N-30B-2 1 a2062347zn-30b_2.txt N-30B-2 THIRD QUARTER REPORT [MORGAN STANLEY LOGO] Morgan Stanley Emerging Markets Debt Fund, Inc. SEPTEMBER 30, 2001 MORGAN STANLEY INVESTMENT MANAGEMENT INC. INVESTMENT ADVISER MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. DIRECTORS AND OFFICERS Barton M. Biggs William G. Morton, Jr. CHAIRMAN OF THE BOARD OF DIRECTORS DIRECTOR Ronald E. Robison Michael Nugent PRESIDENT AND DIRECTOR DIRECTOR John D. Barrett II Fergus Reid DIRECTOR DIRECTOR Thomas P. Gerrity Stefanie V. Chang DIRECTOR VICE PRESIDENT Gerard E. Jones Lorraine Truten DIRECTOR VICE PRESIDENT Joseph J. Kearns Joseph P. Stadler DIRECTOR VICE PRESIDENT AND TREASURER Vincent R. McLean Mary E. Mullin DIRECTOR SECRETARY C.Oscar Morong, Jr. Belinda A. Brady DIRECTOR ASSISTANT TREASURER INVESTMENT ADVISER Morgan Stanley Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 ADMINISTRATOR JPMorgan Chase Bank 73 Tremont Street Boston, Massachusetts 02108 CUSTODIAN JPMorgan Chase Bank 3 Chase MetroTech Center Brooklyn, New York 11245 SHAREHOLDER SERVICING AGENT Boston Equiserve Investor Relations Department P.O. Box 644 Boston, Massachusetts 02102-0644 (800)730-6001 LEGAL COUNSEL Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116 For additional Fund information, including the Fund's net asset value per share and information regarding the investments comprising the Fund's portfolio, please call 1-800-221-6726 or visit our website at www.morganstanley.com/im. MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. OVERVIEW LETTER TO SHAREHOLDERS For the nine months ended September 30, 2001, the Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund") had a total return, based on net asset value per share, of 3.53% compared to 1.40% for the J.P. Morgan Emerging Markets Bond Global Index (the "Index"). For the period from the Fund's commencement of operations on July 23, 1993 through September 30, 2001, the Fund's cumulative total return, based on net asset value per share, was 152.36% compared to 136.24% for the Index. On September 30, 2001, the closing price of the Fund's shares on the New York Stock Exchange was $6.92, representing an 11.3% discount to the Fund's net asset value per share. MARKET OVERVIEW Emerging markets debt (EMD) enjoyed strong but volatile performance during the first half of 2001,but declined during the most recent quarter. Prior to September, Argentina, and to a lesser extent Turkey, dominated the headlines and led to significant moves in asset prices -- both upward and downward. EMD was also greatly impacted by the tragic events of September 11. The global economy, already weak, may well have tipped into recession and commodity prices are expected to continue their march downward. Financial stress in Argentina and Turkey started in early April when it looked increasingly likely that both countries would be unable to service their debt. An asset price recovery ensued as the Argentines implemented a debt-reprofiling exercise and as the international official community came to Turkey's rescue. The rally, though, proved short-lived. In July, Argentina came under increased pressure as a fear of default gripped the market, but the market recovered in August mostly due to continued support for Argentina by the international community. The events in September drove asset prices in emerging countries lower with particular emphasis on Argentina and Middle Eastern countries. During the past nine months, the Fund's construction was based on two self-reinforcing considerations: that the weak global economy is clouding the outlook for emerging markets and that systemically important credits (Argentina, Turkey, and to a lesser extent, Brazil) possess particularly weak fundamentals. At the portfolio level, these considerations translated into a generally defensive stance. Throughout the third quarter, the Fund emphasized lower beta and shorter duration instruments. In terms of country selection, the Fund had a material underweight in Argentina and smaller underweights in Turkey and Brazil. Two sets of countries were over-weighted: those with an idiosyncratically favorable dynamic that dominates overall market considerations (Russia, Morocco, and Bulgaria) and countries whose fundamentals are sufficiently strong so as to survive the global slowdown and Argentina/Turkey contagion (Mexico, Qatar, and Panama). Our