Emerging market debt rebounds on U.S. data; Venezuela sells $1 billion

By Reshmi Basu and Paul A. Harris

New York, April 16 - Emerging market debt bounced back Friday as U.S. Treasuries stabilized on reports of unexpected declines in industrial output and consumer confidence.

"It's such a psychological game," said a trader. "Yesterday, it was rate hike sooner than later. Now, it's later than sooner."

"No one knows how to interpret these mixed signals," he added.

The University of Michigan consumer sentiment index and the industrial production data fell short of forecasts, alleviating fears of a rate hike in the near term.

U.S. industrial production fell 0.2% in March after strong gains the previous two months.

"No one knows whether or not the economy has strong enough legs to sustain a rebound," said the trader.

The JP Morgan EMBI Index rose 0.40% Friday. Its spread to Treasuries tightened by two basis points.

Even Brazil entered into positive territory. Its EMBI component jumped 1.30%. Its spread to Treasuries tightened by 27 basis points.

While some investors have suggested reducing exposure to Brazil, portfolio manager Diane Keefe is cautious but still buying Brazilian corporates. Keefe is a manager at Pax World High Yield Fund, which submits the credits in which it invests to "social issues" screens.

"I bought Brazil Telecom this week, the 9 3/8% that was a new issue a few months ago. I had looked at it when it priced, but that was a time when the Brazilian market was really trading off a lot," Keefe told Prospect News.

"It's very comparable to Telemar. Its triple-B rated because it has political risk insurance. And I was looking at the yield on my Embratel 11% notes, because Embratel is being bought. The Embratel 11% was trading at 108.25," added Keefe.

"It was only 20 basis points cheap compared to where the Brazil Telecom triple-B rated paper was trading. In those circumstances I contemplated doing a swap. But I don't need to raise cash right now. So I decided to own both of them.

"Both of those companies have really low leverage and investment grade-quality kinds of statistics. So it's really the Brazilian sovereign risk that you're taking, but you are getting insurance for that," explained Keefe.

In the morning, the Brazil sovereign 10¼% due 2013 was trading around 105. In late morning, it was at 100.25 bid, 100.75 offered.

"The emerging markets debt market has been trading off as the high-yield market has been trading off this week. It must be that hedge funds are taking some money off of the table, or shorting some stuff," said Keefe.

Venezuela prices $1 billion

In primary activity Friday, the Bolivarian Republic of Venezuela priced its $1 billion offering of floating-rate notes at 109. The securities carry a coupon of Libor plus 100 basis points.

The 109 level at which the notes came to market is the same as the price at which non-competitive bids were accepted.

Venezuela said it was almost entirely placed with small investors.

Noting the bonds were sold mostly to retail buyers, a trader said selling by local investors is expected to be light at first.

He saw the new notes quoted at 75.5 bid, 77.5 offered in the gray market ahead of the pricing, equivalent to a roughly 10% yield to maturity.

Dresdner Kleinwort Wasserstein and UBS Investment Bank handled the Regulation S auction.

Among the South American country's existing issues, the Venezuela bond due 2034 was bid at 84.5, offered at 86.25, up 0.75 on the day. Its bond due 2010 was up 1 points at 81.5 bid, 82.25 offered.

Pipeline grows by 3

Adding to the pipeline of future deals, Indonesia's second largest coal company Kaltim Prima Coal will offer a total of $450 million split between three-year floating-rate notes due 2007 and seven-year fixed-rate notes, with tranche sizes to be determined.

Credit Suisse First Boston and JP Morgan will run the books on the Rule 144A/Regulation S offering.

Also, Croatia-based food company Agrokor dd plans to start a roadshow for an add-on to its €130 million 11% notes due 2007 (B1/B+) in Europe.

Marketing is expected to take place during the week of April 26, making stops in Vienna, Athens, Frankfurt, Munich, Zurich and London.

Deutsche Bank is the sole bookrunner.

And out of Asia, Hong Kong Land Finance Co. plans to roadshow its $300 million 10-year eurobond (A2/BBB+) on Tuesday and Wednesday.

JP Morgan and HSBC Bank are the joint bookrunners on the Regulation S deal.

Brazil, Turkey called in line to default

Brazil and Turkey are the next likely contenders to default, according to Jephraim P. Gundzik, president of Condor Advisers, which provides emerging market risk analysis.

Turkey, Brazil and Argentina are the three largest recipients of International Monetary Fund credit in the world, comprising three-quarters of IMF credit outstanding.

And all three countries share a common thread - unsustainable debt, according to Gundzik.

"Argentina defaulted. Brazil and Turkey are in a similar position, kept afloat by the liquidity provided from the IMF. Take that liquidity away from those countries, there is not that much left standing," Gundzik told Prospect News.

The budget deficits of Brazil and Argentina require ever-increasing amounts of domestic debt to finance.

"There is no way that the ratio of domestic debt to GDP can really decline, so it's set to grow perpetually," he added.

"At some point in time that debt has to be restructured."

And Brazil and Turkey are headed towards a potential default as the governments may be pressured to abandon IMF policy and follow the Argentine model.

Argentina, once the star performer in emerging markets as well as a benefactor of IMF credit, now is walking away from most of its foreign debt.

"They are effectively repudiating this debt since they are forcing bondholders to take such an enormous haircut," noted Gundzik.

When investors realize that Argentina is going to pay far below what was promised, this will push a tidal wave throughout the markets.

"It sends out a message that this country followed IMF policies for so many years, they [IMF] got them into an economic disaster which resulted in a leftist government coming to power which is completely rewriting politics there. Then add this default.

"That has significant implications for other countries in similar positions, such as Turkey and Brazil.

"If investors ignore what's going on in Argentina, then they are at their own peril," added Gundzik.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.