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Warrants Beat Bonds on Fastest GDP Since 2005: Argentina Credit

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Dec. 17 (Bloomberg) -- Argentine securities linked to gross domestic product are outperforming the country’s dollar bonds by the most in two months as the economy grows at the fastest pace since 2005.

The dollar-denominated warrants gained 4.8 percent in the past month, the sixth consecutive monthly gain. The country’s dollar bonds rose 0.3 percent over that period, according to JPMorgan indexes. Emerging markets bonds have fallen 2.7 percent in the month through yesterday, JPMorgan data show.

The price of the warrants, created as an incentive for investors to participate in the 2005 debt restructuring, has more than doubled this year as the central bank says growth will reach 9 percent. Third-quarter GDP expanded 8.3 percent from a year earlier, according to the median estimate of eight analysts surveyed by Bloomberg.

“There’s no other security that gives investors such a return,” said Noelia Lucini, a portfolio manager with Capital Markets Argentina, which says it’s the country’s top broker by volume.

Argentina’s economy surged this year following a record 55-million metric ton soybean harvest and booming auto production and exports, the central bank said. Growth will slow to 4.3 percent next year, the government estimated in its 2011 budget. Vehicle sales rose 68 percent in November from a year earlier, the country’s auto manufacturing association said Dec. 3.

The national statistics agency is scheduled to release its third-quarter GDP report and the November industrial production report at 2 p.m. New York time.

2005 Restructuring

Then-President Nestor Kirchner’s government issued the dollar and peso warrants as an incentive to get investors to participate in a 2005 debt restructuring following the country’s default on $95 billion in debt in 2001. The securities pay investors in December the year after economic growth exceeds annual targets that range between 3 and 3.3 percent and the inflation-adjusted value of the country’s GDP is above the government’s base-case scenario laid out in the prospectus.

Argentina’s dollar warrants will pay investors 4.37 cents in December 2011, delivering a 32 percent one-year return on yesterday’s price of 13.7 cents, according to Alberto Bernal, head of fixed-income research at Bulltick, a Miami-based brokerage that focuses on Latin America. His target price for the securities is 18 cents on a forecast that the economy will expand 6 percent next year.

‘Amazing’ Warrants

“They just look amazing,” Bernal said. “As long as the world economy continues to perform well, the future cash flow of these things looks very aggressive. There is nothing in the market that you can find that will give you this kind of yield.”

Peso warrants, which have gained 10 percent over the past month, will pay investors 6 centavos next year, said Lucini, whose 12-month price target on the securities is 17 pesos. They traded at 13.8 pesos yesterday.

Neither warrant is making a payment to investors this year after last year’s growth of 0.9 percent, the economy’s worst performance since 2002.

The extra yield investors demand to hold the government’s dollar bonds instead of U.S. Treasuries rose 7 basis points, or 0.07 percentage point, to 522 at 8:52 a.m. New York time, according to JPMorgan Chase & Co.

The cost of insuring Argentine bonds against default for five years fell 7 basis points to 647 yesterday, according to CMA DataVision. 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 comply with debt agreements.

The peso was little changed today at 3.9760 per dollar. Dollar warrants slid 0.08 cent to 13.58 cents, while peso warrants were unchanged at 13.8 centavos.

Volatile Investment

The securities’ links to growth make them a more volatile investment than bonds, said Fausto Spotorno, an economist at research company Orlando Ferreres y Asociados in Buenos Aires. Spotorno estimates the economy will grow 3 percent next year, below the 3.26 percent target needed to trigger a warrant payment in December 2012.

“Growth is reaching a plateau due to a lack of investment in energy, while industries are operating near full capacity,” Spotorno said in a phone interview. “It’s not clear that the country will expand more than 3 percent next year, so it’s risky to hold these warrants.”

To contact the reporters on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net; Drew Benson in Buenos Aires at abenson9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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