FG Hemisphere Associates responds to inaccurate and misleading media reports
December 2, 2011
Statement by Peter Grossman, Managing Director, FG Hemisphere Asssociates, LLC
Factually inaccurate and highly sensationalized media reports by a free-lance reporter that have recently appeared concerning an investment by FG Hemisphere Associates (FG) in debt owed by the Democratic Republic of Congo (DRC). I’d like to begin clearing up a number of these factual inaccuracies and to provide some context.
The story is much more complicated than is being portrayed. First of all, we are not seeking $100 million or anything close to it. We have had to sue the DRC because, despite ten years of effort and four written settlement agreements, all of which offered the DRC significant discounts from what was owed, the DRC has never completed any of these settlements after agreeing to them. We’ve been left with no other option but to sue, and when you sue, you obviously sue for what you are owed. So, yes, we are “claiming” 100% of what we are owed – in the lawsuit. But that is not what we have sought from the DRC in our negotiations or have been (and remain) prepared to accept, as the DRC fully knows.
The purchase of these claims by FG is highly beneficial to the country and to the Congolese people, in the following two ways. First, investors into high-risk environments like the DRC need to know that a market exists for their contractual claims if things do not work out. Knowing that that market exists, and that they can obtain at least something for these claims in the worst case scenario, lessens the risks associated with making these investments. Lessening the risk lowers the cost to the country of attracting the investment in the first place.
Even more tangibly and immediately, in the course of trying to resolve these claims, we examine and investigate in detail the commercial dealings of the country. In the case of the DRC, that generally has meant examining the government’s transactions involving its very substantial, natural resources. That activity in turns brings much needed transparency into how the country’s leadership is managing those resources. With our financial means, special expertise and investigative experience, few have done more than FG and other private creditors to bring transparency to how certain countries (for example, Congo-Brazzaville – the "other" Congo) are utilizing their natural resources, a fact recognized and acknowledged by media outlets as diverse as the Sunday Times,
Washington Times and Al Jazeera (
Part 1 and
Part 2).
Regarding the DRC itself, just last month a Member of Parliament in the United Kingdom,
Eric Joyce, alleged (backed by
substantial documentation) that, in the last two years alone, the current administration has “lost” 5.5 billion dollars through "
questionable mining deals" sold through BVI companies whose ownership is hidden. His allegations were backed by the NGO
Global Witness, which had also been
investigating some of the same transactions.
We have been looking into DRC’s natural resource transactions for years. So have a diverse group of other concerned parties including Mr. Joyce, Global Witness, The Carter Center, journalists, creditors and other contractually-aggrieved parties. The ultimate beneficiaries are the Congolese people as the transparency that this effort engenders helps ensure that their natural resources are being utilized for their benefit rather than just for a few at the top (the “1%”, as the current saying goes).
It is healthy for these governments, and vitally important to their citizens, to have independent, third parties from outside the country scrutinizing how these governments manage their country’s resources. This kind of scrutiny can only be done effectively by parties that have the financial means, expertise and motivation to do it and who cannot be intimidated, jailed or worse for asking difficult questions or revealing sensitive information. It is no different than the kind of transparency that we have come to expect of our own governments and the companies in our financial markets. Such transparency only arises because there are parties with a vested interest in the financial activities of these entities, most often creditors, investors and their advisors.
I want to address one or two specific allegations in these stories. First, FG did not seek out DRC claims because the DRC’s debt was about to be extinguished or because it was poor. We were approached to purchase the claim because Energoinvest (the original claim holder) needed liquidity. It had gone into the DRC, built electrical infrastructure worth many tens of millions of dollars, was not paid for its work and now faced potential financial ruin because of its country’s own civil war. Regarding the DRC, we believed that the country was turning a corner politically in 2001. Moreover, while recognizing that they had been poorly managed to date, the country obviously had extraordinary natural resource wealth (the Guardian estimates it at 24 trillion dollars), given which we felt confident that over time we could find some way to work out these claims.
We purchased the claim at a discount, as one would expect given that the claim had not been paid in nearly ten years. There is a market price for non-performing loans from all emerging market countries and we bought this loan at that market price. But it has been portrayed as if that is all we have ever had to invest; far from it. The purchase cost was just the beginning. We have tried to resolve this claim amicably with the DRC for ten years now. Throughout, we have only ever sought a fair and reasonable resolution. We have tried to be extremely flexible in how it might get worked out, including the use of concessions or instalment payments and even the forward sale of electrical power as alternative approaches. All of them would have involved future, purely business-related revenues of the government. All of these proposed solutions were rejected. We have reached agreement in writing on four separate occasions, all of which agreements gave the DRC a substantial discount on what was owed – far greater discounts than the country accepted in a number of settlements in recent years with other private creditors. The DRC consistently failed to complete these deals after agreeing to them. Only last year, we agreed in writing to an effective discount net of enforcement of 66%. The DRC walked from the deal after we spent weeks trying to close it, at a cost to us of over $400,000 in legal fees.
