© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Robert Koenigsberger, managing partner with Gramercy Funds Management, never intended to get mixed up in a war. But he has.
Mr Koenigsberger is being drawn into an expensive and messy litigation battle, now wending its way through courts in New York, that is confusing for outsiders to follow.
At issue is whether Argentina should pay $1.33bn to a group of holders of debt on which the country defaulted in 2001, as ordered by a judge in the US last November. These debt holders had refused previous restructuring deals.
Mr Koenigsberger is fighting against the payment and so is Argentina. This is because Gramercy, a specialist in emerging markets, participated in two debt restructurings the Argentines organised back in 2005 and 2010. And if last November’s ruling, which has been “frozen” pending appeal, takes effect, the 92 per cent who hold Argentina’s restructured bonds, including Gramercy, risk not being paid in full on their investments.
Effectively, the US ruling sets the stage for Argentina either to pay everyone – including the 8 per cent of bondholders who refused to come to the table the last time – or no one, since it would not be able to continue paying its restructured bonds without flouting the judge’s order.
“The battle is about whether the 8 per cent that didn’t participate in the restructuring are entitled to ‘fair and equitable treatment’ and if they are, what is that and what is the impact on third parties?” explains Mr Koenigsberger, speaking on the telephone from his office in Greenwich, Connecticut. “If 92 per cent of bondholders took a two-thirds haircut, is it fair that the 8 per cent get the same amount or six times more than what the others received?”
He adds: “Our position is less about siding with the Argentines and more about insuring that the payments of the 92 per cent of bondholders who agreed to a deal don’t get attacked by some injunction in a New York court.”
The low-key Mr Koenigsberger, who hails from the suburbs of San Francisco, comes across as an unlikely warrior.
And while the legal battle to protect the restructured debt payouts from Argentina wages on, he refuses to be distracted by it and remains focused on leading the charge at the company he set up back in 1998.
Mr Koenigsberger has kept up an interest in sovereign debt crises since his undergraduate days at the University of California, San Diego where he wrote his thesis on the origins of the Latin American debt crisis.
“I’ve been through every major sovereign debt crisis over the past 25 years,” he recounts. “I worked on my very first deal with Costa Rica back in 1988. Then there was Panama. Peru. Ecuador. But also elsewhere like Bulgaria in 1993. Poland in 1994. Russia in both 1997 and 2000.”
He was motivated to launch Gramercy after a spell spent working on emerging market sovereign debt restructurings at Merrill Lynch and Lehman Brothers because he wanted to create a company that was independent and free of conflicts of interest.
“When you work on restructurings at a Wall Street bank, there are all sorts of conflicts of interest that create headwinds for successful outcomes.
“When I worked at a big bank on Wall Street, all I cared about was managing the debt exposure of the bank and its clients. But some other teams at the bank were looking at the countries we were dealing with as potential clients rather than obligors,” he notes. “Wall Street banks tend to want to represent people on all sides of a deal. So sometimes that means you don’t get the most positive outcomes for debt restructurings in emerging markets.”
He says: “Today when I sit down at the table to work on deals, I’m trying to get the best possible return for my clients. We have one business here and that is to manage capital for our clients.”
He dislikes litigation primarily because it drags on and tends to be expensive. When it comes to sovereign debt restructurings, his approach is to get a “reasonable deal” done within 12 to 18 months. “I was involved in a sovereign debt deal with Peru in the mid-1990s. And we got a consensual deal that was worth over 125 cents on a US dollar,” he remembers.
“I believe the holdouts in the legal battle got slightly more, but it took them over a year longer, and I imagine they had to pay significant legal fees.”
Gramercy is still a relatively small boutique, with just seven emerging market portfolio managers on staff. As a house, its focus is on three investment areas across emerging markets: about $500m is invested in EM debt, another $500m in equities and the roughly $2.3bn remainder in alternative strategies, which mainly include opportunistic credit and distressed debt investments.
Over the course of his career, Mr Koenigsberger says that emerging markets have “come out of the emergency room” and become “a much more important part of portfolios”.
And in this new year, the importance of emerging market sovereign debt remains pivotal, given that 10-year US Treasury bonds still throw up yields of less than 2 per cent while long-term sovereign debt issued by Argentina and Venezuela offers yields of more than 11 per cent, he claims. “People always thought of US fixed income as a safe part of their portfolios, but it isn’t so safe,” he advises. “If the yields on US treasuries widen by 100 basis points from 175 basis points to 275 basis points, that represents a big capital loss for US investors.”
Mr Koenigsberger says he also thinks fears about Argentina and other EM governments’ inability to meet debt payments are overblown for the most part.
“When you buy EM debt, the call you’re making is not so much on the medium to long-term prospects of an economy but more a call on credit being oversold,” he argues.
Some of Gramercy’s clients are pension funds hoping to achieve annualised returns of 7 to 8 per cent. Mr Koenigsberger says most remain satisfied with the higher EM allocations in their portfolios.
“It’s clear that emerging markets with their large populations and stronger economies have indeed emerged,” he concludes. “We can build and also protect portfolios with higher returns that are less correlated to mainstream markets and will help to protect capital in case of a shock event in the markets.”
Assets under management
London, Hong Kong, Singapore, Mexico
Number of employees
University of California, San Diego (BA hons in Latin American political science and history and economics)
University of Pennsylvania (MA in International studies)
Vice-president, CR-P Associates
Vice-president, Merrill Lynch, Pierce, Fenner & Smith
Senior vice-president, Lehman Brothers
Founder, chief investment officer and managing partner, Gramercy
Please don't cut articles from FT.com and redistribute by email or post to the web.
FTfm is the voice of the global fund management industry, providing must-have news and sharp analysis to the world’s top asset managers and professional investors.