Emerging market debt ticks lower on Treasuries; four corporates bring new debt

By Reshmi Basu, Paul Deckelman and Paul A. Harris

New York, Jan. 26 - Emerging market debt posted another losing session on the back of weaker U.S. Treasuries, which have seen an aggressive sell-off on concerns that the Federal Reserve will hold interest rates steady rather than cut them.

Meanwhile the primary market remained active Friday as several corporates issued a total of $975 million in new debt.

Turkiye Garanti Bankasi AS sold a $500 million offering of step-up subordinated callable notes due 2017 (Baa1) at par to yield 6.95%.

The lower tier II notes are backed by political risk insurance.

Deutsche Bank Securities and Merrill Lynch were joint lead managers for the Rule 144A and Regulation S issue, which were sold via T2 Capital Finance Co. AS.

Garanti Bank (B1/BB-/BB) is a private commercial bank headquartered in Istanbul.

From Russia, Nomos Bank placed a $200 million offering of three-year senior unsecured notes (Ba3//B+) at par to yield 8.1875%.

The deal priced slightly tighter than guidance, which was set at 8 1/8% to 8 3/8%.

JP Morgan and UBS managed the Regulation S sale, which was issued via Nomos Capital plc (Ireland).

Moving to Argentina, real estate developer Irsa Inversiones y Reprentaciones SA placed a $150 million offering of senior unsecured notes (/B+/B) at par to yield 8½%.

The notes will be non-callable for five years.

Citigroup ran the books for the Rule 144A and Regulation S deal. Credit Suisse acted as a joint lead manager.

Out of Kazakhstan, Tsesna International sold a $125 million issue of three-year eurobonds (B1/B-/B-) at 99.367 to yield 10 1/8%.

The deal came in line with price talk of 10 1/8% area.

JSC Tsesnabank, which is incorporated in Kazakhstan, will guarantee the issue.

Citigroup and Dresdner Kleinwort managed the Regulation S transaction.

The asset class has easily absorbed the windfall of new supply in the past week. But, as one analyst pointed out, the new debt is on the corporate side, which means those issues are playing in a different EM universe.

"The mandates are different. Not necessarily all the people on the sovereign or local side are able to take corporate credit," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Argentina's Impsat to issue debt

In other corporate pipeline news, Argentina-based GC Impsat Holdings I Plc plans to sell $200 million of 10-year senior unsecured notes.

Proceeds will be used to finance a portion of the roughly $367 million of total funding required for the purchase of Impsat Fiber Networks, Inc. by Global Crossing, Ltd.

Credit Suisse is the bookrunner for the Rule 144A and Regulation S deal.

Deutsche Bank will act as a joint lead manager.

The issuer is a corporate communications provider headquartered in Buenos Aires.

EM softer on Treasuries

Overall, emerging market debt was softer Friday, as U.S. Treasuries sold off on government reports that showed that the economy is growing at a better-than-expected pace. That caused investors to scale back their expectations of an interest rate cut anytime soon.

"We're keeping in step, but prices are descending to maintain this relationship with Treasuries," observed Alvarez.

"It's a market that has capped on the upside and is very close to historical price highs and spread lows...and is now drifting in conjunction with U.S. Treasuries," he added.

"I don't think you can call it a bearish market because it has not taken on a bear trend. It's looks to me to be a plateaued market."

Latin America slight wider

A trader in Latin American debt said that there was "not too much going on" in the market that he saw, "Nothing too big."

He said that spreads versus Treasuries widened on average about two to three basis points on the day.

At another desk, Brazil's bonds were seen lower as the market reacted to continued weakening in the U.S. Treasury market on potentially inflationary stronger-than-expected economic data.

Brazil's 2040 global bond eased 0.313 to finish at 131.375, a 2½ month low.

Venezuela's dollar-denominated 6¼% bonds due 2017, on the other hand, were seen up, the yield declining for a third consecutive day to 3.94%, versus 4% on Thursday.

The bonds, which are seen as offering investors some currency-risk protection, continued to rise in apparent response to developments in the foreign exchange markets, where the Venezuelan bolivar slid after an official of the Chavez government threatened to crack down on what he called "foreign exchange crimes" - i.e. trading currencies through unofficial channels not approved by the government, a common practice in that country that its officials seek to halt.

Central bank is Mexico's focus

In Mexico, yields on local-currency bonds bounced around as the market awaited Friday's decision by the Banco de Mexico, the nation's central bank, on the likely inflation outlook.

They first widened on expectations of a harsh message warning of inflationary dangers, then came back in when the bank left current rates unchanged and indicated that the recent inflationary trend might not last - before coming back up again, slightly.

The yield on the country's benchmark 10-year peso-denominated bonds moved up to 7.97% from 7.90% on Thursday, while the yield on its 20-year paper was at 8.02%, unchanged. Yields on both had widened about one or two bps in the early afternoon from the day's lows earlier, reached after the central bank chose to leave its key overnight borrowing rate at 7%.

