Emerging Markets-Colombia and Brazil test investor appetite

By Daniel Bases

NEW YORK, Jan 6 (Reuters) - Brazil and Colombia each
launched sales of $1 billion worth of 10-year bonds on Tuesday
as debt markets showed signs of recovering from the 2008
shutdown, although both countries had to offer discounts to
lure still shaky investors.

The flurry of deal activity is an important barometer for
sovereign as well as corporate borrowers given that the credit
crisis all but closed the new issuance market in the second
half of last year.

Tuesday's deals are among the very first to attempt to
scale the large global emerging market financing hurdle
estimated by Dealogic at $450 billion for 2009.

"If these deals go well I think it is going to give support
to the market in a similar way that Mexico's deal did where
there was strong demand," said Cristina Panait, emerging market
debt strategist at Los Angeles-based fund manager Payden &
Rygel.

Until Mexico broke the dry spell with a $2 billion 10-year
deal Dec. 18, the previous sovereign issue was a $1.5 billion
10-year bond sold by Turkey on Sept. 3.

Emerging market assets held up well during the early phases
of the credit crisis but were hit hard when U.S. investment
bank Lehman Brothers collapsed, causing investors to sell these
profitable assets indiscriminately to shore up core positions.

"Investors are not in a risk averse mode right now. For the
right price people are willing to put money to work and it
looks like the books are oversubscribed," Panait said.

Peru, Philippines and Turkey are said to be looking to come
to the market as well, Panait and other fund managers say.

The discounts have contributed to weakness in existing
Brazilian and Colombian sovereign U.S. dollar-denominated bonds
as investors can gain yield and sometimes reduce duration
risk.

Overall emerging market debt is getting a boost in what
amounts to a sigh of relief that deals are getting done.

The yield spread between emerging sovereign debt and U.S.
Treasuries, a gauge of investor sentiment, improved slightly
with a narrowing of 6 basis points to 643, according to the JP
Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS.

MSCI's emerging market stock index rose 1.57 percent to
608.35 in midday New York trade .MSCIEF.

DISCOUNT PRICING

In both the Brazilian and Colombian deals pricing was above
current yield curves, indicating these issuers had to guarantee
fatter payouts in order to bring cash off the sidelines.

"Issuers recognize that the credit markets are still tight
and that you cannot bring a new issue on the current (yield)
curve. Nobody is going to take that deal," said a New
York-based fund manager.

In Brazil's case, price guidance was given at 375 basis
points over 10-year U.S. Treasury, which brought a yield of
roughly 6.24 percent. The existing 2019 issue is currently
yielding 6.195 percent or 370.8 basis points and has nine
months more of duration risk

Brazil hired Goldman Sachs and Merrill Lynch to be the lead
managers of the bond offering, the first sale since May 2008,
when it issued an additional $525 million of 2017 debt
BRAGLB17=RR to yield 5.29 percent.

"We are modestly oversubscribed," said one lead manager for
the Brazil issue.

Last year Brazil became for the first time a net foreign
creditor, limiting its need for international borrowing.

In Colombia's case, the 7.50 percent yield was roughly 50
basis points above existing bonds maturing in 2017.

Barclays Capital and Morgan Stanley are the lead managers
of this deal, the first since Jan. 8, 2008, when the government
reopened $1 billion in global issues due in 2017 and 2037.

The existing 2017 Colombian sovereign bond is currently
yielding 7.065 percent. The bond is bid down 1.375 points in
price to bid 101.875 COLGLB17=RR.

With the sale of the bond, Colombia's government will have
completed its planned international capital market financing
requirements for 2009. The country intends to borrow $1.4
billion from multilateral lenders later this year.
(Additional reporting by Nelson Bocanegra and Hugh Bronstein
in Bogota; Elzio Barreto in Sao Paulo; Editing by Leslie
Adler)