Barcap Warns Against Argentina Warrants

Argentine sovereign GDP warrants may look cheap, but Barclays warns clients to steer clear given high default probabilities priced by CDS and nominal depreciation indicated by NDFs. Global turmoil and nationalization of pension funds have pushed warrants to $4 from $9 in the past month alone, Barclays notes. It adds that the CDS curve implies a 50% default probability in one year and a 95% default probability in 5 years, while ARP NDFs price a 60% nominal depreciation per year for the next 5 years. “These two phenomena are devastating for the value of the warrant. Although the warrants do not mature until 2035, the market expects Argentina to default in the next few years, stripping the warrants of their potential for long-term gains,” says Barclays. “We fear that warrant prices may experience a further market correction and do not recommend adding exposure at current levels,” it adds. For those investors unconvinced by its argument, the shop recommends EUR warrants over USD warrants. Barclays is working with Deutsche and Citi on a settlement between the Argentina sovereign and holdouts.