But the Banco de Mexico warned that it would push rates higher if need be at its February meeting to fight inflation. Some economists anticipate a 25 basis point increase.

One topic clearly on the central bankers' minds was the recent spike in food prices, particularly for sugar and for corn tortillas, a staple of the Mexican diet. Those price rises have pushed the inflation rate up to around 4% - well above the 3% long-term inflation target set by the central bank.

And things probably will get worse before they get better, inflation-wise, with the central bank's economists having predicted that the rising sugar and tortilla prices will likely pressure the inflation rate for the year's first half upward, to the 4% to 4.5% range.

However, they are hopeful that in the second half of the year, both the core inflation rate, which excludes energy prices and some food prices, and the overall rate can be brought down to a 3.5% to 4% range.

"If there is a negative effect from the supply side shocks ... the board will adjust monetary policy as necessary to bring inflation back toward the target," the central bank said in its statement Friday announcing its decision on interest rates. The Banco de Mexico governors are scheduled to next meet on Feb. 23.

Ecuador slips on debt uncertainty, minister's death

Turning to Ecuador, the Andean nation's external debt fell on Friday, unable to extend gains from the previous session that were triggered by short covering.

Aside from investors' confusion on how to interpret the country's rhetoric regarding possible debt restructuring, there was more negative news on the local front.

Wednesday night, Ecuador's defense minister Guadalupe Larriva died in a helicopter accident, which some have described as a suspicious event.

Her death has made an already tense political environment even more intense, as new president Rafael Correa moves to impose his nationalist agenda.

"We don't know how that's going to affect the stand-off between Correa and [former president Lucio] Gutierrez," remarked Alvarez.

"The congress is sort of playing its cards and sort of over-extending the period in which they want to consider the constitutional assembly language, which has been sent to them," he said

During the session, the Ecuador global note due 2015 shed 0.25 to 74.75 bid, 75.75 offered.

Asia wary on weak U.S. stocks

In Asia, a trader said that the market "continued to feel pretty weak for the majority of the day" for a second consecutive session.

"The fact that equities [in the United States] were lower for a second day in a row didn't give anybody in EM high yield any real incentive to come in and buy on this weakness."

He said that clients, for the most part, were "fairly quiet," and there was "better selling at the margins."

Overnight, he continued, there had been "a little bit of buying interest immediately at the Asia open, with locals lifting the market. But the Street got a little heavy [on Asian] paper [Thursday] as clients sold into bids, and the market was fairly well-offered after the local bid disappeared."

Net-net, he said, spreads of Philippine and Indonesian sovereigns were 3 basis points wider on the day.

MagnaChip gyrates after wider loss

High-yield bond traders in the United States reported hectic up-and-down trading in MagnaChip Semiconductor Ltd. bonds after the Korean computer-chip manufacturer reported a wider loss for the just-ended quarter and issued bearish guidance.

During the company's mid-morning ET conference call, its chief financial officer said that recent amendments made to its bank covenants are not a sign that the company believes it is headed for trouble, but rather were a routine renegotiation similar to several others MagnaChip has arranged since 2004 (see related story elsewhere in this issue).

But the market apparently was not buying that reasoning - traders said that initial gains evaporated after the conference call, leaving the bonds essentially unchanged.

One called trading "volatile," saying the company's 8% notes due 2014 - easily the most actively traded issue - shot up to 70 in the early going, pre-conference call, then "gave it all back," at one point falling to a low of 63.5, before finally closing at 65 bid, 66 offered, which he called unchanged.

He said the 6 7/8% notes due 2011 also traded around "though not as wildly" as the 8s. He had them peaking at 86, and then falling back to close unchanged at 82.5 bid, 83.5 offered.

And he said the company's floating-rate notes due 2011 moved as high as 88 before coming off that high to close at 85.5 bid, 86.5 offered.

He said that "they were going to try and make a run [upward], but that petered out."

He also said that the behavior of the notes was "the exact opposite of what we saw last time around" - the last time the company released results. Then, he said, "they got crushed" initially - but came back from the day's lows to end pretty much unchanged."

In the fourth quarter ended Dec. 31, MagnaChip's net loss about doubled to $45.6 million from $22.9 million a year earlier. Its operating loss grew to $39 million in the latest period from $28.1 million a year earlier, while revenues fell to $162.3 million from $245.6 million in the 2005 fourth quarter.

One small area of improvement was in interest expense, which fell to $14.1 million from $14.4 million a year earlier.

For the current first quarter, MagnaChip expects revenues to fall 10% to 12% from fourth-quarter levels, reflecting lower seasonal demand and an inventory correction in the analog and power areas of its foundry business. It sees gross margins of 4% to 6% of revenue, due to reduced loadings partially offset by cost containment measures. Gross margin in the fourth quarter was $18 million or 11.1% of revenue, down from $60.4 million or 24.6% of revenue for the 2005 fourth quarter.

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