Emerging market debt softer on profit taking; Brazil issues $4.4 billion in bonds due 2018 in C-bond swap

By Reshmi Basu and Paul A. Harris

New York, July 22 - Emerging market debt ended the week softer on some profit taking, as Brazil's lingering political scandal continued to weigh on the market.

In the primary market, the Malaysian state of Sarawak priced $600 million of 10-year bullet notes (Baa1/A-) at 99.016 to yield 139 basis points more than Treasuries.

The issuer is a special-purpose entity of the Malaysian state of Sarawak, which is located on the northwest coast of Borneo.

Deutsche Bank Securities was the bookrunner for the Regulation S offering.

And Brazil's Unibanco SA priced an upsized offering of $500 million in perpetual non-step tier I notes (Ba2) at par to yield 8.70%.

The notes will be callable at par beginning July 29, 2010.

The deal was doubled in size from its original amount.

Merrill Lynch & Co. and UBS Investment Bank were the bookrunners for the Rule 144A/Regulation S transaction.

Adding to the pipeline, Milpitas, Calif.-based Chartered Semiconductor Manufacturing announced in a press release that it would make a public offering of approximately $450 million of senior notes in two tranches (Baa3).

Goldman Sachs (Singapore) Pte. is the global coordinator for the offering. Citigroup and Goldman Sachs (Singapore) Pte. are joint bookrunners. ABN Amro and Bank of America Singapore Ltd. are co-lead managers.

The company also intends to make a private placement of $250 million of units comprised of convertible redeemable preferred shares due 2010 and amortizing bonds due 2010. The amortizing bonds will be issued with an initial amount of approximately $39 million and will amortize in equal payments of $4.56 million in principal and interest up to maturity.

Proceeds will be used to finance the redemption or repurchase of the company's $575 million of 2½% senior convertible notes due April 2006.

And Beijing's XinAo Gas Holdings Ltd. plans to issue $150 million in seven-year bonds (Ba1/BB+).

Proceeds from the sale will be used to fund new acquisitions and for working capital.

Deutsche Bank is the bookrunner for the offering.

EM down on profit taking

Emerging market debt dipped Friday as investors cashed in on the market's strong performance in recent weeks, said a trader.

During the session, the Philippine bond due 2027 fell 0.38 to 110 bid. The Venezuela bond due 2027 slipped half a point to 103.60 bid. The Turkey bond due 2030 lost 0.255 to 141.62 bid

"Things are a little bit wider, the trader said.

"Emerging markets have underperformed the [U.S] Treasury market today [Friday]," he added.

Brazilian securities also ticked lower. During the session, the bond due 2040 was down ¾ of a point to 116.60 bid. A market source explained that Brazilian bonds tend to see a customary sell-off on Fridays.

Some profit taking was the culprit behind Friday's downturn, said the source,

"But it's also that we've just seen a pattern where every Friday, Brazil tends to have a local-driven sell-off ahead of the weekend," remarked the source.

Local investors have chosen to sell in order to insulate themselves from any negative headlines that may surface over the weekend regarding the "bribes for votes" turmoil.

"People are worried about the political scandal. And the way things happen in Brazil is that most of the weekly news magazines come out on Saturday," said the source.

Those front cover stories tend to color market sentiment.

"Locals sell on Friday...and then they come back again and buy on Monday," remarked the source.

Brazil exchanges $4.2 billion C bonds

The Brazil's Treasury said it exchanged $4.2 billion of its C bonds for $4.4 billion in new 8% amortizing global bonds due 2018. The global bonds being offered in the exchange will carry the same 8% coupon rate as the existing C bonds.

That [C] bond is slightly lower on price and the new bond is probably slightly lower than where it was when it first came out," replied the trader at late afternoon.

Unlike the C bonds, the new global bonds will be non-callable.

The maturity on the new bonds has been extended by 3¾ years to January 15, 2018.

"What it does is that it gives Brazil a liquid bond in the middle of the curve," said the market source.

The source added that a couple of years ago, the C-bond was the benchmark liquid bond for Brazil. In 1994, the Brazilian government issued $7.4 billion of the C bonds as part of its debt restructuring.

"But increasingly as the C traded up and around the call price and then over the call price, and as the Brazil '40s in turn were created and became more liquid, the '40 became the liquid bond benchmark.

"Even though it's [the Brazil '40] callable, it trades as a long bond, so people welcomed the opportunity to have a liquid bond in the middle of the curve," remarked the source.

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