Finanzas Argentinas

8/19/2019 Finanzas Argentinas

1/17

1

_______________________________________________________________________

Disclaimer : “This Report is for information purposes only. It is not intended to be a solicitation of

securities brokerage business or transactions.”

Balanz Flash March 3, 2016

Argentina Strategy Update: The BCRA Roars & The Market Flinches

The BCRA’s powerful boost in interest rates of +585bps on the 35day tenor, +450bps on the

63day tenor and +380bps on the 98day securities is an unequivocal signal to the local capital

market players. It may not end here. The BCRA is telling the market that it will not stand by and

allow the local institutional investors to speculate freely in Rofex and MAE futures without facing

the risk of aggressive rate hikes.

Interest rates will remain elevated in coming months due to sizeable domestic funding needs

linked to provincial debt issuance, the resumption of Bonac (Treasury bond auctions to fund the

deficit), and the massive rollover requirements in the BCRA’s LEBACs over the next few months.The local institutional investor market is not large enough to easily absorb the truckload of debt

that will be coming on offer, and the BCRA is eager to lure international investors to the local peso

bond market. Crowding out is a major investment theme for local peso debt this year. YPF just

issued 5-year debt at BADLAR +600bps, demonstrating that the market is extracting higher yields

from issuers. This could be a plus for investors willing to buy duration.

Make No Mistake: This Rate Hike Is Recessionary In The Near Term. Our recent conversations

with our corporate clients clearly indicate that the Argentine economy has slipped into recession

in the first two months of the year. In this report, we provide a picture book that shows a rapid

deceleration in economic activity immediately following the December devaluation. Corporates

are being squeezed by sky-high interest rates.

GDP-Linked Warrants: Put Some Money In Your Pocket. We updated our quantitative model on

the GDP warrants, and the assumption that Argentina will grow 3% in 2017 and above 3% in the

three consecutive years afterwards looks like a riskier proposition when we review the country’s

long-term growth track record. Since 1980, Argentina’s GDP has only grown above 4% for three

years in a row three times, and statistically the probability of a recession in any given year is

around 52%. We suggest taking profits in the TVPP and the TVPY cupones while concentrating

investments in the TVPE which has underperformed its cousins since our September 11, 2015 in-

depth report. A big driver of warrant outperformance is the cost of capital, but the decline in

country-risk is not helping Argentina’s private sector that only has access to peso financing.

We update some of our carry-trade ideas based on the significant reset this week in LEBAC,Badlar, Rofex and NDF implied rates. Issuance of liquid bonds is increasing, and there are growing

opportunities in this space. LEBACs with 35day to 147day terms are offering the juiciest yields.


2/17

2

_______________________________________________________________________



Sturzenegger Draws A Line In The Sand: It Was About Time

Following a month when the BCRA spent over US$1.2bn in reserves in a futile and frustrating attempt to

defend the peso, BCRA Chief Federico Sturzenegger sent a powerful, and much needed, message to the

market that he is ready and willing to hike interest rates aggressively to control inflation and quash local

peso speculation. We congratulate the BCRA on this courageous move as the Rofex futures market was

starting to behave like the ARS is a one-way bet, and for a Central Bank governor, this type of burgeoning

perception would be extremely dangerous in a country like Argentina. The 12M NDF Future’s contract for

December fell sharply from 19.90 to 19.02 implying a one year-forward devaluation of 25.7%. The 12M

NDF spiked 10% since February 24th before correcting sharply after the BCRA’s rate hike. We believe that

this market expectation was becoming “overcooked” and indirectly reflected the market’s lack of interest

in LEBACs yielding flat or slightly negative real interest rates.

