-- [B] Peru, dodging legal restraint, tries to make coupon payments -- By Felix Salmon, BridgeNews New York--Sept. 13--Peru was swift enough to sidestep the financial trap set by Elliott Associates last week. But even though Peru's Brady bond coupon payments avoided being frozen in a New York bank account by Elliott, the country is not in the clear: It still has to find a way to pay its bondholders their money. Otherwise, it faces default. * * * Peru Finance Minister Carlos Bolona confirmed Wednesday that the country had missed the Sept. 7 coupon payments on its four Brady bonds. In fact, according to sources familiar with the situation, Peru never even sent the money to its fiscal agent, Chase Manhattan Bank. If the money had arrived at Chase, the bank would have been obliged to hand it over to a U.S. federal court. Elliott Associates, a New York investment firm, successfully got a restraint on Sept. 6, the day before the coupon payment was due, preventing Chase from transferring the money to Euroclear, which would have distributed it to bondholders. Under the terms of Peru's Brady bonds, the country is supposed to transfer its coupon payments to Chase the day before the coupon payment is made. When Elliott presented Chase with the court documents, the bank should already have been in possession of the funds, and the New York court could have directed the funds to Elliott. But the money wasn't there. It was still in Peru, and as soon as the Peruvians found out about the court order, they decided not to transfer the coupon payments to New York. Elliott's trap had snapped shut just a little too early. Peru now needs to find out how it can ensure the coupon payments are made into Euroclear without them being attached on the way. Most observers think this will not be too hard; Peru itself, according to Jose Cerritelli, an associate director at Bear Stearns in New York, is pledging to have the coupons paid this week. Peru could persuade Chase Manhattan to pay the funds into Euroclear from an overseas account. The action would keep the funds from being attached, but at the same time could be bad public relations Chase might want to avoid, especially at the beginning of a high-profile takeover of JP Morgan. Another strategy, mentioned by more than one analyst, would be to pay the funds through a non-U.S. bank outside of the United States. Peru might even be able to pay the money directly into Euroclear through a Peruvian bank in Peru. Or Peru could borrow the funds from another bank, and then send the funds to Chase in New York, claiming the funds were not from Peru, but rather belonged to the bank. A variant on that theme has a Peru-owned company, or a municipality such as Lima, making the payment. However Peru gets around the order of attachment, it still needs to deal with Elliott sooner rather than later. The case has been dragging on for years, and has now caused Peru to miss a Brady payment it did not want to miss. "I think the Peruvians would be well advised to settle," says Bear Stearns' Cerritelli. And Finance Minister Carlos Bolona told BridgeNews Wednesday that "we are going to have to sit down and negotiate with (Elliott)." Doing so is going to involve a certain loss of face for President Alberto Fujimori, who has pledged that he would not pay the sum ordered by the court. "Fujimori would rather go into default than pay Elliott Associates," said Pravin Banker, an emerging-markets advisor who has sued Peru in the past. But most other observers see a settlement by the time the next coupon payment date rolls around March 7, at the latest. "If necessary, they'll have to swallow their price and deal with this fund," said Michael Gavin, head of Latin America research at UBS Warburg. "With $60 million at stake they're not going to blow up their credit." End (Back) to felixsalmon.com