Peso GDP Warrants Left Behind in Rally as Currency Sinks: Argentina Credit
Peso GDP Warrants Reach Cheapest in 5 Months
The peso touched 3.9540 per dollar on Aug. 31, the weakest level since its creation in 1991. Photographer Diego Giudice/Bloomberg
The peso touched 3.9540 per dollar on Aug. 31, the weakest level since its creation in 1991. Photographer Diego Giudice/Bloomberg
The Argentine currency’s record losing streak is dragging peso-denominated warrants tracking economic growth to the lowest in five months relative to those priced in dollars.
The peso warrants rose 11 percent to 9.35 centavos in the past week, while the dollar warrants climbed 13 percent to 10.54 cents, according to data compiled by Bloomberg. The gap between the two is the widest since March 24. The peso has dropped for eight months, its longest slump since the government abandoned a one-to-one peg to the dollar in 2002.
The warrant “price difference reflects two things -- lower liquidity for the peso warrants and a weaker view on the Argentine peso,” said Peter Marber, the New York-based head of developing nation debt and currencies at HSBC Global Asset Management, which oversees $400 billion worldwide, including peso warrants.
The peso touched 3.9540 per dollar on Aug. 31, the weakest level since its creation in 1991, after the central bank stepped up dollar purchases to weaken the Argentine currency and bolster exports. Economists predict the peso will slide to 4.1 per dollar by year-end and to 4.5 by December 2011, according to the median of 12 forecasts in a Bloomberg survey.
Argentina attached the warrants to bonds it gave creditors in a 2005 restructuring of $95 billion of defaulted debt. Within months, the warrants, which mature in 2035, started trading separately. President Cristina Fernandez de Kirchner issued more of the securities in a $12.9 billion settlement in July with creditors who rejected the 2005 offering.
Warrant Payments
The warrants are triggered when growth is above 3 percent and the inflation-adjusted value of the country’s GDP surpasses a base-case scenario laid out in the contracts. The government made a warrant payment of 3.11 cents on Dec. 15 after the economy grew 6.8 percent in 2008 and will make no payment this year after growth slowed to 0.9 percent in 2009.
Dollar warrants will continue to outperform the peso- denominated securities, with a median theoretical value of 18.81 cents versus 15.97 centavos, estimates Noelia Lucini, a portfolio manager with Capital Markets Argentina in Buenos Aires.
“The peso warrants suffer the most when there is a selloff,” Lucini said. “Depreciation of the currency also led some people to move away from peso securities.”
Economic Growth
Argentine growth estimates are climbing following a record 55-million metric ton soybean harvest and amid soaring car exports to neighboring Brazil, Latin America’s largest economy. The central bank forecasts Argentina’s gross domestic product will grow as much as 9.5 percent in 2010, the most since 1992. Goldman Sachs Group Inc. raised its growth forecast today by a percentage point to 9 percent, while JPMorgan Chase & Co. predicts the economy will expand by 8.5 percent this year and 4.5 percent next year, enough to trigger warrant payments in December 2011 and 2012, Lucini said.
“Those two payments cover your investment at today’s prices,” she said.
Five-year credit-default swaps tied to Argentine debt slid 13 basis points yesterday to 892. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
The peso was little changed at 3.9469 per dollar at 11:25 a.m. New York time. The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries fell 26 basis points, or 0.26 percentage point, to 684, according to JPMorgan.
‘Buy on Weakness’
The yield on benchmark 7 percent bonds due in 2015 fell 12 basis points to 10.74 percent, according to Bloomberg market average pricing.
Argentine warrants tend to recover faster than bonds because “they are seen as cheaper and people want to buy on weakness,” said Siobhan Morden, a debt strategist with Royal Bank of Scotland Group Plc in Stamford, Connecticut. “That remains the case as long as you don’t think it’s been a huge shock that will take out payments.”
The lower liquidity and foreign exchange risk posed by peso-denominated warrants make them “more of a buy and hold” investment than the dollar warrants, Morden said. “If Argentina doesn’t spiral into a crisis, you will make more money on the peso exposure.”
To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net
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