Emerging market debt firmer; CVRD loses ground on acquisition talk

By Reshmi Basu and Paul A. Harris

New York, June 16 - Emerging market debt traded higher as investors engaged in profit taking early in Wednesday's session after Tuesday's run up.

"Today [Tuesday] is a bit softer. We've seen some profit taking, particularly in Brazil. As soon as we hit 91 on the Cs, people come in and sell," said a buy-side source at early afternoon.

Nonetheless, the Brazil C bond was up on the day, although below the highest levels hit during the session. The C bond was quote about three quarters of a point better at 90½ bid during late trading. Meanwhile the bond due 2034 was down nearly three quarters of a point at 72½ bid.

Brazilian debt had rallied strongly during Tuesday's session - as, to a somewhat lesser extent did emerging markets overall - after the release of U.S. consumer price index numbers indicated that core inflation was under control and unlikely to prompt the Federal Reserve to raise rates as much as 50 basis points at its next meeting.

A trader added that with Treasuries weaker Brazil outperformed - making it two straight days of relative gains.

"Brazil is up on the long end ¾ point even though Treasuries are off half a point," the trader said. "Brazil is tighter by five to 10 basis points."

Brazil's component of the EMBI Index jumped 1.12% at Wednesday's close. Its spread to Treasuries tightened by 29 basis points to 648 basis points.

And overall the emerging markets debt was firmer during Wednesday's session. The JP Morgan EMBI index rose 0.23%. Its spread to Treasuries tightened by 11 basis points to 479 basis points.

In the medium term, the market will be more volatile, the buy-side source forecast.

"It's going to stay volatile until we see what the Fed will do at the end of June. But we think fundamentals are still positive," added the source.

"And as soon as people get more comfortable with the interest rate environment in the United States money will return to the asset class."

CVRD falls on purchase talks

Also in secondary trading, Brazil's Companhia Vale do Rio Doce saw its paper down on reports that the company was in talks to acquire a controlling stake of Toronto-based Noranda, Inc. for as much as $3 billion.

The merger - if it goes ahead - would combine the world's biggest iron-ore producer with the third largest zinc and ninth biggest copper producer.

"The market doesn't like it very much," said an emerging market analyst.

While CVRD paper was down, the Noranda bonds were much worse off.

"CVRD was down one point, which is not a lot. It's wider by 10 to 15 basis points whereas the Noranda bonds are wider by 100-125 basis points," added the trader.

The CVRD bond due 2034 was quoted lower by a point at 86 bid, 87 offered while the bond due 2013 was at 101.75 bid, 102.75 offered.

Banco Itau on the road

In primary action, Brazil's second-largest privately owned bank Banco Itau Europa is on the road with a euro-denominated three-year floating-rate bond offering (Baa1/BBB+).

HVB, ING and BIE Bank & Trust are leading the deal, which is expected to price on June 25.

Also heading for the road is Southern Bank. Malaysia's ninth largest bank will start a roadshow for its $150 million 10-year subordinated notes (long-term foreign currency Baa2, long-term subordinated debt -/-/BBB-) Thursday via Goldman Sachs.

Pricing for the Regulation S deal is expected on either June 22 or June 23.

And Korea's wireless provider LG Telecom will roadshow its planned $200 million bonds due 2009 (Ba2/BB+) starting in the United States on June 17, followed by stops in Europe and Asia. Pricing is expected on June 29.

Bookrunners are Barclays Capital and Credit Suisse First Boston.

Argentina, bondholders at impasse

Meanwhile the Argentine government and bondholders continue to duke it out over the government's second proposal to restructure its 2001 default.

The government has said it would offer 25 cents per $1 of defaulted debt as measured by the discounted present value of the bond payments.

This was seen as a low blow by holders who say that the government can cough up the cash, given that gross domestic product is rising at a pace of 9% a year.

The government argues that digging deeper will endanger the country's economy.

"We had a new offer which implied better terms for the bondholders than the one from Dubai," said Alberto Bernal, Latin American economist for research firm IDEAglobal.

"It is still comes short from where the market thinks what is a fair value for Argentine bonds at this point, which is $30. The offer gives you $25, which is still short."

Bernal said there are three options for the Argentine government, which will take place over the next few weeks.

The first is to present a cash bonus to participants who participate in the deal at this point. The second option is to increase the interest payment on the defaulted bonds. And the third option, which he considers very unlikely, is to reduce the haircut on the debt.

"Negotiations are difficult processes," said Bernal. "If you have a position that you want to defend, you will defend it as much as you can.

"The global bondholders committee wants to maximize the amount of resources that they get from the Argentines.

"The Argentines want to minimize the amount of resources that they give to the bondholders because it is optimal for them," Bernal told Prospect News.

Bernal said that the Argentine government needs to move faster because the longer the talks go on the longer it will take for the government to bring back investment to the country to finance productivity activity.

"The market rallied before the presentation of [economy minister Roberto] Lavagna," said Bernal. "It fell a little bit after. And it has since regained a stable equilibrium around close to the $30 level."

In late trading Wednesday, the Argentine bond due 2008 was down a quarter of a point at 28 bid. The bond due 2012 fell a quarter of a point to 30 bid. And the bond due 2030 was unchanged at 27 bid.

Argentina's component of the EMBI Index fell 1.48% during Wednesday's session.

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