Lehman Warms to Argentina Warrants

Despite a generally bearish view on Argentina, Lehman sees value in sovereign GDP warrants, especially when hedged with CDS. “If Argentina does not default, the warrants offer significant upside in the long term,” says the shop. Lehman’s models show the USD and EUR warrants having theoretical values of $16.85 and $14.50, respectively, while they trade in the market at discounts of nearly 50%. “These estimations already take into account the bearish sentiment by discounting expected coupons by current CDS levels plus an additional 250bp to account for a lower recovery rate and higher risk premium on the warrant,” says the shop. On the USD warrants, Lehman expects total payments through December 2010 of $8.94, and $8 for 2011 to 2035. It sees best value in EUR warrants, saying that they are 3.6% cheap to the USD warrants, whereas they normally trade 1% rich.