ARGENTINA UPDATELegal Risk To Local Law Bonds?

The performance of Argentine assets since the beginning of the year has been nothing
short of spectacular. For example, since the beginning of the year, the Buenos Aires
2021s have returned 17.45% (carry included), and the Bonar 2024s have returned
6.9%. At the equity front, the Merval has returned 42.36% in local currency, and
35.28% in USDs (doing the calculation based on the official FX rate). The ADR of Grupo
Financiero Galicia, a key benchmark for international investors interested in the
Argentine equity trade, has paid investors 42.1% since the beginning of the year.
Granted, as of March 19, at the height of the current market rally, Galicia was paying
investors an impressive 68.3% that bought at the beginning of the year.
$90,000

ARGENTINA--External Trade Dynamics. In USD Millions. Source: INDEC, Bloomberg,

Bulltick

$80,000
$70,000
$60,000

BALANCE

EXPORTS

IMPORTS

$50,000
$40,000
$30,000

$20,000
$10,000
$0
-$10,000
-$20,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

As we argued at length in our latest monthly publication, we think that the most
probable scenario is that regime change will in fact bring about a material change in
the guidelines of Argentine economic policy management, even if the governments
coalition does in the end retain power via a Scioli presidency. In our view, Governor
Scioli is a highly pragmatic individual that has the capacity to understand that the wellbeing of Argentines will increase materially if the country is able to reinstate itself as a
credible member of the international financial community. In our view, Scioli does
understand that Argentina needs funding if the country is to be ever be able to reverse
the continued widening of the twin deficits. Hence, we do expect the forthcoming
administration to take appropriate actions that will probably be welcome by the
markets. Of relevance, we remain very bullish in this story, our base case scenario is
that City of Buenos Aires Mayor Mauricio Macri will win the election in a runoff
against governor Scioli in Q415.
Among the key current issues affecting the performance of asset prices, we think that
the question of the risk of attachment of Buenos Aires Law bonds (by the NY Court
system) remains the most pressing one. To most pundits it seems clear that the holdout
community will NOT be able to attach payments related to YPF and Province of Buenos
Aires bonds issued under NY Legislation, despite the injunctions now present against
the sovereign. The key question in the market remains the if US courts can in fact
prevent this sovereign issuer to pay their bonds issued under its own sovereign
legislation. The standing argument from the holdout community is that the Bonar
2024s and the Boden 2015s will be deemed external debt by Judge Griesa in the
future, meaning that such debt needs to be included in the pari-passu injunction.

www.bulltick.com

May 4, 2015

Alberto J. Bernal
Head of Research
abernal@bulltick.com
+1 786.871.3743

Kathryn Rooney Vera

Macroeconomic Strategy
krooney@bulltick.com
+1 786.871.3758

Will that be the case? We are clearly not lawyers, yet our analysis must necessarily hint otherwise. To start, if NY
Courts were to in fact decide that they have jurisdiction over BA Law bonds, because the BA Law bonds were offered
to foreign investors, then what would stop another US Judge from arguing that Mexican M-Bonos are external debt
because foreigners hold a fair amount of the nominal outstanding? What about local debt in Per or Colombia? Once
again, there is an incredible amount of uncertainty surrounding the legal issues concerning Argentine debt, but it is
evident that the markets do not see a material risk of the legal theme of the holdout community winning the
argument. If the markets were pricing such a risk, the Boden 2015s would definitely not be trading at 98% of their
nominal value. In addition, all the indications are that, if anything, the recent issuance of the 2024s was very close
to being a private placement, with one large fund buying an estimated 60% of the issue, according to our sources.

The Bottomline For Markets

We continue to believe that Argentine debt remains a strong buy at current levels. As we argued at the Spring
EMTA forum last week in NYC, we would only start to even think about taking profits in USD-denominated 10year bonds when they reach a yield of 6% (those bonds are now trading at 8.75%). Our argument remains the
same. Argentina is a very unlevered credit (public debt in the hands of the private sector amounts to about 10% of
GDP), and one that is financing itself at discount rates that materially surpass the ones that the markets are
demanding from, in our view, much weaker credits like Ecuador. We sense that regime change will prove to be as
positive as the optimists (like us) believe it will be. Once again, our base case remains that Mauricio Macri wins the
election, and such a victory will bring about a material change in the conduct of economic policy. Since we are
projecting that Macri will win the election, we are currently forecasting that the Argentine economy will grow more
than 5% y/y in 2016. Clearly, investors that buy our argument should be long GDP Warrants (if growth reaches 5%
y/y in 2015, our randomization model estimates the fair value of the GDP warrant at USD $12.5).

ARGENTINA--Histogram Of Hypothetical USD Warrant Prices (Y-Axis,

Number Of Observations). Assumes 2016 GDP Of 5%. Source: Bulltick
90
80
70
60
50
40
30
20
10

0
-10
$6

$8

$10

$12

$14

$16

$18

$20

$22

$24

We believe that under a Macri win, the administration will prioritize the fight against inflation, and in order to
win the fight against inflation, Argentina needs to regain access to voluntary international markets. Among the
tools to be used to achieve such outcome, we forecast that the administration will name a highly respected
economist as the head of the CB (we heard the name of Federico Sturzenegger the last time we visited Buenos Aires).
We would also expect to see a material change in the leanings of international policy, with Argentina inching closer
to the Alianza del Pacifico and moving away from the so-called ALBA. Then again, even if our view is inaccurate
and the winner of the elections is Governor Scioli, we forecast that circumstances will force his administration to
take a much less confrontational view with the international community. As some investors may know, if anything,
the finance office of the province of Buenos Aires is quite market friendly

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About Bulltick Capital Markets

Bulltick Capital Markets is a full-service investment bank specialized in Latin America. The firm offers a variety of
diversified financial products and services with local know-how and international expertise. Its client base is
comprised of established financial institutions and qualified investors in Latin America, as well as of the international
financial community with investment interests in the region. Bulltick is headquartered in the United States, with
offices in Miami, Mexico City, and Bogota.

Our Research Resources

With Bulltick's vast Latin American in-roads, resources and networks, our research team is strategically positioned
to provide value-added research on local and regional companies, markets and industries. With analysts in the
region, along with management road shows, we are able to track the pulse of the leading markets in Latin America.
We make it our business to know the business of the region, so we can help our clients manage volatility with indepth coverage of macroeconomic leading sectors and market-moving events.

Alberto Bernal

+1305533-1541

Kathryn Rooney Vera +1305533-1541

abernal@bulltick.com
krooney@bulltick.com

Macroeconomic Strategy
Macroeconomic Strategy

Eliana Saito Carneiro

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ecarneiro@bulltick.com

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