The surge in Argentina’s securities
tied to economic growth is rekindling a decade-old disagreement
between investors and Wall Street.
The warrants, which provide payouts when growth exceeds
targets, have jumped 29 percent from a nine-month low in March
on speculation a data revision that boosted the size of economy
will lead to bigger payments in the future.
While investors are piling into the securities, banks from
Citigroup Inc. to Credit Suisse Group AG say the advance is
overdone as the terms of the warrants have enough wiggle room
for Argentina to avoid making the larger disbursements. Issued
in debt restructurings from Argentina’s $95 billion default in
2001, the warrants plunged in March when the government said
changes in the way it calculates growth meant the economy didn’t
expand enough to pay holders this year.
“There’s been this extreme valuation schizophrenia among
analysts,” Shahriar Shahida, co-founder of New York-based hedge
fund Constellation Management LLC, which owns the warrants, said
by telephone. “We have found the Argentine valuation story to
be one of the most compelling out there, and the warrants are
the best way to play that.”
Bankers and analysts have been at odds with investors over
how to value the warrants since they were first issued in 2005
as a sweetener to boost creditor participation, dismissing them
initially before average economic growth of 6.7 percent over the
years prompted a reassessment. They’ve produced an average
annual return of 43 percent since 2006.
New Series
Jesica Rey, a spokeswoman for the economy ministry,
declined to comment on how the revision will affect coupons.
As part of an effort to boost the credibility of its
economic data after being censured by the International Monetary
Fund last year, Argentina in March changed the base year for GDP
to 2004 from 1993, reducing growth in 2013 to 3 percent, almost
half the previously forecast pace and below the trigger for a
warrant payment this year.
Officials released the new series of growth statistics May
9, which showed that when adjusted for inflation the economy is
now about 20 percent bigger, according to Credit Suisse.
Holders of the warrants receive a payment if growth in the
previous year exceeded a threshold and the inflation-adjusted
value of the country’s GDP is above the base-case scenario laid
out in the prospectus. The size of the coupon depends on the
extent to which GDP exceeds the base case.
Government Interpretation
While future coupon payments could be about 20 percent
higher, “this calculation is confused given the uncertainty
over how the prospectus will be interpreted,” Jeff Williams, a
strategist at Citigroup, said in a May 13 report.
The warrants traded at 8.1 cents yesterday.
“We would not expect the government to set itself or
future administrations up to pay out larger coupons if it can
plausibly justify using a different economy factor,” Daniel Chodos, a strategist at Credit Suisse, said in a May 20 report.
Even if the government agrees to make bigger payments,
investors won’t see a coupon before 2017 as growth stalls,
according to Siobhan Morden, head of Latin America fixed income
strategy at Jefferies Group LLC.
Since 2005, investors have received six payments totaling
18 cents as the Argentine economy boomed. The warrants can pay a
maximum of 48 cents until they mature in 2035, or a total of
$480,000 for a notional amount of $1 million.
“No one truly knows how to value them, and as a result,
most of the major players in sovereign debt shy away,” Eric Kraus, a Moscow-based managing director at Nikitsky Capital,
which oversees accounts that hold warrants, said in an e-mail.
“They have become, almost by default, the ultimate personal
account asset. Over their lifetime they should be worth circa 35
cents. Not bad if you can afford to wait.”
To contact the reporter on this story:
Katia Porzecanski in New York at
kporzecansk1@bloomberg.net
To contact the editors responsible for this story:
Brendan Walsh at
bwalsh8@bloomberg.net
Lester Pimentel, Bradley Keoun