Peruvian guano bonds
A client recently presented several bonds along with a request for an opinion of value. He asked, “Are these bonds for real?” If so, their value could be over $100 million dollars with accrued interest, and could be used as an asset in a corporation or sold for cash.
The bonds were 7% Gold Bonds dated May 21st 1875, without coupons, due November 1st 1880.
The bonds sold were collateralized by the proceeds of the sale of Peruvian Guano. The Bonds were guaranteed by the Peruvian Government and had the signature of the Plenipotentiary of Peru in Washington D.C. and bore the seal with the coat of arms of Peru.
This loan was agreed upon between the Guano Consignment Co. and the Government of Peru in April 1875, to rewrite a former contract between them on which Peru owed monies to the Guano Consignment Company. The government already was about to default on all of its foreign debt. In 1879 a war broke out between Peru and Chile over the rich guano and saltpeter deposits 380 miles south of Lima in the Atacama desert northeast of Antofagasta. The Chileans won and occupied Lima in early 1881. Peru, now in financial ruin, had to cede the Guano region of Tarapaca to Chile, and subsequently was torn by a civil war until 1886. Since the Chilean decree of February 22nd, 1880, guano shipments were allowed and their proceeds should have been made available to redeem outstanding foreign loans. The price of silver, Peru’s most important export commodity started a long decline, which didn’t help the Peruvian governments financial condition. While most of the £-Sterling notes floated in London were paid by the early 1890s, large parts of the two US Dollar loans remained in default.
The answer to the questions was almost as interesting as the history of the Peruvian Guano Bonds (Say “Peruvian Guano Bonds” out loud: It sounds wonderful and mysterious.) According to international law, countries cannot repudiate their debt because a government change has occurred. There is also no statute of limitations per se on debt. Thus, absent any intervening problems, these bonds were good. Unfortunately, in the 1950s, Peru offered a series of different bonds for any and all outstanding bonds upon which the Peruvian government had defaulted. The offer was good until 1975, and, according to the World Court, settled any and all outstanding debt obligations for which the government was either directly responsible, or, as in the case of these bonds for the Guano Consignment Company, responsible as a guarantor. This is an intervening event.
Another obstacle would be the fact that even without and intervening event, a collection action would need to be taken against the Peruvian Government in the World Court. As with all litigation, this would be both expensive and time consuming. The reality is that while the law may be on the side of old bond holders, practice has placed significant obstacles to its enforcement.
