Emerging markets stumble; Argentina's bonds crushed; Probusinessbank prices $750 million bonds

By Aaron Hochman-Zimmerman

New York, Aug. 7 - Emerging markets were drawn wider by a difficult day on Wall Street for U.S. equities.

"It's thin and pretty weak," a trader said. "We're just following equities and the broader markets."

Once again, Argentina led the retreat as all of its recent troubles bubbled up to take 2.25 points from its benchmark discount bonds due 2033.

In the primary, the new issues continued to be dominated by emerging Europe.

Russia's JSCB Probusinessbank kick started the market into action for the day as it priced $750 million two-year bonds to yield 12½%.

Elsewhere, volatility measures came off of their morning high but spiked again into the close to finish higher by 0.92 at 21.15, according to the VIX index. The index is a common yardstick of market volatility.

As equities reeled, Treasuries came roaring back, throwing emerging markets wider by 12 basis points to a spread of 290 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will require to hold assets in emerging markets debt.

Argentina meltdown

"All the different negatives you've had day by day are coming together and just splattering the credit," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, about Argentina.

Rising electricity and natural gas prices, excess supply from the Boden 15s purchased by Venezuela and inflation questions regarding Indec's reporting have combined into a perfect storm for Argentina, he said.

The credit was smashed for 4.7%, and its spread over Treasuries was wider by "a startling" 49 bps, Alvarez said.

The peso was seen trading at 3.046 to the dollar, and the 8.28% Argentine discount bonds due 2033 sank 2.25 points to 70.5 bid, 71.5 offered.

LatAm holds tack

Elsewhere in Latin America, most of the highly watched credits were at their usual mixed to slightly upward pace.

Despite the 224-point loss in the Dow Jones Industrial Average, the other Latin American credits traded sideways to slightly tighter, Alvarez said.

"It's not dragging the rest of the market down," he said.

"Brazil had a slightly better tone," he added.

The 8¼% Brazilian bonds due 2034 were quoted at 124 bid, while the highly watched 11% bonds due 2040 were up 0.2 point to 132 bid, 132.1 offered.

In Venezuela, the 9¼% sovereigns due 2027 were lower by 0.45 point at 89.9 bid, 90.45 offered.

Also in corporates, Brazil's Grupo Friboi traded lower as it continued to watch for interest in its consent solicitation for its $275 million of 9 3/8% senior notes due 2011 and $300 million of 10½% senior notes due 2016.

In order to enhance its ability to reallocate its debt structure, which will enable each distinct geographic operation to finance its own working capital needs, Friboi has offered $25.00 per $1,000 principal amount of 9 3/8% notes and $40.00 per $1,000 principal amount of 10½% notes.

"I don't think that the consent on Friboi is going through," said a strategist.

"They are basically asking for everything and the kitchen sink," the strategist said, adding that "[investors] don't trust management."

The offer ends on Wednesday.

Probusinessbank prices $750 million

The primary was jolted awake by JSCB Probusinessbank's (//B-) pricing of $750 million two-year loan participation notes at par to yield 12½%.

BCP Securities and Credit Suisse acted as bookrunners for the deal.

The notes are putable at par in one year.

Probusinessbank is a Moscow-based lender.

Meanwhile, Korea Development Bank (Aa3/A/A+) announced plans to offer yen-denominated two-year floating-rate bonds.

The bonds will carry an early redemption clause.

KDB is a Seoul-based state-run bank.

Also in Asia, Overseas China Banking Corp. plans to issue up to 15 million non-cumulative, non-convertible guaranteed preference shares at S$100 each.

The total issue, which may be upsized to $1.5 billion, will pay a fixed rate for the first 10 years.

The rate has not yet been determined.

Proceeds from the offering will be used to strengthen the bank's capital position in order to restructure its finances and grow its business.

OCBC is a Singapore-based retail and commercial bank.

Asia cut down by equities

Asia lost its forward progress as job loss numbers and earnings put the breaks on Wednesday's U.S. equity rally.

