Philippines, Indonesia CDS hold all-time tights; Edcon launches record-breaking S. African LBO deal

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 4 - Phillipine and Indonesian credit default swaps held all-time tight levels in Monday's emerging markets action despite continuing volatility in the Chinese stock market.

In the primary market, Indonesia's PT Gajah Tunggal did a $95 million tap of its 10¼% notes due 2010.

And clothing retailer Edgars Consolidated Stores (Edcon) undraped a €1.83 billion three-part deal to back the biggest-ever South African leveraged buyout.

EMBI wider, but not by much

In the secondary market, participants continued to watch the equity bloodbath in China, where stocks fell for a fourth straight session on Monday, sliding some 8% on the day on top of the sizable losses notched over the previous three sessions.

But while that news was unsettling, its impact on emerging market debt was seen as extremely limited.

While spreads between EM bonds and U.S. Treasury issues were seen to have widened out a little, that may have been as much a function of a narrowing in Treasury yields, as the government paper rose on a combination of flight-to-quality in the wake of the continuing Chinese debacle, benign economic data, with April factory orders up a smaller-than-expected 0.3%, and the attraction that the U.S. paper now has for investors reaching for yield, as the benchmark 10-year bonds remain above the 4.90% mark - their highest levels in 10 months.

Those yields came in slightly in Monday's dealings to 4.94% from 4.96% on Friday, as the price on the bonds rose 5/32 point to 96.625. With the Treasury yields declining a little, EM bond spreads in turn widened, with JP Morgan's widely followed EMBI+ index seen having widened 4 basis points to 152 bps at the close, although this is not far from the all-time tight spread levels around 147 bps that participants had quoted during Friday's session.

The EMBI+ spreads were tighter earlier in the day, and then loosened up a little as the day went on.

Chinese stocks not seen a factor

But a New York-based trader in Asian debt said that he absolutely saw "zero carryover" from the continuing problems of the Chinese equity markets to EM bond trading.

"It was pretty much an isolated event," he said of the stock slide, "which is kind of the case of what we saw last week" when the equities first began heading south on reports that Beijing was upping

stock-trading taxes drastically.

"Last week, there was an initial scare - spreads widened 5 bps pretty much across the curve, and then snapped back. This time around, there was very little effect." He added that "it was a slow Monday here."

The price of five-year credit default swaps contract protecting holders of Philippine government debt from the impact of a possible default was unchanged at 95-97 bps, while the similar CDS contract linked to Indonesian sovereign debt was likewise steady at 94-96 bps - both at new all-time tight levels - and "it was not very active at all."

Philippines cash bonds were seen to have moved up slightly earlier in the day in local-market trading in Asia, with the benchmark 2032 bonds seen having firmed to levels around 97.375 bid, 97.75 offered, while its 2031 bonds were at 113.375 bid, 113.75 offered, a market source indicated.

AIG likes Brazil, Mexico and Turkey

International investment giant AIG Global Investment Group said Monday that emerging market debt is a place where investors can make some serious money - particularly in markets like Brazil, Mexico and Turkey.

The company - which said earlier this year that it had $687.5 billion under management, including $202 billion in international fixed income investment vehicles - likes Brazil because of its strong economic growth and robust capital inflows, as investors are attracted by the shares and bonds of Latin America's largest economy.

It is also touting the debt of Turkey and Mexico, due to the relatively high yields their respective bonds carry because of those countries' high benchmark interest rates - 17.5% in Turkey and 7.25% in Mexico.

Brazil seen easier, Mexico firms

However, Brazilian issues, which have recently traded near record highs, were seen a little easier Monday. Its benchmark 11% notes due 2040 were seen off 3/16 point at 133.3125, while its local currency-denominated bonds were also easier as the recently rollicking real was in retreat.

The yield on its real-denominated zero-coupon bonds due 2008 was seen having widened by as much as 7 bps to 11.40%.

However, in Mexico, local-currency bonds strengthened even as the underlying peso - which last week hit its highest levels in 14 months - lost ground against the U.S. dollar. While the peso dipped, the 10-year peso denominated bonds' yield tightened 2 bps to 7.56%.

Argentina's peso denominated local-currency bonds were also seen stronger, even as the currency unit declined.

Many emerging market currencies were seen lower on Monday as stocks in those countries fell in reaction to the continuing downturn in Chinese stocks.

Gajah Tunggal completes tap

An emerging markets syndicate source in New York said that the broad market appeared to be clinging to "last week's hesitancy" on Monday.

Gajah Tunggal priced a $95 million add-on to its 10¼% notes due July 21, 2010 (B2/B+) at 102.75, richer than the 102.50 price talk.

Lehman Brothers and Credit Suisse led the Regulation S transaction.

The proceeds will bolster the Jakarta, Indonesia-based tire and motorcycle manufacturer's production ability and advance its research and development.

The original $325 million priced at 99.522 to yield 10 3/8% in July 2005.

Russian bank plans deal

Renaissance Capital Bank will take a dollar-dominated three-year senior eurobond (B2/B-) on the road next week with Credit Suisse as the bookrunner.

South African deals

A Europe-only roadshow is underway for Edgars Consolidated Stores (Edcon)'s €1.83 billion three-part deal.

The South African clothing retailer plans to sell €1.18 billion of seven-year senior secured floating-rate notes and €650 million of senior unsecured notes in fixed-rate and floating-rate tranches.

Barclays Capital, Credit Suisse and Deutsche Bank Securities are joint bookrunners.

Proceeds will be used to help fund the $3.5 billion LBO of the company by Bain Capital, according to a market source, who added that the Edcon transaction is largest-ever LBO deal in South African history.

Elsewhere Standard Bank of South Africa announced plans to place dollar-dominated tier II bonds.

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