Wounded emerging debt reinforces void in LatAm deals
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Emerging Markets

Wounded emerging debt reinforces void in LatAm deals

LatAm bonds endured a battering this week, reminding investors of the stubborn correlation of global credit markets with ever-deteriorating economic conditions, and further entrenching potential new issuers into retreat

LatAm bonds endured a battering this week, reminding investors of the stubborn correlation of global credit markets with ever-deteriorating economic conditions, and further entrenching potential new issuers into retreat.

Over the last few months, bankers had cited the out-performance of LatAm corporate and sovereign paper versus US high-yield as evidence of the region’s solid fundamentals, providing some confidence to potential new issuers.

But investors slammed emerging-market debt this week after the US Commerce department said demand for durable goods fell 5.3% and Fed chairman Bernanke warned of further economic and financial turmoil.

Spreads over US Treasuries widened 11bp to 2.75%, according to JPMorgan’s EMBI index – the biggest slide since February 8.

This has overturned gains over the last few weeks and disappointed bankers who were cheered that the rally demonstrated liquid demand for EM debt.

Turkey’s new $1bn 30-year issue this week also failed to inspire fellow high-grade borrowers or unleash comforting liquidity to the asset class after plummeting in the aftermarket. The sovereign priced at 96.457 and as EuroWeek was going to press the issue was trading at 96.375.

Brazilian 5-year CDS widened around 8bp to 141bp-144bp as well this week and Venezuela’s 5-year CDS came in 20bp wider yesterday (Thursday).

With the most liquid issue in the region Brazil’s 2040s also taking a hit, price direction in the near-term is now fuelled overwhelmingly by the technicals of the bond market without discrimination of credit fundamentals.

One DCM head potentially mandated for a possible 2037s or 2017s retap by Brazil later on in the year said: “We are telling Brazil to hold off. With secondaries getting slammed all of the place, it would be very risky financially and politically”.

The sovereign’s 2017s is trading at 5.82% and 2037s at 6.55%. This contrasts with the previous retaps of 5.888% and 6.635% respectively.

The banker argued that before the onset of August’s credit meltdown, the sovereign debt management office had made its tolerance for a 3bp-4bp premium clear.

But given the current market abyss, Brazil would have to pay up at least 9bp – notably wider than previous retaps.

EM fixed-income redemptions stood at around 17% in the last six months of 2007.

With investors continuing to build up large amounts of cash and spreads widening, sovereign and corporate issuers have hardened their resolve to avoid volatile market fluctuations.

“We are redoubling our pitch to potential issuers in light of what is happening: just wait and see because premiums right now are too expensive,” said a New York-based bond syndicate head.

Oil giant and quasi-sovereign Petrobras’ scrapped $500m retap this month has also sparked risk aversion among both high grade and cash-trapped lower rated names.

Nevertheless, the Province of Buenos Aires announced this week that it was formally mandating banks to draw up a 3-year $2bn funding program.

The Province’s amortizing 9.625% 2028s are trading at around 12% via Barclays and Deutsche Bank.

But one banker cautioned: “I cannot see them being able to raise a significant amount of cash in external markets. Conditions are just too bad so it would be too costly and would be politically damaging.”

Investors say that global market distress is driving the repricing of emerging debt only in the short-term and in the long-haul there are willing to pay up for new issues, particularly offerings denominated in local-currency.

Pre-tax profits at London-listed Ashmore Investment Management surged 68% in the second half of 2007 at £100.9m.

“Macroeconomic, demographic and political factors underpin the long-term prospects of the emerging market asset classes,” said CEO Mark Coombs.

Ashmore foresees a 30% appreciation of emerging currencies against the dollar, aided by regional central banks using currency strength as a tool to fight inflation.

Also banking on the undervaluation of emerging currencies, Pictet Asset Management launched this week its ‘PF Latin America Local Currency Debt fund’.

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