underweights to Argentina, and to a lesser extent Brazil, were the major reasons for the out-performance in the third quarter. In addition, overweight positions in Russia, Mexico and Panama also added to returns, as did an underweight to Venezuela. Our overall defensive portfolio stance helped the Fund in several of the months this year including July and September in the third quarter. MARKET OUTLOOK We remain concerned about the near-term outlook for EMD and have the Fund positioned accordingly. However, we are looking for opportunities in countries whose asset prices fall to unwarranted levels. In addition, we remain positive on the long-term outlook for EMD and will look for the appropriate time to become more aggressive with the Fund. Sincerely, /s/ Ronald E. Robison Ronald E. Robison PRESIDENT AND DIRECTOR October 2001 -------------------------------------------------------------------------------- ON OCTOBER 18, 2001, THE FUND'S BY-LAWS WERE AMENDED TO CHANGE THE RETIREMENT AGE FOR ITS DIRECTORS TO 72 FROM 73. THE FUND ALSO ADOPTED A NON-FUNDAMENTAL POLICY THAT, UNDER NORMAL CIRCUMSTANCES, AT LEAST 80% OF ITS ASSETS WILL BE INVESTED IN DEBT SECURITIES OF GOVERNMENTS AND GOVERNMENT RELATED ISSUERS LOCATED IN EMERGING COUNTRIES, ENTITIES ORGANIZED TO RESTRUCTURE OUTSTANDING DEBT OF SUCH ISSUERS AND DEBT SECURITIES OF CORPORATE ISSUERS LOCATED IN OR ORGANIZED UNDER THE LAWS OF EMERGING COUNTRIES. 2 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. SEPTEMBER 30, 2001 (UNAUDITED) INVESTMENT SUMMARY HISTORICAL INFORMATION
TOTAL RETURN (%) ------------------------------------------------------------------------ MARKET VALUE(1) NET ASSET VALUE(2) INDEX(3) ------------------------------------------------------------------------ AVERAGE AVERAGE AVERAGE CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL ------------ -------- ---------- -------- ---------- --------- Year to date 9.82% -- 3.53% -- 1.40% -- One Year 9.01 9.01% 4.85 4.85% 3.32 3.32% Five Year 42.29 7.31 42.93 7.41 52.55 8.81 Since Inception* 123.89 10.35 152.36 11.96 136.24 11.07
Past performance is not predictive of future performance. [CHART] RETURNS AND PER SHARE INFORMATION
YEAR ENDED DECEMBER 31, NINE MONTHS --------------------------------------------------------------------------------- ENDED SEPTEMBER 30, 1993* 1994 1995 1996 1997 1998 1999 2000 2001 ---------------------------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $18.96 $12.23 $12.40 $17.31 $15.21 $ 7.01 $ 8.36 $ 8.22 $ 7.80 Market Value Per Share $18.13 $11.38 $12.50 $15.13 $15.38 $ 7.19 $ 6.81 $ 6.88 $ 6.92 Premium/(Discount) - 4.4% -7.0% 0.8% -12.6% 1.1% 2.6% -18.5% -16.3% -11.3% Income Dividends $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 1.41 $ 1.01 $ 1.08 $ 0.63 Capital Gains Distributions -- $ 0.41 -- -- $ 3.44 $ 2.94 -- -- -- Fund Total Return(2) 35.96% -25.95% 26.85%+ 50.98% 21.71% -33.00% 36.58% 13.50% 3.53% Index Total Return(3) 18.67% -18.35% 26.38% 35.23% 11.95% -11.54% 24.18% 14.41% 1.40%
(1) Assumes dividends and distributions, if any, were reinvested. (2) Total investment return based on net asset value per share reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes dividends and distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on market value due to differences between the market price of the stock and the net asset value per share of the Fund. (3) The J.P. Morgan Emerging Markets Bond Global Index (the "JPM EMB Global Index") tracks total returns for U.S.dollar-denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and local market instruments. The JPM EMB Global Index includes coverage of 27 emerging market countries. Because JPM EMB Global Index was not available prior to January 1, 1994, the performance of the J.P. Morgan Emerging Markets Bond Index is shown for the period July 23, 1993 to December 31, 1993, and used for purposes of computing cumulative performance of the benchmark index for that period. (*) The Fund commenced operations on July 23, 1993. (+) This return does not include the effect of the rights issued in connection with the rights offering. FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS AND CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL SUPERVISION AND REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET VOLATILITY AND POLITICAL INSTABILITY. 3 PORTFOLIO SUMMARY [CHART] ALLOCATION OF TOTAL INVESTMENTS --------------------------------------------------------------- Debt Securities 99.8% Equity Securities 0.2 ---------------------------------------------------------------
[CHART] COUNTRY WEIGHTINGS --------------------------------------------------------------- Mexico 27.2% Brazil 15.5 Russia 14.1 Argentina 6.2 South Korea 4.1 Egypt 2.9 Ecuador 2.8 Morocco 2.7 Phillipines 2.5 Dominican Republic 2.4 Other 19.6 ---------------------------------------------------------------
TEN LARGEST HOLDINGS
PERCENT OF NET ASSETS --------------------------------------------------------------- 1. Republic of Argentina Par Bond 'L-GP' 6.00%, 3/31/23 (Argentina) 6.2% 2. United Mexican States Global Bond 11.38%, 9/15/16 (Mexico) 5.4 3. Federative Republic of Brazil Bond PIK 'C' 8.00%, 4/15/14 (Brazil) 5.2 4. Russian Federation 12.75%, 6/24/28 (Russia) 4.9 5. Federative Republic of Brazil Debt Conversion Bond 'L' 5.50%, 4/15/12 (Brazil) 4.1 6. United Mexican States Discount Bond 'B' 8.30%, 8/15/31 (Mexico) 4.0% 7. Russian Federation 5.00%, 3/31/30 (Russia) 3.6 8. Petroloes Mexicanos 9.38%, 12/21/08 (Mexico) 3.5 9. Federative Republic of Brazil Discount Bond 'Z-L' 5.44%, 4/15/24 (Brazil) 2.9 10.Morocco R&C 'A' 5.09%, 1/5/09 (Morocco) 2.7 ----------- 42.5% ===========
4 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. STATEMENT OF NET ASSETS SEPTEMBER 30, 2001 (UNAUDITED) STATEMENT OF NET ASSETS
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- DEBT INSTRUMENTS (99.8%) ============================================================================================== ALGERIA (0.8%) SOVEREIGN (0.8%) Algerian Loan Agreement Tranche 1 7.188%, 3/31/10 $ 1,812 $ 1,449 ============================================================================================== ARGENTINA (6.2%) SOVEREIGN (6.2%) Republic of Argentina Par Bond, 'L-GP' 6.00%, 3/31/23 18,350 11,239 ============================================================================================== BRAZIL (15.5%) SOVEREIGN (15.5%) Federative Republic of Brazil Bond 'C-L' 8.00%, 4/15/14 44 30 Federative Republic of Brazil Bond 'L' 5.50%, 4/15/09 3,341(a) 2,464 Federative Republic of Brazil Bond 'Z-L' 5.44%, 4/15/24 8,350(a) 5,323 Federative Republic of Brazil Bond PIK 'C' 8.00%, 4/15/14 13,952 9,383 Federative Republic of Brazil Debt Conversion Bond 'L' 5.50%, 4/15/12 12,500(a) 7,422 Federative Republic of Brazil Global Bond 9.63%, 7/15/05 4,200 3,533 --------------------------------------------------------------------------------------------- 28,155 ============================================================================================= BULGARIA (2.1%) SOVEREIGN (2.1%) Republic of Bulgaria Front Loaded Interest Reduction Bond 2.25%, 7/28/12 1,900(b) 1,501 Republic of Bulgaria Discount Bond `A' Euro 4.56%, 7/28/24 2,950(a) 2,249 --------------------------------------------------------------------------------------------- 3,750 ============================================================================================= CROATIA (0.8%) SOVEREIGN (0.8%) Government of Croatia 4.56%, 7/31/10 1,473(a) 1,425 ============================================================================================= DOMINICAN REPUBLIC(2.4%) Dominican Republic Bond 9.50%, 9/27/06 4,440 4,340 ============================================================================================= ECUADOR (2.8%) SOVEREIGN (2.8%) Republic of Ecuador 5.00%, 8/15/30 $ 6,300(b) $ 2,498 12.00%, 11/15/12 4,100 2,655 --------------------------------------------------------------------------------------------- 5,153 ============================================================================================= EGYPT (2.9%) SOVEREIGN (2.9%) Arab Republic of Egypt 8.75%, 7/11/11 5,880 5,237 ============================================================================================= INDIA (0.0%) CORPORATE (0.0%) Surashtra Cement and Chemcial Ltd. 19.00%, 6/26/00 30,000 --@ ============================================================================================= INDONESIA (0.6%) CORPORATE (0.6%) Indah Kiat International Finance, 'B' 11.875%, 6/15/02 900(a,c) 216 Pindo Deli Finance (Mauritius) 10.75%, 10/1/07 4,300(a,b,c) 430 Tjiwi Kimia Finance Mauritius Ltd. 10.00%, 8/1/04 250 30 Tjiwi Kimia International Global Bond 13.25%, 8/1/01 4,300 516 --------------------------------------------------------------------------------------------- 