In the Philippines, the government plans to add liquidity to the central bank via the sale of financial stability bonds.

The bank's governor, Amando Tetangco, said the sale of PHP 40 billion bonds will likely be held later in August or in early September, according to the Manila Times.

The bonds will likely come in two equal tranches.

"You're definitely seeing the local markets come into their own this year," a trader said.

"Local markets are proving to be important for a lot of these issuers," he said. "It has always been one of the big potentials for Asia."

The Philippine sovereign bonds due 2030 were seen at 127 bid, 127.5 offered.

In Indonesia, with the Philippine short squeeze waning, "Indonesia is slightly outperforming," the trader said.

Also, the May rise in fuel price was the foundation of July's year-over-year inflation of 11.9%, an analyst said, according to the Jakarta Post.

However, fuel price history shows that the impact of a price hike usually only lasts for three months with the greatest effects in the first two months, the report said.

In conjunction with the recent 25 bps rate hike to 9% by Bank Indonesia, inflation is likely to ease in the coming months, the analyst said.

The rupiah was seen trading at 9,137.34 to the dollar.

The Indonesian government bonds due 2017 were quoted at 99.75 bid, 100.25 offered.

Also in Asia, as China finished preparations for the Olympics, investors were more interested in the games from a sporting standpoint than a financial one.

However, the severe slowdown the Chinese government imposed in the run up to the Olympics will give way at their conclusion to a large resurgence of construction, a trader said.

Parliament to impeach Musharraf

In Pakistan, parliamentary leaders Asif Ali Zardari and former prime minister Nawaz Sharif announced that they will begin impeachment proceedings against president Pervez Musharraf.

As army chief, Musharraf over threw Sharif's government in 1999, and drew criticism for anti-democratic rule as well as for what was seen as pandering to the United States in the war on terror.

"He has worked to undermine the transition to democracy," Zardari said, according to the BBC.

"Pakistan cannot afford to see democracy derailed; this is not the same Pakistan as was the case in the 1980s and 1990s. People will not accept it now," Sharif said.

"That situation is looking a bit messy," the trader said, adding that "it has the potential of being a story" but "on absolutely zero liquidity."

The Pakistani bonds due 2017 were hardly traded but "likely down into the 60s," a trader said.

Emerging Europe wider

Emerging Europe was wider as the U.S. market tripped over new unemployment figures and sour earnings reports from the retail sector.

In Georgia, South Ossetian and Georgian troops traded fire on Thursday in Tskhinvali injuring 18, reports said.

Russia has brokered talks, which were held in Tbilisi, but the South Ossetian delegation refused to take part.

However, during Thursday's talks Georgia's president Mikheil Saakashvili offered a ceasefire and a willingness to negotiate.

In Turkey, the chief opposition party, the Republican People's Party (CHP), chided the military for failing to dismiss officers the CHP considers to be involved in reactionary activities, the Turkish Daily News reported.

"It should be known that [the supreme military council's] expulsion decisions do not aim at making some groups happy or unhappy," the military said in a release.

"Expulsion of the ones proven guilty through evidence is natural and there is no hesitancy on the subject. However, investigations to reveal one's attitude that could become a legal base for expulsion may take a long time," the military's statement continued.

In the Czech Republic, the central bank surprised market watchers by cutting its key interest rate by 25 bps to 3.5%.

The bank bucked the trend of keeping rates fixed by the European Central Bank and the Federal Reserve in order to arrest the growth of the koruna.

The koruna was seen trading at 15.782 to the dollar.

Eskom issue rumored

Also in South Africa, unions held a one-day strike on Wednesday, but "they tend to happen every year," a strategist said. "It's not a huge surprise."

Still, South African consumers are hurting and inflation is a big problem, the strategist said.

Meanwhile a new issue has been discussed from embattled national power company Eskom, the strategist said.

"I've definitely heard a lot of questions about Eskom ... There could be an issue in the works," the strategist said.

However, "if the market's not there, they're not going to come; I don't think the government will allow it," the strategist said.

The rand was seen trading at 7.482 to the dollar.

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