We believe that this step function boost in interest rates of +585bps on the 35day tenor, +450bps on the

63day tenor and +380bps on the 98day securities is an unequivocal signal to the local capital market

players. It may not end here. The BCRA is telling the market that it will not stand by and allow the local

institutional investors to speculate freely in Rofex and MAE futures without facing the risk of aggressive

rate hikes as retaliation. Moreover, this policy is tacitly confirming that until the soybean liquidation

season begins, the BCRA is not willing to sacrifice large slugs of its international reserves throughadditional interventions (basically because they have not worked). In addition, the BCRA clearly senses

that the local corporations have abused their pricing power, especially since the Kirchner administration

pit bulls are no longer monitoring and punishing their every transgression. The political transition in

January and February effectively reduced the supervision of wholesale and supermarket prices, and this

vacuum presented an opportunity. The best way to punish this activity is to dramatically increase the cost

of funding in the economy and to double down on price monitoring. We are hearing that the small

companies and medium-sized corporations are witnessing dramatic increases in their traditional funding

mechanisms like discounted checks and factoring, but price increases are starting to meet with falling

demand.

LEBAC Curve: Before & After Tuesday’s Auction

Crowding Out Could Maintain Rates High Throughout The Year

It is important to factor in the sizeable domestic funding needs linked to provincial debt issuance, the

resumption of Bonac (Treasury bond auctions to fund the deficit), and the massive rollover requirements

in the BCRA’s LEBACs over the next few months (see chart below). The local institutional investor market


3/17

3

_______________________________________________________________________



is not large enough to easily absorb the truckload of debt that will be coming on offer. The mutual funds

have an industry AUM of ARS217bn and the investable assets of the insurance industry total

approximately AR200bn. We can add in the cajas profesionales (Trade association pension accounts) that

would represent an investor base of ARS35bn. This pool of savings totals to ARS452bn or US$30bn. It

simply is not wide or deep enough to take down this overhang at the interest rates that were being

offered before the rate hike. For this reason, we expect BADLAR and LEBAC interest rates to remain

elevated until the Treasury brings down the fiscal deficit and/or international funds have larger positions

in Argentine local securities.

In addition to the rollover pressure from the LEBACS (a Central Bank monetary bill), the Treasury will come

back to the market with additional sales of Bonar 18 (BADLAR + 275bps) and Bonar 2020 (Badlar +325bps).

The Treasury placed ARS12bn in these two bonds in recent weeks, but the overall announced program

called for ARS40bn in issuance in the first six months. We expect the Bonac offerings to grow in size over

the course of the year.

LEBAC Maturities March To April

Stock of LEBACs in Circulation: $451.855 billion

LEBACs Expiring Until Mid-May: $334 billion

Percentage of Stock To Be Rolled Over: 76%

Argentina’s 12M NDF


4/17

4

_______________________________________________________________________



LEBAC Auction History

Make No Mistake: This Rate Hike Is Recessionary In The Near TermOur recent conversations with our corporate clients clearly indicate that the Argentine economy has

slipped into recession in the first two months of the year. Bank lending stalled in January and February,

car production was down -27.1% yoy in the first two months of 2016, cement shipments fell -8.5% yoy and

FIEL’s industrial index dropped -0.6%. Consumer confidence dropped -9.7% yoy and -15.6% mom including

a -24.5% freefall in current expectations. February’s car exports to Brazil collapsed -41.5% to 14,178 units,

and this followed a 49% decline in January.

The interest rate hike is also slamming the brakes on the expansion in bank credit. Peso based lending

was growing at a 38.1% annualized clip in December 2015 (including a hefty +4.9% in the month of

December), but year-to-date in February, commercial loans have shrunk -2.5% including -1.1% in January

and -1.6% in February. Consumption loans are still growing +2.5% ytd but this segment was expanding at

47.7% yoy pace at the end of last year. If we consider that inflation in the first two months reached close

to 8.0%, an overall 2.2% nominal increase in total loans represents a sharp contraction in real terms.

Picture Book of Argentina Economic Activity: Bad to Worse But Perhaps

TemporaryBefore we summarize and comment on the following picture book of charts illustrating the trends in

today’s Argentine economic backdrop, we want to establish that most of these negative trends are

predictable reactions to a hefty devaluation of the peso and the monetary policy being conducted not only

to contain the inflation pass-through, but also to avert a more disruptive overshooting. Nevertheless, the

prevailing market wisdom is that Macri’s dream team will right the ship quickly and efficiently, setting up a

multi-year bonanza of growth and asset returns. Our confidence in this long-term outcome has notwavered, but Maurcio Macri’s March 1st speech to Congress clearly communicated that the Kirchner

economic hangover and tainted legacy is by no means a quick fix or a done deal. With this in mind, we are

highlighting these charts in order to provide a reality check on what we perceive to “unbridled bullishness”

and to guide investors to reconsider which assets offer the best way to play each one of the multiple

adjustment stages being orchestrated by the highly capable Macri economic team.

