July 8, 2016 / 4:46 PM / 2 years ago

Contentious Peru bond could pay off handsomely for Gramercy fund

NEW YORK, July 8 (IFR) - Hedge fund Gramercy stands to make massive returns if it wins a long-running battle with Peru over so-called agrarian bonds, new figures recently disclosed by the country show.

The Connecticut-based firm says it is owed around US$1.6bn on its holdings of the land bonds, and filed an arbitration claim for that amount last month.

Peru fought back this week, however, asking the arbitration tribunal to throw out the claim.

The country’s official response also shed light, for the first time, on the hefty profits Gramercy could make on at least one of the bonds at the heart of the row - Bond No. 008615.

Gramercy bought over 9,700 land bonds from hundreds of individual bondholders between 2006 and 2008, accumulating a share of around 20% of the total outstanding during that time.

But it has not disclosed publicly how much it paid for each bond.

Bond No. 008615 is part of the Class B of land bonds, which had a maturity of 25 years and carried a coupon of 5%. It was issued in November 1972 with face value of 10,000 soles de oro - Peru’s currency at the time - and had a residual value of 5,200 soles de oro when coupon payments stopped.

Gramercy purchased that bond in November 2006 along with two other notes with the same maturity and the same coupon for a total price of US$38,500.

In an official filing this week, Peru said the portion of the total purchase price attributable to Bond No. 008615 is approximately US$380. That is based on the fact that the bond represents about 0.99% of the total face value of the bundle of Class B notes purchased for US$38,500, according to a document seen by IFR.

If those figures are accurate, Gramercy stands to make a return of around 4,153% over the 10 years it has held the bond, assuming the courts reward it the US$16,161.85 it is claiming Bond No. 008615 is currently worth.

Gramercy disputes the US$380 figure.


The bearer notes in question were issued more than 40 years ago to Peruvian landowners as compensation for expropriated property.

The long-running spat between Gramercy and Peru is centred on the present value of the defaulted bonds. The hedge fund is disputing the payment scheme that has been proposed by the Andean nation.

In an interview with IFR, lawyers for Gramercy said the US$380 figure was inaccurate. They said no portion of the US$38,500 purchase amount was specifically allocated to Bond No. 008615, but refused to provide an alternative estimate.

They would not comment on Gramercy’s potential return on this, or other land bonds it owns.

The lawyers said the payment scheme proposed by Peru would value the bundle at just US$0.20 and Bond No. 008615 at less than a penny - leaving Gramercy with significant losses.

“Peru is attempting to manipulate Gramercy’s purchase price in order to evade responding to the real issue, which is that, under the Finance Ministry formula, the three bonds would be worth less than the cost of a stick of gum,” Mark Friedman of Debevoise & Plimpton, one of the lawyers representing Gramercy, told IFR.

Peru has so far indicated only that it will respond to Gramercy’s own valuations in due course.

“The bondholder process is advancing in conformity with the court ruling,” the lead counsel for Peru, Jonathan Hamilton of White & Case, told IFR. “Gramercy has opted out of that process and has presented new arguments and valuations, and limited evidence, in the Treaty process. Peru will respond at the appropriate time in the procedure.”


The arbitration proceedings have only recently started, and could drag on for years unless the two parties decide to settle before a verdict is reached.

The dispute has had no impact on Peru’s ability to raise funds in the international bond markets, and has been mostly shrugged off by the three major rating agencies and institutional investors.

The land bonds were issued by the Peruvian government under local law starting in 1969 and through the 1970s as part of a broad agrarian reform initiated by the military government of Juan Francisco Velasco.

As the Andean nation suffered hyperinflation and changed its currency twice in the following years, however, payments on the notes stopped and their value became uncertain.

Gramercy, believed to be the only entity to have acquired the land bonds as an investment, has claimed that Peru’s proposed bond mechanism would value its holdings at just US$1.1m, compared to the US$1.6bn it is asking for. (Reporting by Davide Scigliuzzo; Editing by Natalie Harrison, Jack Doran and Matthew Davies)

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