan have been quoted as the bookrunners by several sources.

Also Thailand-based fixed-line telecom operator True Corp. is rumored to be ready to come back and have another try at the market, noted the trader.

In December, True postponed a proposed $225 million offering of seven-year senior notes (B2/B+), citing market conditions.

Another market source added that Chile-based copper producer Corporacion Nacional del Cobre de Chile (Codelco) and Telefonica (Colombia) have sent out requests for proposals.

On Sept. 16, 2005, Codelco placed $500 million of 30-year bonds (Aa3/A) at 98.167 with a 5 5/8% coupon to yield 5.754%, or 118 basis points more than Treasuries.

Loan and HY market pick up, says trader

The trader observed that lower credits have had a difficult time of getting anything done, as investors have become more and more discerning. The loan market has picked up some of the slack as well as the high-yield market in the United States.

"There is the perception that there is better covenant protection in the loan market. But the issuers would prefer the flexibility of issuing in the bond market," noted the trader.

Furthermore, the best comparisons at the moment are in credit default swaps (CDS), he said.

For instance, since last Wednesday, the Philippine five-year CDS has tightened by 15 basis points tighter while the Indonesia five-year CDS is 20 basis points tighter.

During intraday trading Wednesday, both were a couple of basis points wider.

Meanwhile the Korea five-year CDS is three to four basis points narrower on the week.

Overall the trader noted that the market has stabilized a bit and there has been a little bit of a cessation of selling and at the margins some buying. Moreover, there is a little bit of a better tone.

"In Asia there wasn't an enormous amount of selling on the way down. So the technical picture was not as badly damaged during the downturn in the broad market.

"With a little bit of buying stuff quickly snaps in," the trader added.

Cautious optimism, says investor

Elsewhere in Wednesday's session, emerging market debt tracked equities lower. The bellwether Brazilian bond due 2040 gave up 0.20 to 125.50 bid, 125.60 offered. The Russian bond due 2030 shed 0.06 to 107.25 bid, 107.583 offered. And the Venezuelan bond due 2027 lost 0.50 to 119.65 bid, 120.10 offered.

However, the buyside source quoted above described current market sentiment as "cautiously optimism."

"It certainly feels good that we've rallied over the past couple of days, but I still think that the base-case scenario is for more volatility down the road until the third quarter," the source told Prospect News.

Moreover, the source said that the asset class will most likely stay range-bound in the 200 to 220/ 225 basis point range.

However looking ahead, the question is how currencies will trade on the back of equity performances. During the recent sell-off, local markets saw the blunt of the risk reduction sentiment as external debt was somewhat insulated by positive technicals.

"A lot of these currencies have corrected a lot. I still think Brazil's fundamentals are okay, so the real should be well-supported despite external turbulence," the source noted.

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