Monto (MM) $ 50.205 Monto (MM) $ 47.078 Monto (MM) $ 57.733 Monto (MM) $ 32.849 Monto (MM) $ 34.564

Días Tasa Días Tasa Días Tasa Días Tasa Días Tasa

35 30,5005% 35 30,2498% 35 30,4994% 35 31,1461% 35 37,0002%

63 29,5001% 63 29,2488% 63 29,5001% 63 30,0003% 63 34,4998%

98 28,8001% 98 28,4998% 99 28,4997% 98 29,1951% 98 32,9994%

119 27,9999% 119 27,6000% 119 27,9999% 119 28,5000% 119 31,5000%

147 27,9799% 147 27,7790% 147 27,0000% 147 28,1500% 147 31,1499%

203 28,0000% 203 27,7400% 203 27,2500% 203 28,2000% 203 28,0000%

252 27,9999% 252 27,7400% 252 27,5000% 252 28,6000% 252 31,5363%

Monto (MM) USD 774 Monto (MM) USD 1.235 Monto (MM) USD 581 Monto (MM) USD 1.048 Monto (MM) USD 383

Días Tasa Días Tasa Días Tasa Días Tasa Días Tasa

35 1,4997% 35 1,2498% 35 1,0000% 35 0,8997% 35 0,8997%

91 1,5001% 91 1,0000% 91 1,0000% 92 0,8999%

01/03/2016

LICITACION EN PESOS

LICITACION DOLARES

LICITACION EN PESOS

LICITACION DOLARES

23/02/2016

LICITACION EN PESOS

LICITACION DOLARES

10/02/2016

LICITACION EN PESOS

LICITACION DOLARES

16/02/2016

LICITACION EN PESOS

LICITACION DOLARES

02/02/2016


5/17

5

_______________________________________________________________________



Underlying February Tax Collection Numbers Spotlight Big Deceleration In Consumption

The AFIP (Argentina’s tax authority) released preliminary tax collection numbers for February showing an

overall +26.5% yoy growth rate, down sharply from the +38.5% yoy expansion registered in January. The

most telling item in the report was the weakening trends in the VAT Tax excluding the VAT taxes on

imports category. The headline overall VAT revenues expanded a respectable 34.3% yoy, but this

outcome was flattered by a 70.1% burst in import related value-added tax. Imports were artificially

suppressed under Axel Kicillof’s reign as Finance Minister, and Macri’s economic team has reopened t his

part of the economy by lifting the cepo cambiario. The VAT tax on other commercial activities grew just

22.2% or 500-600bps below inflation, and this poor figure followed an equally anemic January expansion

rate of 24.5%. The sputtering VAT tax collection is an undeniable signal that consumers are feeling

squeezed by inflation, and they are economizing in the early part of 2016. Unlike income tax collection

that was negatively influenced by Macri’s early round of tax cuts, the VAT tax deterioration is an alarm bell

signalling recession. With income tax to be impacted by large tax cuts, the VAT Tax was supposed to be

the locomotive driving the country’s tax revenue, and this simply is not the case at the moment.

YoY Growth Rates IVA DGI vs IVA Overall

UTDT – Inflation Expectation: +500 Bps. Industrial Activity – FIEL: -0.6% Breakdown by Type Asset: -16.6% Capital G

Di Tella’s Index of Inflation Expectations spiked to 33.6%, marking a +500bps sequential increase. The BCRA

must react aggressively to stop this inflationary mentality from spiralling out of control.

