Emerging markets mostly in neutral but Korea loses; AES Gener prices

By Reshmi Basu and Paul A. Harris

New York, March 12 - Emerging markets stalled Friday in the aftermath of the fatal bomb explosion in Madrid and the political unrest in Korea.

But AES Gener SA priced its offering of 10-year notes, upsizing the deal to $400 million from a planned $300 million and bringing it at 380 basis points over Treasuries, right on price talk.

However generally there was little action.

"The market has been in neutral all day," an emerging markets trader said.

The J.P Morgan Emerging Market Bond Index (EMBI) slipped 0.08% on the day. Its spread to Treasuries tightened three basis points as the U.S. government market fell back.

But worries about South Korea's political crisis were reflected in its component of the EMBI index. It was down 0.21% on the day at 222.23. Its spread widened 10 basis points.

South Korea's parliament impeached president Roh Moo-hun for allegedly breaking election law and alleged incompetence, thrusting the country into political and economic shambles.

The impeachment comes a month ahead of the April 15 elections.

An emerging market analyst said Roh's impeachment will push back Korean corporate deals in the near term.

"It looks like the Roh impeachment shouldn't mean much more than 10-20 bps of wider spreads in Korea and even that should be temporary," said the analyst.

"True, 20 bps of widening is a lot for a single-A credit, but I doubt it will be enough to put much pressure on the rest of the Asian EM market. Probably its biggest impact will be delaying some of the Korean corporate issuance that was still trying to get done - Mando Corp., NACF [National Agricultural Cooperative Foundation] - though most of the big issuers already made it to the market," he added.

Brazil seen facing pressure

Meanwhile the bond market's current concern about Argentina's default negotiations is just a taste of what the future holds, said Jephraim Gundzik, president of Condor Advisers, a firm that researches political risk.

He warned that volatility in Latin America will worsen in the next few years as the people of Brazil demand more from their government.

"Investors face the same risk in Brazil that they faced prior to the Argentina default. Basically, it is the same situation all over again," Gundzik told Prospect News.

"It is really driven in Brazil more so by the contradiction between economic policies and social issues.

"They have a very poor population. They elected a president based on the assumption that he would address income inequalities in the country, that he would take a more proactive stance on social issues. And he's not doing that. He's doing the opposite. He's doing what every other Brazilian president has done, following what the IMF says.

"At some point, the system is going to break," Gundzik warned.

"There is going to be so much social pressure, that Lula will be forced to loosen fiscal policy.

"Investors haven't quite come to grips with this because the general assumption is that he will do what he is supposed to do and have a tight fiscal policy. Hence, everyone will be happy.

"But the problem is that doesn't make the people in Brazil happy. He [Lula] is going to have to loosen his fiscal policy. Once the market realizes that, you will see a sharp correction in the asset value both in equities and bonds," said Gundzik.

Argentina's bonds "driven more on momentum"

And according to Gundzik, the International Monetary Fund and Argentina are headed into another impasse as the Argentine government puts a "people-first" policy ahead of the IMF.

"It's interesting that the IMF takes a different mind with Argentina because they have to. Argentina essentially has a leftist government putting social issues first.

"Over the next few years, I see several repeats of what we've seen in the past. Argentina is going to push the IMF on policies to allow them to pay more attention to the country's social needs," he said

"There's a large disparity between what the actual reality of risk is and what investors think the risk is. Realistically, market values right now are driven more on momentum than anything else," he added.

"When Argentina defaulted, that marked an enormous change in the way this should be viewed but hasn't.

"It doesn't seem to have taken hold of the investment community, they still do things from the old perspective that you follow the mandates of the IMF, and everything will be great and you pay off your debt.

"And Argentina demonstrated that is not feasible. You have the largest debt default by a sovereign. I think, longer term that suggests to me there will be greater volatility because the risk is clearly higher than it has been, but the perception of the risk has not caught up where the actual risk is," Gundzik said.

New issues from Chile and Brazil

In primary action, AES Gener SA came to market Friday after postponing by a day its bond offering.

The Santiago, Chile power company upsized its deal to $400 million from $300 million and priced it at 99.853 to yield 7.521% (Ba3/BB+/BB) or a spread of 380 basis points over Treasuries.

The spread was at the middle of talk that put the spread at 380 basis points.

The note issue was part of the company's debt restructuring which includes refinancing its existing convertibles and Yankee bonds.

Deutsche Bank was bookrunner on the issue.

"This transaction marks the return of AES Gener to the international capital markets and shows the interest and confidence the market has in the company," said chief executive Felipe Ceron in a news release.

Meanwhile, from Sao Paolo, Brazil, Banco Votorantim sold a $50 million bond due 2007 at 99.6535 to yield 4 5/8%.

The underwriter was Standard Bank of London.

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