Peru’s finance minister said land reform bondholders will be paid according to local law, despite the challenge from a US hedge fund to take the dispute to international arbitration.
Starting in 1969, Peru’s military government granted the bonds to farmers as compensation for land seizures. The country began defaulting on the bonds in the 1980s, during a time of hyperinflation.
Connecticut-based hedge fund Gramercy Funds Management, which reportedly owns 10,000 of the defaulted bonds, last month said it will initiate international arbitration under the US-Peru free-trade agreement, looking to get more than $1.3bn from Peru for failing to pay the debt.
Gramercy also claimed Peru withheld information about the land bonds when it sold a €1bn ($1.1bn) 14-year eurobond in February, sources close to the matter told LatinFinance.
Gramercy’s lawyers have asked the US Securities and
Exchange Commission (SEC) to inform investors in Peru’s bond deals of the dispute or
halt trading of the country’s notes.
However, Peruvian finance minister Alonso Segura told LatinFinance that the land bonds are “very different from
conventional sovereign bonds,” stressing that they were issued under local law.
“This company is mounting a campaign,” Segura said of Gramercy. “Peru is a responsible country. We are following Peruvian law,” he said.
“Any holder of these bonds can present them to be authenticated,” Segura said. “There is no registry available for them, however, due to their age, but every investor is free to submit them, authenticate them and they will be paid accordingly.”
A 2013 court ruling ordered the government to calculate the debt owed using US Treasury rates rather than Peruvian inflation, reducing the bonds’ value to five cents on the dollar.
Ramon Remolina, head of the lobbying organization Land Reform Bondholders Association (ABDA), said in a statement that President Ollanta Humala’s
administration has “engaged in a campaign of deception against thousands of
Peruvians whose land was seized decades ago and are still awaiting compensation.”
Remolina added that the court decision and a subsequent presidential decree have
left bondholders with a 99.5% haircut on the bonds’ value “and forces them to turn
over all of their rights.”
A source told LatinFinance that Peru could exchange the defaulted land
bonds for the eurobonds issued in February, but the government is not likely to do that.
“Peru has had no issue tapping the cross-border markets
recently, so repayment is not really a problem,” he said. “But there is just
not much willingness from the government’s end, so it’s tough to see a
different outcome for land bond holders.”
Gramercy said in a statement that Segura’s remarks “are materially and deliberately misleading.”
Segura and other officials from the Ministry
of Economy and Finance were on an investor roadshow in New York this week.