Gramercy Versus Peru: The Next Nasty Bond Fight in Latin America

  • Gramercy says its owed $1.6 billion from defaulted land bonds
  • Peru accuses hedge fund of resorting to ‘threats,’ ‘blackmail’

Gramercy Funds Management and Peru are embroiled in the latest bond dispute pitting a U.S. hedge fund against a country in Latin America.

The Greenwich, Connecticut-based fund says the government is violating the U.S.-Peru Free Trade Agreement by refusing to pay the $1.6 billion it says it’s owed for unpaid notes. Gramercy, which is seeking to enter arbitration with Peru, blasted the country for “stonewalling.” Peru denied the fund’s claims, and Finance Minister Alonso Segura has described the efforts as a “campaign to try to tarnish the reputation of” the country. 

The fight between Peru and Gramercy is getting nastier three months after Argentina and hedge fund Elliott Management settled their own dispute that lasted more than a decade. In both cases, long-defaulted bonds are at issue. Gramercy is seeking payment for notes issued under Peru’s military dictatorship in the 1960s and 1970s as compensation to farmers whose lands were seized. Peru stopped paying the debt as its economy collapsed in the 1980s and is currently evaluating how much it will repay creditors. The government says Gramercy, which began buying the so-called land bonds in 2006, is using “threats and blackmail” in its campaign.

“What they’re trying to do is put enough pressure on the government for them to say, ‘You’re creating other problems. I’m going to pay you a lot of money for these bonds,’” said Mark Cymrot, a lawyer who is head of BakerHostetler’s international disputes group.

While Cymrot isn’t involved in this case, he has represented Peru in U.S. litigation. He said his wife’s family owns Peru’s land bonds.

In a statement on June 2, Peru said it “will defend itself vigorously.”

“Gramercy has not shown that it is a legitimate investor that made lawful investments in Peru, or that it is entitled to jurisdiction under the treaty. Gramercy also has not shown that Peru has violated international law.”

Gramercy responded with a statement on Friday describing Peru’s current efforts to determine who owns the notes and how to value them as a “sham,” and criticizing the government for not saying explicitly how much the bonds are worth.

“Gramercy has rightly refused to participate in that process -- just like thousands of other bondholders -- because, among other things, it offers no value,” the fund said. Gramercy says the accusation of blackmail is demonstrably false, and said the fund isn’t running a negative campaign but just bringing attention to the government’s contradictory statements and refusals to engage in substantive negotiations.

Gramercy even attached a photograph of one of the bonds it said is in its possession. The bond would be worth $16,161.85 under one inflation-linked methodology, and worth less than a single penny under formulas the government has published, the fund said.

Jonathan Hamilton, counsel to Peru’s Finance Ministry and head of Latin American arbitration at White & Case LLP, said in a June 7 interview that bondholders seeking payment under a process set up in 2014 are getting closer to receiving a payout.

“Peru will continue to act respectfully and to respect the free trade treaty’s procedural rules, and hopes Gramercy will do the same,” he said.

The fund had given notice of its intent to seek arbitration on Feb. 1, which under the treaty had to be delivered at least 90 days before the claim to arbitration. The claim came June 2, three days before runoff presidential elections in Peru. 

Pedro Pablo Kuczynski, a former finance minister and veteran of Wall Street, is getting closer to winning the tightest presidential race in Peru’s history as the count nears its conclusion. The electoral office expects to complete the vote tally on Thursday and announce the winner this weekend.

If elected, Kuczynski would have to address the dispute with Gramercy, which may try to disrupt his proposed plan to sell $6 billion in bonds to fund infrastructure projects and spur economic growth, according to Narghis Torres, who teaches securities law at Lima’s Esan business school and Universidad de San Marcos.

Gramercy also released a legal opinion dated Jan. 11 saying that Peru withheld information about disputes over the decades-old defaulted debt when it sold new bonds and asked the U.S. Securities and Exchange Commission to either insist that investors be informed about the dispute or halt trading of Peruvian notes.

“The next president is going to have to decide if they negotiate and come to a deal, or if they can’t, it’s probably going to continue and end up in arbitration,” Torres said. Kuczynski “has experience in the financial sector, a track record on Wall Street, and will know how to handle it.”

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