Securities tied to Argentine growth are rallying to a two-month high on speculation holders will receive larger coupon payments after the government changed the base year used in its calculations of economic expansion.
Dollar-denominated warrants have climbed 11 percent his week to 8.15 cents on the dollar, according to prices compiled by Bloomberg.
After the government was censured by the International Monetary Fund last year for misreporting economic data, officials released a new series of growth statistics May 9 that show higher levels of nominal gross domestic product. The change may result in larger coupon payments going forward, depending on how Argentina interprets the rules that govern the securities, according to Citigroup Inc.
“The rally is likely based on the implicit higher coupons that the new time series would imply,” Jeff Williams, a strategist at Citigroup, wrote in a report today. “This calculation is confused given the uncertainty over how the prospectus will be interpreted.”
Holders of the warrants receive a payment if growth in the previous year exceeded a stipulated 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 relies on the extent to which GDP exceeds the base-case.
Argentina in March changed the base year for GDP to 2004 from 1993, reducing growth in 2013 to 3 percent, almost half the pace previously forecast by the government and 0.22 percentage point below the trigger for a warrant payment this year.
While the prospectus says the government can adjust the base-case scenario to reflect the new weightings, the language is unclear and investors will depend on the interpretation of policy makers, according to Jefferies Group LLC.
Cabinet Chief Jorge Capitanich last month ruled out making a $3.6 billion payment this year.
“Argentina will continue to interpret calculations to their benefit,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies, wrote in a report. “The current gains on GDP warrants are vulnerable.”