As a result of these constant settlement failures over ten years, we now have incurred over $20 million in costs. So the idea that we have invested $3 million and we are trying to get $100 million, is a completely mischaracterization of the situation. We are in for much more than $3 million, and we have been (and remain) more than willing to settle for very substantially less than we are owed.
We have also been portrayed as seeking to take monies designated for development and poverty alleviation. That is completely untrue. Regarding any legal actions by us, we are prevented from attaching funds or assets of any kind that are used or designated for aid, development, poverty relief or any other social issues of that kind. Under existing law in effect throughout the world, the legal doctrine known as “sovereign immunity” allows us only to obtain assets or revenues of the DRC that are not allocated for such “sovereign” purposes. That is, in simple terms, we can only attach and collect from government assets or revenues that are being used for “commercial” or “business” purposes. Thus, we cannot possibly, ever (nor would we want to) interfere with aid or funds used for development, poverty relief or any similar purpose.
The impression that these news stories have created is that that is precisely what we are trying to do through our legal action in Jersey. The Jersey action involves funds due to the DRC from the sale of cobalt. Even if FG were to drop this action entirely, the funds released would go to an entity engaged in mining-related activities. It would not go to the DRC treasury or to development or any other similar sovereign purpose.
Putting aside our legal actions, the other complaint made is that companies like FG, by suing the country, indirectly force these countries to divert money saved from debt relief and that “have been earmarked for poverty reduction, education and health”. This misconceives how debt relief operates. There is no requirement under the IMF’s “HIPC” debt relief initiative that debt relief has to be allocated by the country to poverty reduction, development or indeed any particular purpose. The government is free to use these funds any way that it chooses to. In the DRC, that would suggest about 22% of it would be used for such purposes based on its 2011 budget. But the real point is that these are commercial claims that should and can be resolved entirely out of the country’s purely commercial revenues and assets that by their very nature would, under any circumstance, never be applied to development, poverty alleviation or any such social purpose. Indeed, less than one per cent of just what is alleged by Eric Joyce MP to have been “lost” in the last two years alone would have funded entirely the settlement FG reached with the DRC last year.
There is also the notion that we are not offering the same debt relief that other, official and private creditors have offered. This notion is based on the belief that all creditors of the DRC have offered the same, uniform amount of debt relief under the HIPC initiative. In fact, under HIPC itself, the countries are free to work out their arrangements with their private creditors on a voluntary basis on whatever terms they want. The Paris Club has urged the DRC to obtain “comparable” debt relief from its private creditors, but it does not insist upon it and in fact specifically carves out an exception for claims that represent a small portion of the country’s overall indebtedness. In the DRC, ALL of its private creditor debt, collectively, amounts to only 2 ½ percent of the country’s overall external indebtedness. The balance, and vast majority of DRC’s external debt – 97.5% – is debt lent by the Paris Club and other “official” creditors.
Consistent with that approach, within the last three years the DRC has settled with a number of its other, private creditors at 100% of what was owed, to the tune of $120 million dollars, and neither the Paris Club nor the IMF (nor Jubilee or any other NGO) has complained. FG has never asked for 100% of what it is owed in any of its negotiations. Far from it; we have agreed in writing to discounts as high as 66%. So the notion that we are insisting on being paid in full is simply not true. These news reports are basing this idea on what we have claimed in our lawsuits (again, you claim what you are owed). We are not looking or expecting to recover that amount, and have always been prepared to accept much less. Suing the DRC is our last and least preferred resort, after it has failed to complete several deals that it agreed to in writing.
I want to put to rest another misimpression from these reports. It was suggested that FG filed its legal action in Jersey in some devious way in order to evade the UK debt relief legislation. We filed our action in Jersey in March 2009 – a year before the UK law was even passed. Secondly, Jersey is the only “situs” (the legal term for “location”) of the debt we sought to attach. We could not possibly have brought the action in England. A Jersey joint venture company owes this debt to the DRC. As such, we could only ever have proceeded in Jersey.
