The dollar-denominated GDP warrants that were part of Argentina’s $81 billion bond exchange are proving to be one of the emerging markets’ hottest securities. The warrants, which traded at between 5 cents and 5.5 cents when they were first detached from the exchanged bonds in November, have gone up more than 40% in just a few months. The stream of payments is now a $4.5 billion asset class and is actively traded.
The warrants, which came free with every new bond in the May 2005 exchange, have a rather complex structure. The general idea behind them was, however, simple: Argentina didn’t want to commit itself to a payment stream it couldn’t afford so it set up a separate stream of payments, over and above its coupon payments, which was linked to GDP.
Part of the reason for the impressive rise is technical – when the warrants first detached a lot of bondholders decided to sell them more or less at the same time, depressing the price. At the same time, spreads on Argentine bonds have compressed, and with them the discount rate that investors use to value the warrants. The lower the discount rate, the higher the value of the warrants.