Feb 22,2% 34,3%

Jan 24,5% 36,1%

Dec 32,5% 4,0%

Nov 35,7% 30,1%

Oct 38,4% 33,1%

Sept 38,2% 30,9%

Aug 42,4% 39,2%

Jul 31,1% 28,3%

Jun 42,9% 34,2%

May 34,8% 25,9%

VAT

OverallVAT DGIDate


6/17

6

_______________________________________________________________________



Industrial Activity by Sector – FIEL

General Economic Activity – O. Ferreres: -1.9%

FIEL and Orlando Ferreres Economic Activity and Production Indices have turned south with few

industrial groups pulling the GDP growth wagon. Vehicle production was down -32.7% yoy in

January, cement shipments fell -8.5% yoy and FIEL’s industrial index dro pped -0.6%, while the

Orlando Ferreres index slid -1.6%. Chemicals and financial services are the two bright spots.

Trade Balance: Import +0.7%; Export -25.4%


7/17

7

_______________________________________________________________________



Global trade numbers have been poor due to weak growth and falling commodity prices, and in

Argentina, the last few months of 2015 registered a sharp deceleration in exports. In the last two

months of last year, the exports fell -24.2% and -25.4%, respectively. Imports should begin growing

solidly now that the FX market has been opened.

Crude Steel Production Index: -11.8% In January

Steel production has declined -13.65%,-14.3% and -11.84% in the last three months, spotlighting

weakness in the automotive industry and durables.

Date ast Price Imports YoY Date st Price Exports YoY

31/12/2015 4521 0,7% 31/12/2015 3411 -25,4%

30/11/2015 4741 -0,5% 30/11/2015 4000 -24,2%

31/10/2015 4951 -10,4% 31/10/2015 5205 -12,8%30/09/2015 5546 0,8% 30/09/2015 5611 -6,7%

Argentina Trade Balance

Date Last Price YoY (%)

31/01/2016 350 -11,84%

31/12/2015 372 -14,29%

30/11/2015 405 -13,65%

31/10/2015 469 -1,68%

30/09/2015 446 -3,67%

31/08/2015 474 -1,04%

31/07/2015 431 -6,71%30/06/2015 445 6,71%

31/05/2015 411 -8,46%

Steel Production - Argentina


8/17

8

_______________________________________________________________________



Argentina Vehicle Exports: Deep decline in the exports // Brazil accounts for 72% of Exports.

Argentina’s Vehicle Export Markets

Argentina’s vehicle exports fell -43.3% yoy first two months of 2016 after plummeting -63.3% in

December. The Brazilian market (72.1% of export demand) is in the grips of a severe recession,

and Argentina is seeing the knock-on effects. The good news is that domestic car sales to dealers,

including imported vehicles, jumped 31.1% yoy in the first two months, but imports, not

domestically produced vehicles, are driving this boost. Total production fell -30.6% yoy in

December and -25.1% in February yoy.

Date Export YoY (%)

29/02/2016 14178 -41,47%

31/01/2016 3888 -48,98%

31/12/2015 10961 -62,26%

30/11/2015 18599 -52,44%

31/10/2015 18834 -48,70%

30/09/2015 21853 -27,33%

31/08/2015 21355 -22,18%

31/07/2015 21817 -9,42%30/06/2015 28218 -18,01%

31/05/2015 22454 -25,48%

Argentina Vehicle Exports


9/17

9

_______________________________________________________________________



Argentina’s Cement Shipments

Argentine cement deliveries fell -8.7% yoy in January 2016 after registering growth of +1.8% yoy in

the four quarter of 2015. We expect the construction sector to pick up speed in the 2H16.

Banking System Pictures: Loan Growth Stalling

14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

1

1

1

1

1

1

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

O c t - 1 4

J a n - 1 5

A p r - 1 5

J u l - 1 5

O c t - 1 5

J a n - 1 6

J a n u a r y

2 n d ,

2 0 1 0 = 1

0 0

Loans/Deposits Ratio Overdraf ts Rate ARS (right axis)


10/17

10

_______________________________________________________________________



The banking industry’s sustained growth trajectory is starting to slow. Compared to other banking

systems, Argentina’s banking industry is still in a comfortable position, but the charts show that

funding is becoming less abundant and more expensive. Bank lending stalled in January and

February with only 2.5% nominal expansion during a period when almost 8% inflation was

registered. In real terms, lending contracted -5.5% in the first two months of the year. Most loan

categories turned negative in February, and the commercial loan segment shrunk -1.1% in January

and -1.6% in February. This does not augur well for economic activity in coming months.

