Emerging market debt down with Treasuries, Brazil; CSN's proposed offering fetches investors

By Reshmi Basu and Paul A. Harris

New York, July 5 - Emerging market debt traded down in response to a pullback in U.S. Treasuries and new developments in Brazil's kickback scandal.

Yields on Treasuries reached a two-week high on stronger-than-expected factory orders data in the United States. The market was also weaker on negative sentiment growing from last week's decision by the Federal Reserve to continue its monetary tightening campaign - and the comments it made about the state of the U.S. economy.

The yield on the 10-year note stood at 4.11% in late trading, which translated into pressure for Latin American paper.

The Treasuries tumble coupled with a revisiting of Brazil's corruption scandal resulted in a sour mood across emerging markets, said sources.

The Brazil C bond lost half a point to 101¾ bid while the bond due 2040 fell 1.85 points to 117.90 bid. The Ecuador bond due 2030 slid two points to 81½ bid. The Mexico bond due 2009 fell 0.60 to 118.70 bid.

"You have dual effects hitting the market today [Tuesday]," said Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"You have again the Brazilian scandal resuming: more accusations out there about Workers' Party participation in other kickback and bribery schemes," said Alvarez.

"And that seems to be expanding and becoming more noisy. And that has jolted Brazil."

Late Monday, the head of the Workers' Party secretary general Silvio Pereira stepped down amidst allegations that he was involved in the bribes for votes scandal. On Tuesday, treasurer Delubio Soares took a leave of absence.

Last month, cabinet chief Jose Dirceu was forced to leave.

The resurfacing of the scandal comes as no surprise, said sources. Alvarez said that such scandals in Brazil tend to play out in different stages.

"It still seems that there are all sorts of skeletons coming out of the closet. It may take a lot of time before we actually know the full extent...of the actual allegations."

CSN fetches investors

In the primary market, Brazilian steel maker Companhia Siderurgica Nacional SA set price guidance for its offering of $150 million of perpetual preferred shares (B1/BB-/BB-) at the 9 5/8% area.

The order book was at $750 million or five times oversubscribed, according to a market source at late afternoon.

One investor, who already owns CSN's existing bonds, said she will take a look into the proposed issue.

"They are a big company and it makes sense for them to improve their capital structure and have more equity at a reasonable price," Diane Keefe, portfolio manager of the Pax World High Yield Fund

"CSN has $2 billion in cash. It's a very strong company."

Furthermore, Keefe is not dissuaded by the decline in steel prices in the United States.

"You can still make money at these levels," she remarked.

"CSN is backward integrated into iron ore. And they have long-term contracts with China. So a lot of what is causing steel prices to drop is the fact that China is developing its own capacity. But CSN has iron ore.

"So just to be a steel producer, without owning your own iron ore mines, is not as good as being backward integrated into iron ore," she replied.

Credit Suisse First Boston and Deutsche Bank Securities are joint bookrunners for the Rule 144A/Regulation S offering

Meanwhile during Tuesday's session, two more Brazilian corporates joined the pipeline. Corporates have been shielded from the scandal, said Alvarez, allowing them to tap the market.

"Corporates, per se, are earmarked for a different type market than sovereigns," said Alvarez.

"Then again, the sizes are quite small, which is quite manageable for the market at this time."

Cement company Camargo Correa Cimentos SA (B1/BB-), via its offshore special-purpose vehicle Caue Finance Ltd., plans to issue $150 million in 10-year senior notes.

Morgan Stanley is running the Rule 144A/Regulation S offering.

And regional bank Banco Industrial e Comercia (BicBanco) plans to start a roadshow next week for a minimum offering of $50 million in two-year bonds (B1). Dresdner Kleinwort Wasserstein is the bookrunner for the Regulation S offering.

Philippines down

In trading, the on-going political scandal knocked down Philippine bonds.

President Gloria Arroyo is fighting allegations that she rigged last year's presidential election. One source said the bonds were finally beginning to react to the noise.

During the session, the bond due 2025 fell one point to 109¾ bid.

In another development, there are reports the country will bring a new eurobond deal via Deutsche Bank and UBS.

"Until now only intentions," said an investor in Asia.

"It might take several months for this issue. But ROP bonds have at least a bit reacted to Arroyo scandal," said the investor, citing a 1½ to 2 points dip in sovereign prices.

And the department of finance, the bureau of internal revenue and the executive secretary of the president filed separate motions to lift the temporary restraining order on the VAT.

In Asian trading Tuesday, the bonds were higher on speculation that the Supreme Court would lift the order. The court ruled to keep the suspension but moved up the hearing on the VAT bill to July 14 from July 26.

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