EFTA01386038.pdf

16 October 2017 Special Report: Argentina - Position tor the upturn residual gain at these levels (entry: 95bp; current: 77bp; GOP War runts - With economists revising up their GDP target: 70bp). growth forecasts for the 2017 and 2018 recently, there has been some renewed interest in GDP Warrants, The BONARs - The local law bonds have lost their which have outperformed bonds over the past couple prominence since Argentina reopened its international of weeks. In our view, it is perhaps a bit too early to be markets in 2016, but in our view some of the less liquid overly excited about the Warrants. A 2017 growth bond at the shorter end of the curve offer attractive potentially exceeding 3% - clarity of which could be value for taking Argentina's credit exposure. During obtained in the coming months via looking at higher this year's rally, BONARs have underperformed NY law frequency proxy data - will indeed force government to counterparts due to real investors increasing their stop procrastinating on the tricky issue of base case overweight on the latter. Interestingly, BONAR 25s and GDP interpretation (likely with a re-launch of buybacks). 27s are actually trading inside corresponding ARGENT We remain constructive on the Warrants due to our bonds. The value on the SONAR curve clearly longstanding view that the government will go with the concentrate at the front end (up to the 22s), but market friendly resolution to this issue but after the liquidity could be an issue. recent rally we would only look to buy on dips given the uncertainty in growth. Our economist calls for a Going provincial Among Argentina provincial bonds, below trigger level of 2.8% for 2017. we retain a preference for 7-year bonds from the Argentine provinces of Cordoba (Province of Cordoba Concluding remarks 7.45% '24s) and Salta (Province of Salta 9.125% '24s) due to relatively low leverage and superior credit The current pro-growth policy mix will likely continue metrics within the Argentine provinces, expected to favor equities, but It will also impose limitations on increase in government transfers as per favorable fiscal tightening: on the pace of disinf€ation, fixed supreme court ruling in 2016, positive reform income returns, and currency adjustment. The momentum in Argentina, superior relative value within combination - which will support additional (mild) real Argentine quasi-sovereign and provincial credits. See peso appreciation and high real rates in the near term - graph below for a snapshot of provincial bonds' bodes for positioning for short-end carry and floating valuation in comparison with the sovereign curve. rates. Valuation and the prospect of back-loaded FX depreciation supports duration extension via USD debt. A snapshot of main Provincial bonds in comparison with sovereign bonds The choke of instrument in local markets is important :Kvead at this stage where Argentina's markets are not • Farr "n10.411V0...earijn byrryi rifr trending anymore and because 0 wide dispersion in 093 valuations. The macro dynamics favors floating rates ■PHO Y. over fixed rate instruments given both supply and 55) einini) 1> monetary policy risks as well as valuation, although the • 1 '22 latter is clouded by market segmentation. A deeper • REGO'2, look at the valuation via our fixed-rate implied yield rri, ft Yr -a LultflOS ■ S.L.02.1 model helps support our macro intuition. NEVOJE revjil:" r ) II3C.4. While valuation in credit looks tight vs. its current IL credit standing, there are a number of reasons for u to believe there is still scope for further tightening. In addition, alternative instruments (with spread pickups) offered by EUR bonds, select local law USD bonds, and select provincial bonds also enhance the attractiveness in this space. Soar* AntxAt Pant Deutsche Bank Securities Inc. Page 7 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0087566 CONFIDENTIAL SDNY_GM_00233750 EFTA01386038