Short Term Investment Conclusions: Warrants May Run Out of Steam On Recession, Carry Trade

Becomes More Compelling

Thinking tactically, we believe that it is time to top slice large positions in the GDP-linked warrants,

especially the TVPP and TVPY flavors. We have been vocal and active supporters of the warrant trade

since last September, but the near term execution risks to Macri’s economic plan are rising rapidly. We

looked at our GDP-warrant model, and if there is not 3% growth in 2016 or 2017, but there is >3% growth

in 2018, the YTM for the TVPP warrants in pesos would be only 24% compared with the 25.4% expected

devaluation rate embedded in Argentina’s 12M NDFs (see chart above). If Argentina does achieve >3%

growth in both 2017 and 2018, the YTM climbs to 34%, which is not that attractive compared to thecurrent interest rate backdrop in Argentina. We would take profits in the TVPPs, and we would rotate

from the TVPY’s to the TVPE’s given that the Euro has corrected -4% in recent weeks. As we can see from

the chart below, the GDP warrants have stalled in the last two weeks, and this is explained by the volatility

in the ARS.

During our latest visit to NY, we discovered that the hedge fund and real money community in the Big

Apple is highly enthusiastic about the GDP warrants at the moment, and we suspect that these securities

have become a crowded trade. Our belief is that the news flow out of the real economy is going to turn

decidedly negative in the next 3-6 months, and the opportunity cost of holding outsized positions in the

warrants does not make sense given the material opportunity cost and relative value proposition offered

by the carry trade investments that are starting to improve in liquidity and returns.

TVPY Warrants Underperform During Sustained Periods of ARS Devaluation


11/17

11

_______________________________________________________________________



Argentina’s Long Term GDP Track Record Marked By Volatility & Frequent Recessions

While there are manifold reasons to be optimistic about Argentina’s GDP growth outlook post 2016, for

GDP warrant holders, it is important to take a walk down memory lane and examine Argentina’s growth

long-term track record. Since 1980, Argentina has only managed to grow its economy above 3% per year

in three consecutive years three times: (1) 1991-1994; (2) 1996-1998, and (3) 2003-2008. This volatility is a

function of dysfunctional politics and the dominance of Peronist governments, powerful unions and fiscal

profligacy. Argentina’s new government is implementing many of the right policies, but Argentina’s future

growth trajectory will require help from the global economy and a sea change in inflation levels and fiscal

policy.

Argentina’s GDP – Normal Distribution (High Incidence of Recessions/Slow Growth)

From 1885 to present, Argentina has, on average, suffered a recession every four years. Since 1913, the

average GDP expansion rate has barely managed 2.7% growth annually. Only four times throughouthistory Argentina has been able to grow four consecutive years at 4% or higher. A highly bullish trade in

the warrants presupposes that this Argentina’s economic DNA has been altered by a group of economic

magicians. We are not questioning that there is room for optimism, but making this transformation is not

a simple task; it is a Herculean undertaking. After a +39% return in TVPP since September, putting some

profits in the pocket makes sense to us.

Large skew of recession and

slow growth years


12/17

12

_______________________________________________________________________



Since 1975, the past 40 years, Argentina had fourteen recessions, and also Argentina had a serious CRISIS

with a memorable moniker every five years. A few examples: Rodrigazo, Tablita, the Austral Plan, the Plan

Primavera, hyperinflation, the Bonex Plan, Tequila, 2001 corralito. Our statistical model for GDP shows that

Argentina has 52.4% probability that its GDP will grow more than 3% in any given year. This is a bit better

than flipping a coin.

Probability Of Argentina GDP Growth >3%: A Bit Better Than Coin Flip

GDP – Three consecutive years or more of >3% GDP growth

Our Quantitative Model For The GDP-Warrants Offers High Return Profiles..But Only If GDP Growth

Exceeds 3% For Three Consecutive Years Post 2016

One of key drivers to valuation gains in the GDP warrants is a decline in Argentina’s cost of capital. The

USD sovereign bond yields have fallen 150-170bps across the sovereign curve since we published our in-

depth September 11th report, Time to Get Back Into The GDP Warrants? We think So. The TVPY’s

denominated in USD have returned 37.5% in this time frame, but this warrant has corrected -4.3% from

the highs reached on February 17th. The TVPP has risen +39% in USD and the TVPE +29% in USD. Under

the current economic environment, the sturdiness of this linkage to sovereign bond yields is questionablegiven that Argentina’s domestic cost of capital is increasing sharply in reaction to pass-through inflation

from the devaluation and tight monetary policy. Domestic interest rates are much more influential on

GDP outcomes than USD debt costs. Argentina’s USD denominated corporate debt is only US$49 billion

or 8.9% of GDP, so only a small fraction of the corporate sector can immediately benefit and access lower

USD yields that will take hold after the holdouts deal. Meanwhile, the vast majority of the corporate

Mean 0,033

Statitical error 0,005

Median 0,042

Standard Deviation 0,053

Variance 0,003

Curtosis 0,222

Skewness -0,184

Range 0,307

Min -0,108

Max 0,199

Suma 3,731Sample 113

Conf idence Leve l( 95% ) 0,010

Descriptive Statictics

p(X>3)=1-p(X


13/17

13

_______________________________________________________________________



universe is financing their operations at BADLAR +400-650bps, a nominal rate that is 30.5% to 34%. Until

this domestic cost of capital follows the country risk down, the multiplier effect on GDP will be more

negative than positive. In the chart below, we show just how dramatically the domestic cost of capital has

spiked in the last few weeks.

Lebac and Badlar Interest Rates: Big Move Up

Investment Conclusion: TVPE Still Offers Value But Upside Requires >3% Growth 2017, 2018, 2019

In the tables provided below, we provide some of the outputs of our quantitative model for the three

main GDP-linked warrants. The YTMs are based in the currency denomination of each warrant so that the

TVPP YTM does not factor in future devaluations, the TVPY is priced in USD and the TVPE is in Euros. It is

extremely important to keep in mind that GDP trigger payments are made in pesos so large

devaluations decrease the returns to the hard currency warrants (TVPY and TVPE). The attractive YTMsin our first simulations assume meeting the following challenging, albeit entirely possible, scenarios: (1)

Argentina will grow more than 3% in 2017, and will continue growing above 3% in the subsequent three

years (remember how few times this has taken place in Argentina’s history) ; (2) Argentina will not grow

above 3% until 2018 but will expand above 3% the subsequent three years; (3) Argentina will grow above

3% in 2017 and 2018, but the GDP growth will not reach 3% in 2019 and 2020. In all of these simulations,

the TVPE comes out on top in terms of potential returns, but the other two warrants, expressed in hard

currency returns, fail to fully compensate investors for the potential shortfalls to growth, should they

occur. Using our baseline scenario, the TVPE has the highest remaining residual value of 2.83x the current

price. We suspect that better entry points may present themselves in coming months.

When investing in these warrants, it is important to remember that they pay zero current yield so if they

do not trigger payments they fail to offer the compounding (reinvestment of interest) benefits of bonds

with high coupons and elevated current yields. The warrants historically have performed poorly during

years with high levels of FX volatility, which makes sense since because a volatile currency acts a catalyst

for higher inflation, spiking interest rates and greater economic insecurity.


