Emerging market debt softer on declining commodities; new issuance picks up

By Reshmi Basu and Paul A. Harris

New York, Jan. 9 - Emerging market debt slipped Tuesday, triggered by lower commodity prices and a bout of profit-taking while Venezuelan assets plunged on president Hugo Chavez's push for a leftist agenda.

Tuesday also saw an active primary market, in which two sovereigns and two corporates issued new deals totaling $4.25 billion.

On the sovereign side, the Republic of Philippines sold a $1 billion offering of 25-year global bonds (B1/BB-) at 97.862 to yield 6.55% or a spread of 180.3 basis points more than U.S. Treasuries.

The deal came inside of initial price guidance of 6.60%.

Citigroup, Credit Suisse and Deutsche Bank managed the off the shelf and Regulation S deal.

Elsewhere, the Republic of Turkey issued $1 billion in new debt Tuesday in a dual reopening of its global bonds due 2016 and 2036 (Ba3/BB-) via Deutsche Bank and JP Morgan.

The country retapped its 7% global bonds due 2016 to add $500 million. The reopening priced at 101 7/8 to yield 6.732% or a spread of 207 basis points more than Treasuries.

With the latest addition, the total size of the issue is $2 billion.

Meanwhile Turkey also reopened its 6 7/8% global bonds due 2036 to add $500 million. The retap priced at 95 7/8 to yield 7.215% or a spread of Treasuries plus 247 basis points.

With the retap, the total size of the issue is $2.75 billion.

However, the sale was not described as knock-out deal for the country, according to a few sources.

Some questioned the rather "small size" of the offering. Historically in January, the country taps the market with $1.5 billion bond deals.

"Initially they announced price talk of 102 for the '16s, and 96 1/8 for the '36s," noted one source.

"And later in the day, they changed the price talk to 101 7/8 for the '16s, which was an 1/8 lower" and guidance was also reduced on the 2036s.

"I think it was a bad deal. I don't think it was the timing. Maybe it was the strategy - maybe people were thinking of one area of the curve," noted the source.

"By getting $1 billion on a program of $5.5 billion for the whole year, it's not a good start," he added.

ICICI, NACF tap

On the corporate front, South Korea's National Agricultural Cooperative Federation (NACF) placed a $250 million offering of five-year floating-rate notes (A3/A-) at 99.824 to bear a coupon of three-month Libor plus 20 basis points.

JP Morgan and Daiwa Securities led the Regulation S deal, which comes off the company's $2.5 billion medium-term notes program.

NACF is an umbrella organization for Korea's regional cooperatives, headquartered in Seoul.

Turning to the subcontinent, Mumbai-based ICICI Bank, the second largest commercial bank in India, placed a three-part bond offering worth $2 billion.

The bank sold $500 million of three-year floating-rate senior notes at par to yield a spread of 54 basis points.

Meanwhile the issuer also priced $750 million of five-year fixed-rate senior notes priced at 99.786 to yield a spread of Treasuries plus 114.3 basis points.

The third tranche included $750 million of 15-year upper tier 2 subordinated notes, which came at 99.766 to yield a spread of 174.8 basis points more than Treasuries.

The latter tranche will bear 10 years of call protection. Additionally, if the notes are not called before April 2017, the coupon will step up by 100 basis points.

Citigroup, Deutsche Bank Securities and Merrill Lynch & Co. were joint bookrunners for the Rule 144A and Regulation S transaction.

EM softer on host of headaches

Emerging market debt closed out 2006 on an upbeat note, but the emergence of negative headlines as well as lower commodity prices are making for a bearish start to the new year.

Friday's surprisingly robust U.S. job numbers forced many investors to scale back their hopes of an interest rate cut in the near term.

And as the market re-evaluates the Federal Reserve story, risk aversion has heightened on negative headlines, particularly from Venezuela.

Late on Monday afternoon, president Chavez spooked investors with his calls to revamp the South American nation as he vows to nationalize utilities, including the nation's electric power and telecommunications networks.

His calls for a "socialist revolution" have triggered a sell-off as investors make a mad dash to unwind positions. On Tuesday, both external debt and local markets fell for a second straight day.

During the session, the Venezuelan bond due 2027 gave up 1.10 to 123.50 bid, 124.10 offered.

No insulation from oil prices

Declining oil prices mean that the country has lost its cushioning from "Chavez's antics," noted one analyst.

"I think people have gotten use to the fact that the guy makes weird statements all the time, but as long as they had oil, everything was okay," observed a sellside source.

But still, Venezuela may see a return of stability over the next few weeks, depending on whether Chavez keeps quiet and how oil prices play out.

"Everything will be determined by the price of oil because the correlation is close to one in that credit," remarked the sellside source.

If oil continues to go down, the credit will move down. Chavez may hope for quick end to the unseasonably warm weather in the United States, which has pushed oil prices to a near 18-month low.

Nonetheless, sources have said that the Venezuelan story is contained, having a minimal impact on the Latin American region.

EM hurt by weaker commodities

Instead the shift in Federal Reserve sentiment coupled with falling commodity prices such as copper and zinc is pressuring such countries as Argentina and Mexico, according to a trader.

Also the analyst noted that with so many headaches, such as Venezuela, out there, investors are seeing this as an opportunity to take some profits.

"Too many things in a very few days have been driving down prices," noted the sellside source.

During the session, the bellwether Brazilian bond due 2040 gave up 0.35 to 132.40 bid, 132.55 offered.

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