EFTA01386037.pdf

16 October 2017 Special Report: Argentina • Position for the upturn Figure 1: Real exchange path implied by market curves While valuation looks tight vs. its current credit rating after its outperformance this year. there is still scope and a trend inflation of 5% for spread to tighter further due to a). Market's imps] foal achinga fan pod, perception of multiple notches credit ascension if 130 politics stay on track; b). The flattening of spread / - by ARGENT/SOWS Curve quality curve in EM credit markets under the 120 offolmolod by 607ES.CER woo constructive external backdrop with continued inflows; 110 - Wel of PEER and c). Opportunities offered by EUR-denominated bonds, local law USD bonds, and select provincial 100 bonds, even if one does not like the valuation on the NY law USD bonds. 90 so EUR bonds vs. USD bonds - Argentina is due to issue USD2.65bn more bonds denominated in EUR, CHF, or 70 JPY in the coming weeks. In our view, Argentina 2017 2019 2021 2023 2025 should issue in EUR to boost the liquidity of the EUR bonds curve despite initially unfavorable pricing for the Scurf Drab dont sovereign. Any supplies to that markets, if priced properly, would only help - not hurt - the performance When we assume that inflation follows the implied of those bonds, in our view. On ft-hedged basis, the breakeven rates priced in linkers, the cushion is a lot EUR bonds remain significantly cheap to their USD less and substantial real appreciation is required to counterparts, especially the EUR Discounts in balance returns as time goes by - again, in contrast comparison with USD Discounts (at FX-hedged spread with our expectation and with our view that the peso is differential of 175bp). already overvalued. E.UR denominated bonds remain substantially cheap to Credit - Scope for further tightening IUSD counterparts, especially the EUR Discounts In terms of the external markets, as the long term Par-Equivalent Spread picture seems intact, market should continue to price a 600 likely second mandate of Macri administration with a Par strong reform agenda and ascension in credit 550 ■ E Disc standings, and associated ratings upgrade to BB levels 500 over the medium term, in our view. 450 sPar' 17 NE '27 400 36 Ilk- '46 One-notch upgrade is priced in Argentina credit; potential for more if politics stay on track 350 CdOof ahead 300 IWO 250 200 '27 '21 150 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Modified Duration Sane Oduelatieedint The USD curve - On the back of recent outperformance of the Pars, we have taken profit in Pars vs. 5Y CDS and Pars vs. 46s despite that the Pars remain substantially cheap to the curve. But we, nevertheless, look to switch out of bullets to the Pars on any meaningful dip of the latter. Sono Dance•Bent While the Pars continue to offer good value, the bullet bond curve (10s30s) has flattened from recent peak; we retain curve flatteners 46s vs. 27s but only for any Page 6 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0087565 CONFIDENTIAL SDNY_GM_00233749 EFTA01386037