14/17

14

_______________________________________________________________________



Residual Value

GDP Warrant GDP Scenarios

U$S - NY LAW (TVPY) EUR - Engl. Law (TVPE) ARS - Arg. Law (TVPP)

Price USD 11,58 EUR 10,94 ARS 10,60 / USD 0,68

Residual USD 29,97 EUR 31,01 ARS 24,60

Residual/Price 2,59x 2,83x 2,32x

Warrants

GDP % Trigger

Year Year Year

3,0 2016 2016 2016

3,0 2017 2017 2017

3,0 2018 2018 2018

3,0 2019 2019 2019

3,0 2020 2020 2020

3,0 2021 2021 2021

3,0 2022 2022 2022

3,0 2023 2023 2023

3,0 2024 2024 2024

3,0 2025 2025 2025

3,0 2026 2026 2026

3,0 2027 2027 2027

3,0 2028 2028 2028

3,0 2029 2029 2029

3,0 2030 2030 2030

3,0 2031 2031 2031

3,0 2032 2032 2032

3,0 2033 2033 2033

3,0 2034 2034 2034

Scenario IIIScenario IIScenario I

1,0

GDP Grow th (%) GDP Grow th (%) GDP Grow th (%)

1,0

3,0

3,0

1,0

1,0

1,0

4,5

3,0

5,0

3,0

1,0

3,5

3,0

1,0

3,5

4,0

3,0

1,0

2,0

3,0

5,0

4,0

2,0

3,01,0

1,0

3,0

3,0

1,0

3,0

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a


15/17

15

_______________________________________________________________________



GDP Trigger Payment Schedules On Three GDP Scenarios

Depth & Liquidity of Carry Trade Candidates Is Improving Quickly

Last week, Argentina’s Treasury began auctioning off BONAR 18 peso bonds offering a spread overBADLAR of 275bps and BONAR 2020 peso bonds offering spreads of 325bps over BADLAR. The

government sold ARS12bn out of a total program targeting ARS20bn (US$1.33bn) of each security. These

bonds will offer an attractive alternative for EM local debt funds that are looking to take advantage of the

carry trade in Argentina. These variable rate bonds, hedged with NDFs, would provide strong net USD

returns only if the BADLAR rate remains elevated and the 3.69% spread over BADLAR narrows under

3.0%, both conceivable bets but by no means a sure thing. In addition, these bonds are variable rate

securities priced off the BADLAR curve, which is tied to 30-35 day term deposit rates, and the healthy

spreads over the benchmark would become more valuable if Argentina’s inflation and country risk decline

in the next 18 months. The LEBAC fixed rate curve underwent a violent upward shift with Tuesday’s

auction, but the majority of the liquidity is found in the shorter durations of 35-147 days. In the table

below, we provide the outputs from our bond calculators on the Bonar 2020 securities.

Date TVPY TVPE TVPP TVPY TVPE TVPP TVPY TVPE TVPP

03-Mar-16 -11,58 -10,94 -10,60 -11,58 -10,94 -10,60 -11,58 -10,94 -10,60

15-Dec-16 - - - - - - - - -

15-Dec-17 - - - - - - - - -

15-Dec-183,00 3,46 23,14 - - - 3,00 3,46 23,14

15-Dec-19 3,46 3,99 1,45 2,72 3,13 23,84 3,09 3,56 1,45

15-Dec-20 3,76 4,33 - 3,18 3,66 0,76 - - -

15-Dec-21 3,87 4,46 - 3,47 3,99 - - - -

15-Dec-22 - - - 3,57 4,11 - 2,77 3,19 -

15-Dec-23 3,78 4,36 - - - - - - -

15-Dec-24 3,90 4,49 - 3,46 3,99 - - - -

15-Dec-25 - - - 3,57 4,11 - 2,49 2,87 -

15-Dec-26 - - - - - - 2,57 2,96 -

15-Dec-27 3,32 3,82 - - - - - - -

15-Dec-28 3,42 2,13 - 2,95 3,39 - - - -

15-Dec-29 - - - 3,04 3,50 - 1,87 2,16 -

15-Dec-30 1,46 - - - - - 1,93 2,22 -

15-Dec-31 - - - 3,21 1,15 - - - -

15-Dec-32 - - - 0,80 - - 2,04 2,35 -

15-Dec-33 - - - - - - 2,10 2,42 -

15-Dec-34 - - - - - - 2,16 2,49 -

15-Dec-35 - - - - - - 2,77 3,19 -

YTM 14,9% 18,2% 34,5% 11,9% 14,3% 24,7% 8,6% 11,2% 34,5%


16/17

16

_______________________________________________________________________



BONAR 2020 Carry Trade Hedged With NDFs: Badlar Rates Need To Stay High With Spread Compression