1,192 ============================================================================================= IVORY COAST (0.6%) SOVEREIGN (0.6%) Republic of Ivory Coast 2.00%, 3/29/18 3,183(a,b) 485 Republic of Ivory Coast Front-Loaded Interest Reduction Bond 2.00%, 3/29/18 4,550(a,b) 637 --------------------------------------------------------------------------------------------- 1,122 ============================================================================================= MALAYSIA (1.8%) SOVEREIGN (1.8%) Government of Malaysia 7.50%, 7/15/11 3,175 3,216 ============================================================================================= 5 FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- MEXICO (27.2%) CORPORATE (6.6%) Grupo Iusacell SA de CV 14.25%, 12/1/06 $ 1,100 $ 1,089 Petroleos Mexicanos 9.375%, 12/2/08 6,120 6,395 9.50%, 9/15/27 2,700 2,626 TV Azteca 'B' 10.50%, 2/15/07 2,000 1,831 --------------------------------------------------------------------------------------------- 11,941 ============================================================================================= SOVEREIGN (20.6%) United Mexican States 2.50%, 3/12/08 4,600 4,807 8.30%, 8/15/31 7,790 7,332 United Mexican States, Discount Bond 'A' 9.88%, 2/1/10 6,850 7,326 United Mexican States Discount Bond 'B' 5.06%, 12/31/19 1,800(a) 1,785 United Mexican States Discount Bond 'C' 4.84%, 12/31/19 800(a) 793 United Mexican States Discount Bond 'D' 4.79%, 12/31/19 5,630(a) 5,582 United Mexican States Global Bond 11.375%, 9/15/16 8,410 9,709 --------------------------------------------------------------------------------------------- 37,334 --------------------------------------------------------------------------------------------- 49,275 ============================================================================================= MOROCCO (2.7%) SOVEREIGN (2.7%) Morocco R&C, 'A' 5.09%, 1/5/09 5,634(a) 4,845 ============================================================================================== NIGERIA (1.0%) CORPORATE (0.3%) Nigeria Promissory Notes, Series RC 5.09%, 1/5/10 1,350 459 ============================================================================================== SOVEREIGN (0.7%) Central Bank of Nigeria Par Bond 6.25%, 11/15/20 2,000(b) 1,267 --------------------------------------------------------------------------------------------- 1,726 ============================================================================================= PANAMA (1.9%) SOVEREIGN (1.9%) Republic of Panama 9.375%, 4/1/29 1,000 1,020 9.625%, 2/8/11 2,375 2,358 --------------------------------------------------------------------------------------------- 3,378 ============================================================================================= PERU (1.7%) SOVEREIGN (1.7%) Republic of Peru Front Loaded Interest Reduction Bond 4.50%, 3/7/17 $ 4,480(b) $ 3,083 ============================================================================================== PHILIPPINES (2.5%) CORPORATE (0.2%) Bayan Telecommunications, Inc. 13.50%, 7/15/06 1,800(c) 306 ============================================================================================== SOVEREIGN (2.3%) Republic of Philippines 9.50%, 10/21/24 2,000 1,968 9.88%, 3/16/10 2,430 2,272 --------------------------------------------------------------------------------------------- 4,240 --------------------------------------------------------------------------------------------- 4,546 ============================================================================================= POLAND (1.7%) CORPORATE (0.6%) Netia Holdings II BV, 'B' 13.125%, 6/15/09 1,400 112 PTC International Finance II SA 11.25%, 12/1/09 900 855 --------------------------------------------------------------------------------------------- 967 ============================================================================================= SOVEREIGN (1.1%) Government of Poland 6.00%, 10/27/14 2,100(b) 2,074 --------------------------------------------------------------------------------------------- 3,041 ============================================================================================= QATAR (2.2%) SOVEREIGN (2.2%) State of Qatar 9.75%, 6/15/30 3,700 3,975 ============================================================================================== RUSSIA (14.1%) SOVEREIGN (14.1%) Russian Federation 0.00%, 