GDP warrants dissected
We again revisit our analytical approach to GDP warrants from both a trading perspective and long term valuation.
First and foremost, we have to separate the payments into near term and long term with more important focus on the near-term payments. Our conservative view is that there are two upfront payments for around 9.2 cumulative coupon payments or 7.5 in NPV terms. The optimistic view is for four up-front payments on a positive shock to growth from regime change for 20.3 points or 14.8 NPV at the current CDS discount curve.
The long term payments are penalized on two fronts – 1.) the low survival probability of the current CDS discount curve and 2.) the uncertainty of the long term contingent cashflow.
It is no surprise that the market prices rarely seem to coincide with the standard convention for the valuation model for long run GDP growth rates. There is an obvious reluctance to anticipate the valuation of longer dated payments that are determined by a stochastic process. Or conversely, these mean reversion models overestimate the amount of potential long dated payments with our jump diffusion process only estimating an average 2-4 long dated payments.
Under conditions of stable external risk (and stable to improving Argentina credit risk), there is a structural bid for Argentina GDP warrants for the optionality of the higher valuation of the longer dated payments and, even more important, for the prospects of additional up front payments on a positive shock to GDP growth from a centrist policy shift after the elections.
We would view the USD GDP warrants as a trading vehicle to target the optimistic scenario of “regime change” buying at 10.5 (two upfront payments) to target 18.3 (four upfront payments).
Our preference remains for the cheaper ARS GDP warrants, which we would buy outright as a structural long with the most upside on more potential near-term payments. The liquidity is improving with preference for the potential P&L but they still remain cheaper in relative terms with current market prices on ARS warrants reflecting 0.78 ratio to the next two coupons while the USD GDP warrants prices trade at 1.2 ratio to the next two coupon payments.
FUENTE: RBS 15/09/10
abrazo
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