Three months ago, when the concern that subprime losses would spill over into other markets was making headlines, I examined the issue through the lens of the emerging world. I saw sporadic puffs of smoke, but no fire. EM ABS was unruffled.

Now that subprime anxiety has rekindled - and left Bear Stearns badly scorched - I figured it's worth another visit.

(And indeed, there's some trouble, at least on the vanilla side of emerging markets,) in the corporate and sovereign debt that forms the bulk of volume and the lifeblood of the secondary market. At press time, average spreads on emerging bonds had edged out to their highest level since March 21, as measured by JPMorgan Chase's EMBI Plus Index. In addition, the Mexican peso had weakened to a two-week low, and the Brazilian real was also getting hit, according to Bloomberg. Liquidity was inarguably on the retreat, which should have surprised no one. The bonanza that had compressed EM spreads to all-time lows couldn't go on forever.

Which brings us to the structured side of EM: How's it faring? Pretty well, if you look at the two busiest poles of EM activity, Mexico and Russia.

"We're still on the narrowing side," said Jean-David Ciroteau, lead analyst of ABS at Societe Generale, pointing to the recent pricing of Gazprombank's RMBS via Barclays and the originator. The deal featured a BBB+'/A3' senior tranche at 110 basis points over one-month Euribor, the tightest for a Russian existing asset deal in that rating category.

While that RMBS came out before the recent bout of Bear Stearns-related liquidity retrenchment, Ciroteau has a point.

The Russian RMBS market is just getting started - i.e. there's still plenty of pent up appetite out there, and the market certainly didn't feel a thing from the first wave of subprime-inspired volatility a few months ago.

As for Mexico, local yields have crept up with the blown-out spreads of the country's foreign bonds, but local players said the impact on structured deals in the domestic market - where most transactions are being placed - should remain subdued.

The evidence from last week bore that out.

On Thursday, Chiapas, the Mexican state once famed for launching the left-wing Zapatista rebellion, was set to close a bond collateralizing payroll taxes. The bulk of the deal, about Ps4.2 billion ($388 million), was denominated in inflation-indexed units and priced at a real 4.67%. It wasn't the tightest rate ever for a subsovereign, but it was the tightest spread ever against the local benchmark for a subsovereign. Yes, treasury rates had gone up, but the solid demand for structured product wasn't allowing spreads to widen as much. Doesn't sound like much of a liquidity drop there.

On the volatility from up north, "We didn't see any impact," said Pablo Pena, a director at IXE, the local boutique that led the deal.

Tonatiuh Rodriguez, a fund manager at pension fund Afore XXI, said that the strength of ABS and MBS structures in the domestic market was keeping spreads firm. Rodriguez manages Ps43 billion.

If players didn't see securitized deals from Mexico and Russia feeling the EM liquidity pullback to its full extent, they remained emphatic that subprime credit woes were irrelevant to the performance of emerging market RMBS.

Said one London banker: "I don't think anyone's looking at Russian deals with their credit hat on."

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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