GDP warrant valuations benefit from 2012
outlook revision
We revised up our 2012 real GDP forecast (official) for Argentina to
4.5% from 3.2%.
Although current data shows a clear decelerating trend,
balance of payments pressures that were depressing Argentina’s growth and
inflation outlook late last year have been easing this year (for details see:
Argentina: The economic outlook in the aftermath of the BoP “lock
down”
, Morgan Markets, Feb 10). In part this owes to the rebound in global
financial and commodity markets. Yet idiosyncratic factors are also relevant:
First, downside tail-risk to the outlook has diminished as recent change in
weather alleviated drought conditions threatening Argentina’s soy crop.
Second, upside risk has increased due to policy changes aimed to lower
capital flight and raise the trade surplus. We revise our expectations for 2012
real GDP (private estimates) to 2.5% from a prior forecast of 1.0% which—
considering INDEC’s reporting relevant for GDP warrant payments—is
expected to translate into a 4.5% officially measured performance, from a
prior forecast of 3.2%.
The revision favors GDP warrant valuations, with a new fair value
US$24.52 and expected final payment for 2018.
The impact of our growth
revision on the NPV of model valuations for the US$ GDP warrant is about
+18.5%. The revision to 4.5% results in the activation of the payment trigger
(GDP growth > 3.216%) for 2013. Under this revised scenario, the next two
coupon payments (nominal US$6.30 and US$6.92 for 2012 and 2013,
respectively) in NPV terms amount to US$12.1 vs current mid-market price
of US$ 14.25. This gives the holder of the instrument (almost) free
optionality on future growth of Argentina through 2034 (the final payment
under model simulations is expected to be made in 2018, one year earlier
than the pre-revision estimate).
Among warrants, EUR denominated are trading the cheapest to fair
value of our model.
The EUR warrants are 52% of FV (prior to revision at
current price: 63%), ARS are 65% of FV (prior: 78%), and USD are 58% of
FV (prior: 69%). Please see below for model outputs of the different
currency denominated GDP warrants. Note the EUR warrants valuations are
based on current forward EUR/USD rates and ARS is based ARS/USD 4.80
and 5.70 for 2012, and 2013, respectively and NDFs thereafter. Also note
that the ARS warrant is exposed to an additional year of FX risk vs the other
warrants (USD and EUR warrants fix a year earlier than payment).
Moreover, given recent tightening of capital controls convertibility of
coupons paid on ARS warrant may be an issue ahead and therefore FX basis
risk becomes an important additional consideration (not reflected in the
model output)
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