Emerging markets still assessing impact of Spanish attacks; Russian deals coming

By Reshmi Basu and Paul A. Harris

New York, March 15 - Investor uncertainty continued to plague emerging markets in the aftermath of the March 11 terrorist killings in Madrid.

"Investors don't know how to react," said a trader. "The Madrid bombings unnerved the market."

A senior sell-side source added that the weight of the train attacks could be felt across the spectrum.

"It's impacting all the markets. Maybe it impacts emerging markets a little more just because it's more international to begin with," he said.

"People are still watching Treasuries. They're not certain of what the implications are for emerging markets, so they're pretty cautious."

The source said Brazil was a little stronger, although not substantially.

He quoted the C-bonds up 0.375 and the Brazil 2040 up around about 30 cents.

"It's not a massively strong showing. But on a day when Treasuries are relatively flat it's not too bad," said the trader.

However, the recent elections in Russia appeared to have little effect on the market with a landslide victory by Vladimir Putin on Sunday, according to an emerging market analyst.

"Can we even call it an election? Four more years of Vladimir, it was a foregone conclusion," said the analyst.

"They were worried about a low turnout because that would have necessitated a run-off election," added a trader.

"And there were stories that people were impelled to vote. One story said that people trying to check into the hospital had to be able to demonstrate that they had cast an absentee ballot, in order to be admitted. So basically by putting a gun to everyone's head they got the turnout up.

"Everyone knows that Putin was going to win. The only good thing is that you didn't have a run-off. So it's over, and you can move forward," commented the trader.

Russian calendar building

Several pipeline deals did emerge from Russia including a $300 million 10-year issue (B3/B) from Moscow-diamond company Alrosa Co. Ltd.

JP Morgan and ING are the underwriters for this deal, which is expected to price in the first half.

Russia's Alfa Bank (Ba2/B/B+) is expected to unveil an issue during the first half of this year, via UBS Investment Bank and Merrill Lynch.

The city of Moscow is expected to bring a €450 million five to seven year deal (Ba2/BB) via UBS, Citigroup and Dresdner Kleinwort Wasserstein.

And Russia's cellular service company MTS (Mobile TeleSystems) is expected to issue a $600 million 10-year deal (Ba3/B+) to price during the second quarter.

Southeast Asian supply

As for Asia, news of the impeachment of South Korean president Roh Moo-Hyun for allegedly breaking elections law continues to dominate headlines.

"The news is the Korea impeachment," said a trader.

"I think Malaysia is a little on the soft side," the source observed. "Part of it is the political noise. Also there has been a fair amount of supply out of Asia. You had a Philippine [sovereign] deal. You've had deals out of Korea."

One of those Korean issues is coming from Sun Sage Mando BV. The auto parts manufacturer is expected to start a roadshow this week for $200 million of senior secured notes due 2009 (confirmed Ba2/expected B+). JP Morgan, Lehman Brothers and Deutsche Bank are the co-managers of the Rule 144A/Regulation S (no registration rights) issue.

Another upcoming issue from the same area of the globe is coming from Malaysia's Titan Petrochemicals & Polymers Bhd in the form of $300 million of bonds due 2011 (Ba3/BB-). Goldman Sachs & Co. and JP Morgan are running the Rule 144A/Regulation S (with no registration rights).

Sovereigns on the way

Expected sovereign deals are in the pipeline from Croatia, Israel and Latvia.

The Republic of Croatia is expected to launch a €500 million 10-year offering (Baa3/BBB-), with marketing to be conducted via a roadshow.

UBS Investment Bank and JP Morgan are running the Regulation S deal, expected to price in April.

The Republic of Israel is expected to launch a €400 million deal (A2/A-/A-).

Deutsche Bank and Morgan Stanley are running the Regulation S transaction.

The Republic of Latvia plans to issue €300 million of 10-year notes (A2/BBB+).

Citigroup is running the Regulation S deal, which is expected in March.

Funds take in $103.4 million

According to the latest weekly bond fund flows data released by EmergingPortfolio.com Fund Research which tracks 251 dedicated emerging market bond portfolios, emerging market bond funds took in $103.4 million in the week ending March 10.

The cumulative year to date inflows into these funds amounts to $922.5 million, or about 5.7% of total assets. This outperforms the $864.6 million for the comparable period of 2003, a record-setting year for emerging market bond fund flows.

Less then stellar economic data in the United States and Europe has bolstered interest in emerging markets in the last reporting period.

"The recent disappointing jobless report in the U.S. and some evidence that economic recovery has already peaked in Europe are keeping international bond prices firm, relative to equities," said Brad Durham, managing director of EmergingPortfolio.com Fund Research, in a news release.

"International bond fund flows will also be influenced less by rising risk aversion than emerging market bond funds."

However, this latest flow data covers the weekly period ending the day before the fatal Madrid bombings, which is likely to lead to increased investor concerns.

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