It was also suggested that “other nations bar collections by ‘vultures’”, and that “vulture funds”, as we have been pejoratively labelled, were “in effect made illegal in the UK last year”. First, the UK is the ONLY country that has passed a law in this area. (Belgium has a law respecting development funds, but that is no different than the sovereign immunity law I mentioned earlier.) Secondly, even under this unique, UK law, it’s entirely “legal” to enforce sovereign claims. What the UK law does is limit what a creditor can recover against certain sovereigns. It does not “bar” these actions.
There is one final, particularly upsetting part of the recent media campaign against FG that I want to address: the ostensible “illegality” that purports to surround the purchase of the claims from Energoinvest. Let me begin by categorically denying that FG itself did anything whatsoever illegal or inappropriate in this purchase. The stories themselves were very careful not to specifically allege that FG actually did anything illegal. Rather, they have tried to imply that something illegal occurred, and that as a result, the purchase is tainted in some way.
At no point since our purchase of the debt over 10 years ago has anyone ever before raised with us any allegations of impropriety regarding the purchase - neither Energoinvest nor any Bosnian authority nor anyone else. No one at the BBC or the Guardian gave us any warning, let alone details, about what was being alleged by certain people within Bosnia, nor did they give us an opportunity to make our own inquiries or respond in any meaningful way.
Based on such research as we have subsequently been able to undertake, first and foremost, FG is not alleged to have done anything wrong whatsoever under Bosnian law or any other law. Secondly, the purchase was vetted, documented and closed for FG by a world class law firm, Shearman and Sterling, which obtained in the process, among other things, a legal opinion from Energoinvest’s own, outside counsel confirming that the transaction was duly authorized by the company and was legal in all respects under Bosnian law. Based on an opinion recently obtained from our own Bosnian counsel, that remains the case. We relied on Shearman and Sterling to ensure that all necessary authorizations had been obtained, and I am sure Shearman and Sterling, among other things, relied in turn on this opinion rendered by Energoinvest’s outside counsel. When dealing with a foreign corporation in a foreign country with laws in a foreign language, there is very little else that one can do to ensure that a transaction has been completed appropriately in all respects under local law.
This is all that I want to put across for now about these highly inflammatory and misleading reports. We are going to approach the BBC and the Guardian through appropriate channels to try to correct some of the more overt errors and misstatements in these reports, but that can be a long process. I wanted to get this response out to the wider public quicker than that so that at least you have some balance and perspective on the story and our responses to it.
I fully understand why these reports would be upsetting to people, none more than me personally, I can assure you. I hope that the above information will be of some help in at least understanding that the situation is neither as simple nor as straightforward as it has been presented. I thank you for taking the time to try to understand and appreciate these complexities and nuances of our business and of this particular situation.
Sincerely,
Peter Grossman
FG Hemisphere Associates, LLC
http://www.fghem.com/
For media inquiries, please contact:
conal.walsh@powerscourt-group.com
FG Hemisphere Associates, LLC
80 Broad Street, Fifth Floor
New York, NY 10004
1 212 687 3930
Email: fgh@fghem.com
Most recently, in "Elliott Management Vs Argentina Round 2: Now It's Personal" we laid out the story of how in the ongoing legal fight between Argentina's prominent distressed debt creditor, and exchange offer holdout, Elliott Management (and to a smaller degree Aurelius), and distressed debtor Argentina, the moving pieces continue in flux, even as various US legal institutions have demanded that Argentina proceed with paying the holdouts despite the Latin American country's vocal prior refusals to do so, and most importantly, the lack of a sovereign payment enforcement mechanism. Last night, the fight escalate one more, and perhaps final time, before the Rubicon is crossed and Argentina either pays Elliott, "or else" the country proves all those who furiously bought up Argentina CDS in the past two weeks correct, and the country redefaults on $24 billion of debt. Because as Reuters reports, late last night, US District Judge Griesa overseeing the Argentina case, ordered the Latin American country to make immediate payment with a deadline for escrow account funding of December 15.
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1) If by some act intermediary banks are in fact forced to follow the injunction, forcing Argentina to make a pro-rata payment to holdouts in order to continue servicing their performing debt, doesn't this mean that it constitutes an event of default on the currently performing debt? If memory serves me correctly, the exchange bond prospectus says that Argentina is not allowed to give holdouts a better offer than what it initially offered everybody. Does this matter at all to the courts?
2. What would the timing look like for an injunction to be enforced, assuming that the Second District affirms whatever Griesa comes back with? This case has dragged on for a while but I wonder if we might see an unravelling within the next year or so.