The market price of Lebanon's latest Eurobond issue, in common with other emerging market debt, has been hit by fallout from the dive in world equity markets.

The yield of the $400 million, 10-year bond over comparable US treasuries is now almost a percentage point wider than when it was issued on 22 October. Beirut analysts say this means that Lebanese debt issues will now have to be priced more generously.

Debt pricing is a key issue for the government, which has to finance a huge budget deficit, and for Lebanese banks which want to issue 10-year bonds so that they can lend to long-term industrial projects. The latest bond, which has a coupon of 8.625 per cent, is the longest-dated security issued by the government without a World Bank guarantee. Finance Minister Fouad Siniora stated on 29 October that the issue has been oversubscribed.

The issue, managed by SBC Warburg and Credit Suisse First Boston (CSFB) and placed by a syndicate of five Lebanese and nine global banks, was priced on 22 October to yield 250 basis points (bp) over US treasuries. This spread widened over the next few days to 435 bp as world stock markets plummeted and bond investors sold emerging market debt to buy safe-haven investments.

By 28 October, the spread had narrowed again to around 320 bp as Arab investors, many of them Lebanese who found the issue price too expensive, began to buy the bonds on the secondary market.

A banker at CSFB says the Lebanese bond fared better during the stock market panic than other emerging market debt issued at the same time, such as a Russian bond which was priced to yield 320 bp over US treasuries on issue but saw its yield widen to 750 bp. The reason for this was strong demand for the paper from Lebanese investors, the mainstay of all bond issues from Lebanon since the state's debut issue in 1994.

Lebanese banks in particular are attracted to the bond because its yield is now close to the rates they can earn on domestic lending, only with much lower risk.

Some analysts maintain that the bond was too tightly priced to start with. 'My reading is that treasuries plus 250 bp was not sufficient. The next few weeks will indicate to us how the market is pricing it, and I'm reading it as going to 300,' says Anthony Tzerzis, head of capital markets at Beirut finance house Lebanon Invest. 'If this is to be the benchmark, that's fine.'

At least one Lebanese bank, Banque du Liban & d'Outremer, is planning a 10-year bond issue, though the launch date for the issue has not been announced. Tzerzis says that, in general, once the global markets have settled, fund managers will take another look at the economic fundamentals in Middle East markets and could invest more there, even as they decrease their involvement in Asia.

'I think Egypt, Lebanon and Morocco stand to benefit from the attention of fund managers as they redeploy [their money],' he said.