CS zu GDP-Kicker vom 20.3.2012

Argentina: Maintain long positions in GDP warrants

We maintain our recommendation in GDP warrants in Argentina as we continue to

expect a payment next year.

We spent three days in Buenos Aires last week in marketing

meetings with local public and private financial institutions and companies. While we found

that local sentiment deteriorated significantly after the recent increase in the government’s

interventionism in the economy, we found consensus that growth remains a key priority for

the government and policy tools will likely be put in place to stimulate economic activity this

year. Our economics team still expects the government to report real GDP growth of 5% in

2012, even though the actual expansion of the economy is likely to be lower. For this reason,

we continue to see a payment in 2013 and therefore we see value in GDP warrants in the

medium term. We also note that the 2012 payment amount is not in question because there

is little uncertainty about 2011 GDP growth (the official real GDP growth number for Q4

2011 is scheduled to be released next Monday, March 26th).

We favor peso-denominated warrants (exchange rate hedged), because they trade

on only a moderate premium to this year’s coupon.

In our base-case valuation, the

market prices of all warrants correspond to around 50% of the model “fair value” (Exhibit

1). However, the ratio of the next two coupon payments to the warrant price is the highest

for peso-denominated warrants. The 2012 payment covers almost 70% of the peso

warrant’s price, while the two expected payments exceed the total cost (our forecast of the

coupon payments on the peso warrant is 9.28 pesos in December 2012 and 11.15 pesos

in December 2013). It is worth noting, however, that peso warrants carry additional foreign

exchange risk, which we recommend hedging in the NDF market (the current nine-month

NDF implied yield is at around 18.7%). It is only a partial hedge because of potential

convertibility issues, but we think it will be effective in the event of a sharp peso

depreciation (not our forecast).

Warrants’ fair values have moderate sensitivity to exact growth assumptions, but

reaching the 3.26% threshold is important.

The valuation only drops noticeably if the

growth rate fails to reach the threshold Indeed, if real GDP growth fails to exceed the

3.26% threshold for 2012, the payout in 2013 will be zero and the warrant’s fair prices

would be on average four points lower than our base-case value (Exhibit 2). The sensitivity

is relatively small when expected growth is above the 3.26% threshold because payments

are based on cumulative GDP growth since issuance, which has been much higher than

the base-case GDP growth. According to our analysis shown in Exhibit 2, a one

percentage point change in GDP growth in 2012 changes the fair value by 0.6 price points

for growth scenarios from 4% to 6%. Growth will be a key factor to monitor in the coming

months, but we continue to believe that growth in excess of the threshold is likely in 2012.