Emerging market debt rides higher on Brazil; Ecuador's uncertainty on oil fund vote

By Reshmi Basu and Paul A. Harris

New York, June 17 - Emerging market debt ended the week on a high note, as the political scandal in Brazil dimmed.

In the primary market, petrochemical Thai Olefins PCL sold $300 million in 10-year bonds (Baa3/BBB-) at 99.469 to yield Treasuries plus 149 basis points.

Citigroup and Deutsche Bank ran the Regulation S bond offering.

Russia's private bank OJSC Alfa Bank priced an upsized offering of $250 million in three-year bonds (Ba2/B/B+) at par to yield 7¾%.

Barclays Capital and JP Morgan were the joint bookrunners for the Regulation S offering.

Also, the Republic of Peru said it would issue up to $1.5 billion of bonds to repay Paris Club debt.

EM up as Brazil moves higher

The fallout from allegations of corruption charges against president Luiz Inacio Lula da Silva's administration is winding down, spawning a rally, said sources.

"Lula has taken essentially the reigns in the situation," said Enrique Alvarez, Latin America debt strategist at IDEAglobal.

"The cooling experienced by this political pressure has allowed the market to come back," said Alvarez.

By the end of the session, the Brazil C bond was up 0.062 to 101 7/8 bid while the bond due 2040 was 0.40 better to 119¼ bid.

The Brazilian 2040 had proved resilient during the upheaval, as it never dipped below a 116 bid. Part of its support stemmed from the fact that the allegations were unsubstantiated and also from the low interest rate environment, remarked Alvarez.

"There were accusations, but there was no proof. You have to look at it in the sense that the market...is very positive.

"If you start throwing in these political elements, unless there's a lot of weight behind it, there's really no way to get the market lower," Alvarez replied.

Inflows of $113.6 million

The decreasing noise in Brazil helped emerging markets see stronger flows into the asset class. Emerging market bond funds took in $113.6 million for the week ending June 15, according to EmergingPortfolio.com Fund Research.

Furthermore, a combination of factors such as low interest rates, low inflation and expected moderate growth in the United States has prompted speculation that the Federal Reserve will not accelerate its tightening of monetary policy, which is giving support to emerging markets, said Alvarez.

Other winners Friday included Russia and Turkey. The Russia bond due 2030 added 1/8 of a point to 108 7/8 bid. The Turkey bond due 2030 surged 7/8 of a point to 142¾ bid.

Ecuador's oil funds

Late Wednesday night, Ecuador's congress voted to change the oil stabilization fund (FEIREP) to use 35% of the money currently earmarked as FEIREP money towards economic growth and debt buy-backs. 30% will be directed towards social projects, 15% for road, environmental and technical projects and 20% for potential economic stabilization needs.

This move has created long-term uncertainty, said sources.

"Essentially, the FEIREP, as it was originally designed, is now dead," noted Alvarez. "What you have now is an oil fund that has 35% instead of 70% now for possible debt repurchases, although that 35% is essentially earmarked for economic re-activation projects.

"If oil was to fall and that's a big if, we could see some problems as far as solvency for Ecuador. But I think that's more of a medium- to long-term concern due to the actual behavior of crude oil prices," he remarked.

In trading Friday, oil prices hit above the $58 per barrel mark. Those high prices have helped chip away some of the pressure on Ecuador from a fiscal perspective, added Alvarez.

"That's why you're seeing the market essentially coming back. It's been a short squeeze... and that's been pretty evident."

During Friday's session, the Ecuador bond due 2030 fell a quarter of a point to 85 bid.

Dominican Republic restructuring

Late Thursday night, the Dominican Republic said it announced an agreement to restructure its outstanding international bank debt. The restructuring package will bring about $200 million of debt service relief over the next two years, according to an analyst note. The agreement will consolidate all unsecured international commercial bank credits maturing in 2005 and 2006, as well as all arrears as of Dec. 31, 2004. There will also be a two-year grace period on principal payments.

The restructuring is viewed as a positive step, said the analyst. It paves the way for the private sector to access credit from international banks. The agreement meets one of the conditions set by the International Monetary Fund's financial strategy. It also allows the country to meet its commitment to Paris Club creditors to obtain comparable treatment of non-Paris Club debt, added the analyst.

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