LEBAC Simulations Show Strong Return Profiles On Short Duration Paper

Under the prevailing yield curve and dollar futures rate structures, the most profitable opportunities at

the moment are to be found in the LEBACs with maturities ranging from 35days to 98days. We provided

two simulations that show enhanced returns if the LEBACs are bought directly in the weekly Tuesday

auctions vs. still attractive, albeit lower, returns if the bonds are bought in the secondary market. The

March/Mid-May time frame will be an active time for LEBAC auctions to roll over 76% of the stock or

ARS334bn (~US$20bn). We think this will be a fertile time to build positions in increasing liquid primary

and secondary markets.

LEBAC Effective USD Yields Using Auction Prices

Lebac + Rofex Lebac + NDF

LEBAC USD Prices Using Secondary Market Prices

Lebac + Rofex Lebac + NDF

ROFEX Futures & NDFs Are Now Trading Roughly In Line With One Another

Argentina’s 12M NDF is currently trading at 19.02, implying a 25.7% slide in the ARS. The 9M NDF is

offered at 18.11 or a 25.5% implied yield that nearly matches the trajectory embedded in the 12M NDF.

The 6M NDF is now at 17.1, implying a lower annualized depreciation pace of 24.4%. In the chart below,

we show the ROFEX Futures curve with the implicit rates. The longer end of the curve from August to

December are implicitly offering 25.1% (August) to 25.4% in December. Accordingly, we can infer that

over the next year, local investors can lock in ARS hedges at 24%-26% while local bonds coming to market

1,00% 2,00% 3,00% 3,69% 4,00% 5,00%

26,60% 26,65% 12,9% 11,1% 9,3% 8,1% 7,6% 5,9%

26,60% 30,00% 15,3% 13,6% 11,9% 10,7% 10,2% 8,6%

26,60% 22,00% 9,7% 7,7% 5,9% 4,6% 4,0% 2,3%

26,60% 20,00% 8,3% 6,3% 4,4% 3,1% 2,5% 0,7%

26,60% 18,00% 6,9% 4,9% 2,9% 1,6% 1,0% -0,9%

YTM in dollars with differents Spread in one year

3,69%

Next Payments

Badlar

1st Payment

BadlarSpread

35 2,72% 28,3% 32,3%

63 2,96% 17,1% 18,4%

98 3,35% 12,5% 13,0%

119 2,91% 8,9% 9,2%

147 2,54% 6,3% 6,4%

203 -0,89% -1,6% -1,6%

252 3,52% 5,1% 5,1%

Days

Effective

Yield

Nominal

Annualized Yield

Effective

Annualized Yield

28 1,76% 22,9% 25,5%

56 2,24% 14,6% 15,5%

98 2,60% 9,7% 10,0%

Days

Effective

Yield

Nominal

Annualized Yield

Effective

Annualized Yield

28 1,12% 14,6% 15,7%

56 1,39% 9,1% 9,4%

98 1,36% 5,1% 5,2%

Days

Effective

Yield

Nominal

Annualized Yield

Effective

Annualized Yield

35 2,08% 21,6% 23,9%

63 2,11% 12,2% 12,8%

98 2,10% 7,8% 8,1%

202 1,30% 2,3% 2,4%

Days

Effective

Yield

Nominal

Annualized Yield

Effective

Annualized Yield


17/17

17

_______________________________________________________________________



should offer effective yields of 32%-38%. We believe that annualized dollar returns of 12%-13% are much

more attractive than the 6.43% YTM offered by the BONAR 2017 USD bonds and the 6.85% YTM that

currently prevails for the BONAR 2020 USD bonds.

Rofex & NDF Curves Based on Contract Prices Rofex & NDF Implied Forward Yields

Finanzas Argentinas

Documents

Transcript of Finanzas Argentinas