Emerging market debt trades flat in directionless market; Turkey's Vestel prices $225 million bonds

By Reshmi Basu and Paul A. Harris

New York, April 29 - Emerging market debt traded with little juice Friday, as investors paused to chew over the state of the U.S. economy.

"The Brazil 2040 is up 0.60 today [Friday]," said a sellside source early in the session.

"They've been trading in a range of 113 bid, 114 offered for well over a week now. It's about the most boring market you could get.

"I think in general people feel like emerging markets is boring right now. It's trading in a range, and the range is pretty good - pretty expensive, if you look at what's happening around us," remarked the source.

Meanwhile in the primary market, Vestel Electronics Finance Ltd. priced $225 million of seven-year bonds (Ba3/B+/BB-) at 99.231 for a spread of 150 basis points over the Turkish government bond due 2012, according to a market source.

The new 8¾% bonds will yield 8.90%.

Price talk was set at the Turkish treasury due 2012 plus 125 to 150 basis points.

A buyside source said she did not play in the deal because "it was little too tight to the sovereign compared to other corporates."

Despite Turkey's spread widening, the issuer had no choice but to price the deal, said the source.

"They did go to 150 over 125. They had to do it because the deal was kind of interconnected with the tender that they had on the '07.

"The two things have to be simultaneous. You couldn't call those if they didn't issue the new bonds. They had no choice."

ABN Amro and Credit Suisse First Boston ran the issue.

The new issue prices as Vestel conducts a tender offer for its 11½% notes due 2007. The tender offer closes on May 3.

Also, JSCB Bank of Moscow plans to issue a dollar-denominated bond with a five- to seven-year maturity during the early to mid part of May, pending market conditions.

The size of the deal and precise timing remain to be determined.

"It's still two weeks off," said an informed source. "In this market you don't want to make too many final decisions too early."

BNP Paribas and JP Morgan will be the underwriters.

Limp market

Emerging market debt traded flat Friday with little liquidity, said sources. Thursday's GDP report in the United States failed to inspire bids in the market as the mood carried into Friday.

"It's pretty quiet today [Friday]," said the buyside source.

"We were a little bit wider versus yesterday [Thursday], but I think we actually closed flat on the day.

"It's mostly the Street dominating flows. We're not hearing about a lot of real money either way," she said.

In the secondary, sovereign prices saw little movement Friday. The Brazil C bond was unchanged at 99½ bid. The Russia bond due 2030 was up a quarter of a point to 106¼ bid. The Venezuela bond due 2027 rose 0.10 to 98.35 bid.

"Mexico is underperforming again," said the sellside source. "People may be starting to worry about politics there. And uncertainty about U.S. growth also effects Mexico."

Mexico City's popular mayor Lopez Obrador is facing charges that he ignored a 2001 court order to stop building a hospital access road on private land. The charges could cost him a chance at a presidential bid. But Obrador's side says the charges are a politically motivated attempt to keep him out of the election.

On Friday, Obrador told supporters that he backs efforts to slow opening of the economy to more private investment, a market "no-no," said a source.

Meanwhile, Thursday's GDP data indicated that U.S. growth appeared to be de-accelerating while inflation is accelerating, according to market sources. That would be a double whammy because a stagnant economy means less demand for emerging market goods in the United States as well as higher interest rates.

Overall, Friday's action was "surprisingly slow" as the market remains focused on the status of the U.S. economy and the reports coming out of that, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"The market still seems to be in a highly undecided mode where it is going to take a lot more on the Treasuries side in order to peel away that risk aversion sensation that's still out there," he said.

He added that trading was "still lackluster with defensive buys."

Data dependant

With the Street being the main driver of flows, the buyside source said that the next several sessions would be influenced by the economic news coming out of the United States.

"It still depends a lot on the U.S. credit markets," she said.

For the trading malaise to end, one of the two stories - either slower growth or inflation has to break in one direction or another, remarked Alvarez.

"I think what you saw in crude oil is quite important - a break below $50. That may be the start of something and that may cool the inflation story.

"With that retracing, it may cool one side of the equation and perhaps stimulate a little more interest in the market."

Alvarez added the market would pay close attention to Tuesday's decision by the Federal Open Market Committee and Friday's release of non-farm payroll numbers by the Labor Department.

The market will be very data dependent and in a defensive mood, noted Alvarez.

Furthermore, for real money to make a come back, spreads need to further widen, said the buyside source.

"There are plenty of potential factors that could cause that: some weakness in the Treasury market, some weakness in the credit market or dollar volatility.

"It's just a matter of time before one of these things impact the market. I think we are just waiting to see a little bit more widening from here," she said.

The source added that a market correction would be regarded as a buying opportunity.

EM outperforms

Overall, emerging market has performed very well, especially Brazil, in comparison to other classes, said a sellside source.

"When you look at what has happened in high grade and high yield, deals are pricing 200 basis points wide of pro forma, which is even more surprising now because you would think that pro formas would start to be getting set more realistically.

"If you went to an EM issuer and told them they were going to have to pay 200 more than they thought they were going to have to pay when they started a roadshow you'd have holes shot through your head," said the source.

"You can't get Korea to price FIVE basis points wide. The others may go 10 basis points, but never 100 or 200. So it's amazing that the high yield deals are still happening."

U.S. interests in Latin America stability

The sellside source said that the United States is asserting its interests in promoting stability in the Latin America region. The source added that the market would not immediately feel the impact.

Secretary of state Condoleezza Rice said on Wednesday that Washington wants to observe arms sales to Venezuela on concerns that they could be transferred to Marxist rebels in neighboring Colombia.

"It's probably a pretty good bet that Venezuela is funneling arms to the Colombian rebels," said the sellside source.

The source added that the United States is beginning to pay more attention to politics in the region than it did in the first four years of the Bush administration.

"Obviously [president Hugo] Chavez just continues to get stronger. There is an interesting editorial in the Wall Street Journal today [Friday] about the Castro-ization of Latin America, written by the Latin editor for the Journal."

The source noted that Chavez's hero is Fidel Castro.

"Then, most recently, you have Ecuador having installed a Chavez look-alike - a liberal populist president. He doesn't have the money that Chavez does. Unfortunately, the thing that bails Venezuelan politicians out is all of Venezuela's oil money. They can afford to have bad economic policies," according to the sellside source.

On April 20, Ecuador's debt suffered in the with the ouster of president Lucio Gutierrez. The market has been spooked by his replacement Alfredo Palacios, who has been viewed as market unfriendly.

"Ecuador gets a lot of money from oil, but it's not swimming in oil money the way Venezuela is right now," the source said.

"And you have elections everywhere next year. All of the major countries have elections next year.

"I think the Bush administration is beginning to realize that it has been so focused on the Middle East during the first administration that Latin America, by comparison, looked okay. And I think the administration has been getting beaten up for its lack of attention to Latin America."

People in emerging markets are aware of the political situation in Latin America, said the source.

"It's probably a good thing for the U.S. to start to pay more attention to Latin America. At the same time it creates headlines that might be good or bad.

"I think it's a good long term improvement in U.S. policy. But I am not sure it has any immediate implications for the emerging markets asset class."

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