12/31/01 8,215(d) 4,311 0.00%, 3/4/03 2,192(d) 1,143 5.00%, 3/31/30 14,944(b) 6,797 8.25%, 3/31/10 6,026 4,550 12.75%, 6/24/28 9,000 8,802 --------------------------------------------------------------------------------------------- 25,604 ============================================================================================= SOUTH KOREA (4.1%) CORPORATE (3.1%) Korea Electric Power Corp. 6.38%, 12/1/03 3,510 3,644 7.75%, 4/1/13 1,850 1,950 --------------------------------------------------------------------------------------------- 5,594 ============================================================================================= 6 FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SOVEREIGN (1.0%) Republic of South Korea 8.88%, 4/15/08 $ 1,600 $ 1,853 --------------------------------------------------------------------------------------------- 7,447 ============================================================================================= TUNISIA (1.0%) SOVEREIGN (1.0%) Central Bank of Tunisia 8.25%, 9/19/27 2,000 1,820 ============================================================================================== TURKEY (0.2%) CORPORATE (0.2%) Cellco Finance NV 15.00%, 8/1/05 710 440 ============================================================================================== UKRAINE (0.9%) SOVEREIGN (0.9%) Ukraine Government 11.00%, 3/15/07 2,040 1,683 ============================================================================================== VENEZUELA (2.1%) SOVEREIGN (2.1%) Republic of Venezuela Debt Conversion Bond 'DL' 4.75%, 12/18/07 2,012(a) 1,597 Republic of Venezuela Global Bond 9.25%, 9/15/27 700 466 Republic of Venezuela Par Bond 6.75%, 3/31/20 2,270 1,713 --------------------------------------------------------------------------------------------- 3,776 ============================================================================================= TOTAL DEBT INSTRUMENTS (Cost $194,462) 180,917 ============================================================================================== NO. OF RIGHTS ---------------------------------------------------------------------------------------------- RIGHTS (0.2%) ============================================================================================== MEXICO United Mexican States Value Recovery Rights 06/30/03 (Cost $--@) 45,419 318 ============================================================================================== NO. OF WARRANTS ---------------------------------------------------------------------------------------------- WARRANTS(0.0%) ---------------------------------------------------------------------------------------------- COLOMBIA (0.0%) Occidente y Caribe, expiring 3/15/04 69,200 69 ============================================================================================== NIGERIA (0.0%) Central Bank of Nigeria expiring 11/15/20 1,250 $ --@ ============================================================================================== TOTAL WARRANTS (Cost $44) 69 ============================================================================================== TOTAL INVESTMENTS(100.0%) (Cost $194,506) 181,304 ============================================================================================== AMOUNT (000) ---------------------------------------------------------------------------------------------- OTHER ASSETS & LIABILITIES ---------------------------------------------------------------------------------------------- Other Assets 20,292 Liabilities (29,658) (9,366) ============================================================================================== NET ASSETS ---------------------------------------------------------------------------------------------- Applicable to 22,046,681, issued and outstanding $0.01 par value shares (100,000,000 shares authorized). $ 171,938 ============================================================================================== NET ASSET VALUE PER SHARE $ 7.80 ==============================================================================================
(a) -- Variable/floating rate security - rate disclosed is as of September 30, 2001. (b) -- Step Bond - coupon rate increases in increments to maturity. Rate disclosed is as of September 30, 2001. Maturity date disclosed is ultimate maturity. (c) -- Security is in default (d) -- Zero coupon bond (@) -- Amount is less than $500 7