Gramercy closes distressed emerging debt fund to new investment

NEW YORK, Sept 9 Mon Sep 9, 2013 6:11pm EDT

NEW YORK, Sept 9 (Reuters) - Emerging market debt specialist fund Gramercy on July 1 closed a distressed credit fund, having raised just over $305 million, the firm wrote in a letter to investors.

The Gramercy Distressed Opportunity fund II has so far called 40 percent of each limited partners' capital commitment, Gramercy said in a letter dated Sept. 3 that was provided to Reuters.

The firm said that since the first capital call from June 2012 through July 31, the fund's net return is approximately 28.4 percent, which is a cumulative, time-weighted rate of return based on drawn capital.

Gramercy said it has approximately $900 million focused on the distressed debt strategy, which includes the recently closed fund as well as separately managed accounts.

Robert Koenigsberger, the firm's founder, managing partner and chief investment officer, told clients Gramercy believes an environment of rising interest rates will "likely make refinancing for many in the second-tier credits in emerging markets extremely difficult."

"Sometimes, half the opportunity set that we have seen has been classic dislocation. Dislocation in this environment is occurring more often and with more velocity than we've seen in quite some time," Koenigsberger said in a telephone interview.

"And the reason for that is the traditional participants in emerging markets are leaving. And it is not just this quarter," he said.

Koenigsberger noted that weakened European banks, and some U.S. banks that no longer have the flexibility to take higher risks on to their own proprietary accounts, have pulled back from being the traditional providers of secondary market liquidity.

According to the letter, Gramercy's Distressed Opportunity Fund II's top five exposures are: Argentina at 19 percent; Hungary at 8 percent; Mexico at 7 percent; Kazakhstan at 7 percent and the Czech Republic at 5 percent.

Koenigsberger stressed that Gramercy holds a "very diversified" position in Argentina, including restructured sovereign debt as well as corporate and "other" assets.

The Greenwich, Connecticut-based firm faces the risk of a default on the restructured Argentine government bonds it holds if Buenos Aires exhausts the appeals process in U.S. courts and fails to get overturned an order to pay holdout investors from its historic default in 2001.

Argentina insists it will never pay the $1.33 billion award to investors who held out from accepting restructured sovereign debt.

In the portfolio of the recently closed fund are four performing and three defaulted corporate bonds, one performing and three defaulted sovereign bonds, three short-credit positions and a diversified global basket of credit default swaps.

"We continue to see a larger number of rating agency downgrades relative to upgrades, overall deteriorating leverage metrics and the negative effects of softer commodity prices take a toll on cash flow generation and already fragile balance sheets," Koenigsberger said.

"As such, we anticipate an increase in corporate defaults," he added.

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