Uncategorized

Argentina | Investment options

| April 16, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Argentina stands out as an underperformer this year. Prices have retraced to historic lows after last year’s debt restructuring led to no follow-up economic plan. It will take some creative thinking to generate positive total returns with near zero-coupon bonds.  The passive approach assumes historic low prices are more sensitive to positive than negative news and have potential upside from a moderate policy shift after elections.  But Argentina could still underperform over the next six months with almost no coupon and further risk of disappointment if International Monetary Fund negotiations get delayed into next year.

The alternatives are off-index opportunities in quasi-sovereigns such as BUENOS or waiting to position closer to potential positive events toward year end. The most upside clearly depends on a return to 4Q2020 levels if Argentina reverts to policy moderation and normalization of creditor relations after 4Q2021 elections. The alternative strategy is adopting a longer view that focuses on cumulative coupon payments.  There has been increasing focus on the step-up coupons in Ecuador with Argentina on a similar schedule after July with an increase in current yields. This same analysis now shifts to Argentina. Argentina’s low average coupons require a strategy of conservative entry levels—prices closer to 30 than 35—and preference for the higher coupon bonds on the important assumption that the Fernandez administration avoids default through his term and through January 2024 coupon payments.

The low Eurobond prices in Argentina are a function of not only weak fundamentals but also weak technicalS. There are legacy long positions, no incremental buyers and near-zero coupons.  If we assume that cash flow stress from hefty IMF loan repayments in 2022 will ultimately force a resolution late this year or even early next year, the lower discount rates should allow for outperformance across the curve.  Although ideological differences will prove difficult in IMF negotiations, there is no other alternative to an IMF program ahead of $18 billion in payments through 2022.  Higher commodity prices would not prove sufficient to accumulate enough foreign exchange reserves to repay the current schedule of IMF loan payments. The potential for a positive shock on normalization of IMF relations could conservatively imply a reversal back to the credit risk levels in 4Q2020 and maximize the potential near-term gains for bondholders. This would provide a potential windfall and opportunity for outperformance with asymmetry to the upside and with current prices trading at or below historic recovery value. The shorter tenors would outperform under this scenario on curve normalization. The moderate policy shift post-elections and yield compression closer to 4Q2020 levels would provide the best risk and return profile close to 25% to 39% total returns from current levels.

The alternative strategy takes a longer-term view to buy at price lows and maximize carry returns through the duration of the Fernandez term.  The higher current yield after July step-up coupons reminds investors about the optionality of coupon payments. The step-up annual coupons of 2.0% and 2.5% for the ARGENT’38 and ARGENT’41 would increase the current yields to 5.4% and 7.15%, respectively at today’s low prices.   The still low average coupons 2% to 2.5% for the Kirchner bonds (2038, 2041) and 0.5% to 1.125% for the Macri bonds (2035, 2046) do not offer much passive returns on a 12-month basis. This is where potential returns are more interesting on a longer-term horizon.  Not necessarily for the optionality of higher recovery value after another debt restructuring but rather the coupon payments prior to another default.

The current low prices may discount a high probability of default; however the timeframe is critical. The latest statements from Vice President Fernandez de Kirchner are highly relevant. “We are not saying that we won’t pay the debt.  Our political front has been the only one to pay the debt of other governments….”

There has been a unique track record of Kirchnerismo to avoid debt issuance but yet pay the debt issued (BODEN’15) with favorable relative treatment of the “Kirchner” relative to the “Macri” bonds in the last 2020 debt restructuring.  It would be illogical from both a political and economic perspective for the Fernandez administration to default so soon after a restructuring, especially since there was significant cashflow relief through 2024.

If we assume that the Fernandez administration avoids default through January 2024 coupon payments, this provides cumulative coupon payments of 8.11 points for the 2038 and 7.86 points for the 2041 bonds.  The breakeven return analysis then depends on the entry and exit price to capitalize on the coupon payments.   If we assume a conservative recovery value of 30 to 32, then it’s critical that investors enter close to these levels to maximize potential returns.  It is also worth remembering the favorable relative treatment of the “Kirchner” versus the “Macri” bonds through the restructuring on higher recovery value while maintaining the same favorable indentures.  This implies a slightly higher recovery value for the ARGENT’38 and ARGENT’41. The ARGENT’41, ARGENT’35 and ARGENT’46 seem to offer the best combination of a relatively lower cash prices and higher cumulative coupons for total returns of 8% to 13% through January 2024 based on low 30 recovery value. However, these returns are clearly suboptimal for the lengthy 2.5-year investment horizon with breakeven returns not too far above current levels at 36 to 37. This would then require more optimistic scenarios of higher recovery value (closer to 40 than 30) or delayed timeframe for default (beyond January 2024) or preferably a shift in policy management that allows for lower default risk and near-term tactical gains on IMF negotiations late this year /early next year.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles