Emerging market debt grinds tighter; corporate pipeline building; Ecuador rallies

By Reshmi Basu, Paul Deckelman, and Paul A Harris

New York, Jan. 17 - Emerging market debt squeezed out gains Wednesday, shrugging off continued softness in commodity prices as spreads narrowed to a historic low.

In the primary market, two more corporates added to the pipeline. Out of Russia, MDM Bank OAO (Ba2/BB-/BB-) plans to sell a dollar-denominated offering of three-year bullet notes.

The issue will be structured as senior loan participation notes.

Deutsche Bank and Goldman Sachs are joint bookrunners for the Regulation S transaction, which will be sold through MDM International Funding plc.

Also, Polish steel producer Zlomrex SA began marketing a €170 million offering of seven-year senior secured notes (Caa1/B) on Wednesday in Europe.

The roadshow continues on Thursday in London and Paris, and moves to Frankfurt on Friday.

The notes, which will be issued via subsidiary Zlomrex International Finance SA, are expected to price next week.

Deutsche Bank Securities is the bookrunner for the Rule 144A for life and Regulation S notes, which come with four years of call protection.

Adding price guidance, Brazilian private equity firm GP Investments, Ltd. talked its $150 million offering of perpetual notes (/B+/B) at a yield in the 10% area.

The notes will come with five years of call protection.

Credit Suisse has the books for the Rule 144A and Regulation S offering.

Pricing is expected to take place this week.

Ecuador up on minister's comments

Back to the secondary market, Ecuador captured investors' attention on comments made by finance minister Ricardo Patino, who indicated the country may include debt payments in this year's budget.

Patino told reporters in Quito that Ecuador had not decided whether or not it would service this year's foreign debt obligations. Additionally, he said the country would pay the $135 million in interest on the global bond due 2030, if the money is available after planned increases in social welfare spending.

"If we have the resources, we will certainly pay," he said of the scheduled bond payment, which is due Feb. 15.

"But first, we will pay for the human development bonds [i.e. a planned welfare increase]... First we will provide microcredits" for small businesses, Patino told reporters.

Also noteworthy, he added that the Andean country may exclude its global bond due in 2015 from a possible restructuring process, which sources described as an implausible legal move.

"We are not aware of legal methods that would permit a change in the terms of the 2030s and the 2012s without forcing an SD rating [selective default] on the 2015s as well, due to the existence of pari-passu and cross-default clauses," said Alberto Bernal, fixed income analyst for Bear Stearns, in an analyst note.

"The Correa administration may not be aware or, more likely, may not care about these legal issues, but either way we believe it signals a hostile attitude towards foreign creditors."

Given that the country has three international bonds, how the country could restructure the 2012s and 2030s and leave out the 2015 bonds is a mystery, according to Enrique Alvarez, Latin America debt strategist for IDEAglobal

Nonetheless, the country's debt staged an impressive rally on Patino's comments as prices were at their highest levels in nearly a month.

During the session, the Ecuadorian bond due 2012 was up 2 points to 84 bid, 86 offered. The 2015 bond gained 3.50 to 86.50 bid, 87 offered while the 2030 bond moved up 1.25 to 79.75 bid, 80.25 offered.

On a historical note, one reason why the 2015s were left out is because it was the creation of the Alfredo Palacios administration, which Correa had participated in, explained Alvarez.

"By excluding it, they are trying to say this is the only legal bond that we will recognize because in one way, shape or form: we had something to do with it even if it is on the fringes," he noted.

Mexico loses traction

Turning to Mexico, the country's bonds were off Wednesday on indications that Banco de Mexico will not cut interest rates any time soon due to inflation fears sparked by Tuesday's news of higher prices for food staples.

Tortilla prices have doubled in the past year and egg prices have jumped 25% due to higher chickenfeed costs

There had been some hopes that the central bank might resume a trend of rate cuts seen in late 2005-early 2006, but higher food costs have stoked inflation fears.

Merrill Lynch said this week that the bank will not cut rates and will leave them unchanged, while JP Morgan even said that it could actually raise rates at its February meeting.

Currently, the benchmark lending rate is 7%. The next meeting is scheduled for Jan. 26.

EM at record tights on inflows

Meanwhile the broader market edged higher, bolstered by robust inflows into the asset class.

Declining oil prices may be capturing the headlines in financial markets, but prices on such commodities as zinc and copper are off by more than double digits since the start of this year. And this week, the market has been ignoring weakness in commodity prices.

"They're shrugging off everything," said Alvarez.

"Inflows continue to be positive and heavy towards both the bond and equity categories for Latin American or EM in general.

"And I think that with money on your lap and very little opportunities elsewhere, you are forced to chase prices up here and to shrink spreads," he observed.

And that is exactly what happened on Wednesday, as spreads grinded to a record low.

In trading, the bellwether Brazilian bond due 2040 moved up 0.05 to 132.50 bid, 132.55 offered. The Argentinean discount bond due 2033 gained 1.75 to 113.55 bid, 114.25 offered. And the Venezuelan bond due 2027 added 0.40 to 124.50 bid, 125.50 offered.

As the search for yield becomes even harder, Alvarez noted that investors would continue to seek out local markets. And issuers would take advantage of that hunger for yield by selling global bonds denominated in local currencies.

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