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2007 Fall Forum

EFFECTS OF SUB-PRIME CRISIS, CORPORATE MARKET PRIME TOPICS AT EMTA FALL FORUM
Lehman Brothers hosted EMTA’s Fall Forum in New York City on Wednesday, October 10, 2007.  The event included a panel composed of a mix of investors, sell-side analysts and a representative of the corporate bond market.  Approximately 125 market participants attended, with Guillermo Mondino of Lehman Brothers acting as the Forum’s event moderator.

Bracebridge Capital’s Mike Rashes kicked off the Forum with his thoughts on the global economic outlook.  “The 800-pound gorilla in the room is the US housing market,” Rashes observed, continuing that it would be difficult to discuss the future for credit markets without addressing prospects for that sector.  Rashes cited data which suggested that US house prices would fall further.  He noted that the response to the problem has been some orthodox measures such as interest rate cuts in the US and a flooding of liquidity into the financial system, but interestingly, heterodox policy measures have also been adopted, e.g., extending the definition of collateral at the discount window and extending the term of discount loans. 

Where do we go from here?  Rashes argued that equity prices, job growth, inflation, and weakness in the US dollar, combined, hardly make a case for further rate cuts.  He added that traditional principles of corporate finance make it unclear whether it is a good time to buy EM sovereign Eurobonds.  Local markets are doing well across the Board, Rashes acknowledged, but is this is a function of economic fundamentals or “another way for investors to express bearishness on the dollar?”

Paulo Leme (Goldman Sachs) warned that there was still downside risk for the US economy for the next nine months, although he still expected US economic growth to be positive.  EM countries which are more tied to US business cycles (such as Mexico and Central American countries) could suffer more than others, he stated.  Leme questioned whether the markets were properly pricing this risk in. 

HSBC Halbis’ Mike Gagliardi recalled being told “it’s all about politics” when he first started in the Emerging Markets debt industry two decades ago, and commented that the market might be “nearly immune—not totally” to developments in the US economy.  On the other hand, the market reacts strongly to local political developments, he asserted.

The panel’s corporate expert, Eric Ollum of ING Financial Markets, reviewed recent developments in the EM corporate bond market.  Ollum reminded the audience that EM corporate issuance has been exceeding sovereign issuance for a while now.  Ollum recommended Brazil’s agricultural sector because of its low production costs, globally traded product, and the bio-fuel frenzy pushing up prices in corn, soy and sugar.  His enthusiasm for Kazakh banks had tempered in the weeks prior to the Forum. 

Gagliardi voiced his opinion that the market has become increasingly disciplined, and at least with regards to Kazakh banks, “Bullsh*% Inc.” will not be issuing paper anymore, he stressed.  “There was a lot of that…you might not like the credit, you might not like the way it stands relative to its peers, but you aren’t going to be seeing companies that just should not be borrowing money anymore,” he affirmed.

Leme viewed growth of the corporate market as a natural evolution of the EM market.  Rashes stated that the ability for corporates to access funds via the international bond markets augurs well for the equity market, and also suggests that the EM securitization markets won’t be too far behind.

What are the new frontiers in EM, and what new assets will we discuss a year from now, Mondino polled the panel.  Gagliardi admitted to being a fan of African sovereigns including Ghana, most African currencies and Mongolia, while avoiding Fiji and the Seychelles.  Ollum sees the next frontier as corporates denominated in local currencies and cited the ruble-denominated corporate market in Russia as well as the peso-denominated corporate market in Mexico (conceding that the latter is difficult for foreigners to access).  Leme saw structured products (such as the Mexican mortgage market) as a new frontier, with Brazil perhaps following.  Rashes expects more development of the corporate CDS market, as well as inflation swaps, global NTNBs and Argentine local CDS.