Emerging market debt higher; Turkey issues $2 billion bonds; Argentina plays hardball

By Reshmi Basu and Paul A. Harris

New York, Jan. 13 - Emerging market debt moved higher Thursday amid new supply from the Republic of Turkey and the Republic of Colombia.

During Thursday's session, the Brazil C bond was up 1/8 of a point to 101 3/8 bid while the bond due 2040 gained 0.35 to 114.60 bid. The Ecuador bond due 2030 added 0.10 to 87.10 bid. The Mexico bond due 2009 was bid at 121.80, up 0.05. The Russia bond due 2030 added 0.62 to 103.37 bid.

After many sessions of speculation, Turkey priced its upsized $2 billion global bonds due 2025 (B1/BB-/BB-) at 98.507 to yield 7.52% after the session's close.

The deal, upsized from $1.5 billion, came in tighter than price guidance for a yield in the 7.60% area.

One buyside source decided not to play in the deal, given how tight the issue priced.

"We felt that they tightened the yield too much and did not want to pay the transaction costs of swapping out of our Turkey '30s," said the source.

"I guess it fills a pocket of need given its low dollar price, but we didn't want to give up the yield and liquidity we are getting in the '30s."

Early in the session, Fitch upgraded Turkey to BB- from B+, citing continued improvements in fiscal policy and ongoing political stability. That helped the proposed issue gather demand.

"The deal went well initially; it traded up about 1.5 points in the gray and then came off later in the day.

"The initial pop was probably due to the Fitch news and then Moody's comments made it sell off."

But apparently there were many players for the sovereign issue.

The source had heard that the final book size was $11 billion, "which is also why I am a bit surprised it didn't do better."

Five and a half times oversubscribed and the price action did not reflect that, added the source.

Citigroup and Morgan Stanley ran the deal.

Meanwhile, the Turkey bond due 2030 added 5/8 of a point to 1423/4.

Taking advantage of the current investor demand for peso-denominated issuances, the Republic of Colombia priced a Ps. 293 billion ($125 million equivalent) add-on to its existing peso-denominated 11¾% bonds due March 2010.

The add-on priced at 103.813 to yield 10¾% via ABN Amro.

Argentina plays hardball

Argentina said that it would consider its impending debt exchange a success if they get a 50% participation rate, said economy minister Roberto Lavagna, after a formal presentation regarding the country's restructuring proposal over $100 billion in defaulted debt.

"The meetings were highly scrutinized, not everyone could attend," said a Latin America debt strategist at Refco EM.

The nation was also conducting individual sessions with bondholders who held large positions, he added.

During the presentation, the government of Argentina swore that it would do no more to sweeten its forthcoming debt exchange. Investors say the current proposal leaves a bad taste.

In addition, Argentina clarified that if there was a second round and if there were any improvements in the offering, it would benefit those bondholders who participated in the first round, said the strategist.

They also said there will be no buybacks of non-exchanged debt, he added.

There were two important issues that came out of the meeting, according to Alberto Bernal, head of Latin America research for think tank IDEAglobal.

"There were no surprises on the announcement, other than the threat by minister Lavagna to sue investors that decided to go the legal way [to try to recuperate some of their losses], and the specific statement arguing that even if only 50% of the debt is restructured the Argentines would be comfortable with that situation," Bernal told Prospect News.

In terms of taking legal action against investors, there is absolutely no logic behind that statement, noted Bernal.

"It is not credible. But it is a function of the fact that Lavagna is playing hardball and has been playing hardball for a very long time."

There is no legal route that the Argentines can use to keep investors from heading to the courts, he said.

"It is also not credible that Argentina would be comfortable with 50% participation, but that does not mean that they are not going to say it," Bernal remarked.

"They will continue to say it because if they say it, the risk or the sense gets to the market that Argentina really does not care about the degree of hold-outs.

"Therefore, some investors may get 'anxious' and could, in theory, decide to participate on this deal."

An emerging market analyst agreed that Lavagna is playing hardball, but could within reason get above 50% participation.

"I think he has a good chance of getting 60-70%, but no more than that. The Argentines will participate for the most part, and that gets you probably around 35% right away," he noted.

"So all Lavagna needs to get is about half of the foreign bondholders to participate, and he would have roughly 65% participation, not great, but well above the 50% level he has mentioned as a success rate.

"Of course, if only 65% participate and 35% are left out, Argentina is going to have a massive legal headache, with all the ensuing risks that foreign court action could suspend the exchange or suspend payments on the exchange bonds.

"But, again, Lavagna is playing hardball, and I think that's an outcome he wouldn't mind," he observed.

Furthermore, the statements are meant for small investors, who want something in return, anything in return, according to Bernal.

"All those statements are not geared at the big investors - the professional investors like pension funds and others here in the U.S and Europe, but rather to the small investor such as the future retiree in Italy and Germany - whoever has $20,000 in the bonds and basically wants to make sure he gets something back.

"The statements are generating a sense of anxiety among those nonprofessional investors who may decide to take it because of the strong risk," he added.

However, the Argentina is using other tools to lure investors, said the Refco strategist.

There has been more demand for the peso-denominated options, which are becoming more appealing given the risks involved with holding dollar-denominated paper, he said.

"It has an inflation-adjustment mechanism that will protect the purchasing power of the notes - that is calling the attention of the investors," he said.

Nonetheless, how the debt restructuring plays out will be a direct function of world interest rates, according to Bernal.

"Argentina has not done anything to increase the value of the offer. They have not done anything that is relevant in terms of boosting the market price of the forthcoming bonds," he remarked.

But Argentina has been lucky, as Brazilian bonds have been performing well.

"The inherited risk of the emerging region has continued to come down and therefore Argentina has enjoyed from that a free ride.

"The exit yield, which is the yield that will be used to value the bonds, has continued to fall - thanks to the rally of the other assets in the emerging region," he noted.

"Therefore, without Argentina taking any proactive decisions under that front, the price of the current number has been increased significantly."

Argentina is offering 25 cents on the dollar. The current offer is worth 32 cents on the dollar. The market price of the bond is around 33 to 34 cents, Bernal said.

"My sense is that there is a good enough probability that a good amount of investors will participate if the markets continue to hold their ground. And according to my calculation, it could be as high as 72%," he concluded.

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