Brazil, Hungary do benchmarks; market recovers after early drop, Turkey, Eastern Europe hit on bird flu

By Paul A. Harris

St. Louis, Jan. 10 - As forecast, Brazil slid into the red-hot primary market Tuesday to issue $1 billion on the long end of its curve. Its new 7 1/8% 31-year paper priced on top of the Treasuries plus 295 basis points price talk, and tightened in the aftermarket.

Earlier Tuesday Hungary priced €1 billion of 10-year paper in the middle of guidance.

However sources told Prospect News that the broad market saw some widening for the first time in 2006. It was variously attributed to profit taking, a huge amount of supply and deepening fears in Eastern Europe - and particularly in Turkey - that an outbreak of bird flu could take a significant toll on business.

By the end of the day, however, one source pointed to softness in U.S. government paper and said that emerging markets had actually outperformed Treasuries by two basis points.

Brazil with $1 billion

Late last week Enrique Alvarez, Latin American debt strategist at IDEAglobal, gave a heads up to Prospect News that the time was ripe for Brazil to bring a benchmark-sized chunk of new paper.

Further, the strategist insisted, it would logically be issued on the long end of the curve.

Bingo.

Tuesday Brazil did indeed price a $1 billion issue of 7 1/8% 31-year global bonds (Ba3/BB-/BB-) at a 295 basis points spread to Treasuries, on top of the Treasuries plus 295 basis points area price talk.

Deutsche Bank and UBS Investment Bank led deal.

Shortly after the terms rolled out an investor told Prospect News that the deal had been more than two times oversubscribed.

However an emerging markets strategist speaking on background said that the Brazil deal did not turn into the walk in the park that the leads had been anticipating.

"They've basically brought it flat to the curve, whereas Turkey brought their bonds cheap to the curve last week," the source said, referring to Turkey's new 6 7/8% due 2036.

"With spreads this tight, investors want a little incentive to get into the new deals, but Brazil obviously decided they didn't need to be generous in what they thought was a hot market," the strategist continued.

The source said that the sell-off in Treasuries, combined with bird flu jitters and the Ukraine parliament's attempt to sack the government as the row over the price of Russian natural gas continues, all combined to push the market down in the early going Tuesday.

The result, the source said, was that people began to wonder why they should "buy a new Brazil deal that offers no pick-up to the curve.

"Also, the big CVRD deal last week may have sapped a little of the demand for Brazilian paper," the source added.

All in all, the strategist said, the market was holding in, considering all the bad news.

The source marked Brazil's benchmark dollar-denominated 11% bonds due 2040 down a point, but they were still trading north of 130 at 130.3 early in the afternoon.

"That's not bad when Turkey's long end is down almost 2 points and Ukraine's '13s are down a point, with Ukraine spreads up more than 10 basis points," the strategist added.

Going long

Shortly after the strategist's message arrived, and terms on the Brazil deal had subsequently emerged, an investor who also spoke on background spotted the new Brazil 7 1/8% due 2037 five basis points tighter, and insisted that it was "fairly priced to the curve.

"I don't think it came particularly cheap," the buy-sider added.

"The main driver was the book was pretty well built, which was more than two times oversubscribed."

This investor pointed to the spate of recent sovereign deals - the Philippines bonds due 2031 and the Turkey bonds due 2036, as well as the new 2036 amortizing bonds from Panama, announced Tuesday in an exchange offer - and said that right now people seem to want to be on the long end of the curve, and issuers are obliging.

"A lot of investors are in the long end of the [Brazilian] curve - maybe in '40s," the investor observed. "Maybe they decided to switch into this bond because of the lower dollar price. Also the '40s are callable in 2015.

"There seems to be a trend," the investor added. "We had the Philippines and Turkey last week, We have Panama announcing an exchange today for a bond due in 2036.

"So everybody is trying to issue for as long as they can. And there seems to be appetite for it."

Hungary with €1 billion

Elsewhere Tuesday, The Republic of Hungary priced a €1 billion issue of 3½% global bonds due July 18, 2016 (A1/A-/BBB+) at a 99.437 dollar price, giving a 15 basis points spread to mid-swaps, in the middle of the mid-swaps plus 14 to 16 basis points guidance.

HSBC, Societe Generale and UBS were joint bookrunners.

Official press information stated that the transaction attracted significant demand from countries including Spain, Portugal, Italy and France, where investors had not traditionally been buyers of Republic of Hungary bonds.

The press statement added that the order book contained €1.5 billion of orders.

Bird flu

News of Turkey's 15th confirmed human case of bird flu made an impact on its paper, according to sources who reported that there was collateral damage Tuesday on debt securities and stocks from around Eastern Europe.

News also circulated that a massive poultry-slaughtering program is underway in several parts of Turkey.

"Eastern Europe traded mostly on the bird flu-news out of Turkey," an investor said. "The whole Turkish curve was selling off."

The source added that Turkey's new 6 7/8% bonds due 2036 had declined.

"It didn't wipe out all of the profit from when it was issued, but it certainly traded down," the source added.

However at the New York close one source spotted the paper at 95 bid, 95.25 offered, versus the 96.89 issue price.

Turkey's other long bonds also sold off, according to a market source.

The dollar-denominated 8% due 2034 was spotted at 108.50 bid, 109.50 offered, down from Monday's 110 bid. The dollar-denominated 11 7/8% due January 2030 was at 152.25 bid, 153.25 offered, down from Monday's 154 bid, and the dollar-denominated 7 3/8% bonds due May 2025 were at 102.50 bid, 103.50 offered, down from Monday's 103.50 bid.

Ukraine Parliament to Yekhanurov: 'You're fired!'

Headline news also prompted a sell-off in Ukrainian securities on Tuesday as the country's parliament voted to sack prime minister Yuri Yekhanurov's government over Ukraine's gas deal with Russia. Ukraine will pay nearly twice as much for its gas imports this year.

Yekhanurov is expected remain as acting prime minister until a successor is named. Ukraine is scheduled to hold parliamentary elections in March.

Early Tuesday a source had Ukraine's 7 5/8% bond due 2013 down a point at 107.25 bid, and later had it going out at 107.25 bid, 108 offered.

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