Very patient investors hope to be paid on Cuban debt

As the United States prepares to raise its flag in front of an embassy in Cuba for the first time since the late 1950s, a small group of investors are watching, hoping to finally get paid after holding Cuban debt in default for 15 years.

Julian Adams of London-based Adelante Asset Management is one such investor – a small group made up mainly British risk takers who bought the debt a decade or more ago and are now closely monitoring political developments on the communist-ruled island. Adams wouldn’t disclose how much he owns, but with debt trading between 8 and 10 cents on the dollar for more than 10 years, he owns a lot.

He likens it to a penny stock: “It trades around 10 cents on the dollar for a very long time. And then when you have the event, which in this case would be the lifting of the embargo, the restructuring of the debt, the economic reforms, then you get an increase in the value of the old debt.”

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Adams believes the debt, which Cuba stopped paying in 1986, could be settled between 27 and 49 cents on the dollar, depending on the methodology used in a final settlement. For a brief period during the Clinton administration, when relations seemed to be improving, it traded at up to 35 cents on the dollar.

Getting paid on a very old, defaulted debt is not unprecedented. Iraqi debt traded between 8 and 10 cents on the dollar for a decade, then settled around 32 cents on the dollar after the US invasion in 2003. Liberian debt traded on 3 cents on the dollar in the 1990s – creditors received 21 cents. on the dollar during a buyback in 2008.

The share of Cuba’s total debt held by Adams and hedge fund investors is impossible to determine, as it is difficult to determine the amount of Cuban debt in the first place. There are many varieties, and its issuance and payment has sometimes been handled in financially unconventional ways.

Moody’s estimated in a June report that Cuba’s total foreign debt exceeds $20 billion, or 24 percent of the rating agency’s estimate for Cuba’s gross domestic product.

“There are many different types of debt. You can buy 25 to 50 different loan agreements, all with different jurisdictions and different clauses,” said emerging market debt specialist Peter Bartlett, who estimates he paid 5 to 10 cents on the dollar for Cuban debt. he has owned it for over 10 years. “It’s like buying good wine or vintage cars, you have to know the specific characteristics of each asset.”

Another debt holder, Nicholas Berry of London-based Stancroft Trust, said he had around $140 million in face value, which he started accumulating 15 “long” years ago. There could be up to five major holders, most of them in London because US investors and companies are barred from trading the debt due to the US embargo against Cuba.

Berry estimated the total face value of Cuba’s outstanding debt from the 1980s at around $1 billion. It is estimated that when overdue interest is included, the amount could reach up to $5 billion. What complicates this calculation is that part of the debt is denominated in a currency that no longer exists, the Deutschemark.

Typically what happens with such debt is that the actual principal is heavily depreciated – in the case of Iraq it has been reduced by 80% – and then investors gain money on accrued overdue interest, or what is known in the restructuring. world as IDPs.

They would not necessarily receive money. There is precedent for payment in the form of a financial instrument that “isn’t worth much right now but can be extremely valuable in the future,” Berry said. For example, so-called GDP warrants have been used in other debt restructuring deals – these are instruments that pay more as GDP increases. Another option is a “debt-for-equity swap,” an arrangement where debt holders receive equity in some sort of infrastructure or investment project that they believe will increase in value.

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Cuba will want to settle the debt one day, Adams said, because “once they do, they regain access to capital markets, which allows them to issue new debt very cheaply. Their overall cost of financing drops significantly, as well as for trade financing and other credits.

He and Berry see themselves not as vulture investors, but as investors interested in capitalizing on a slow reform process on the island.

“We are asked when we go to Havana: ‘Why are you investing in our debt?’ Because they don’t like it, really, they try to forget about it,” Adams said. “And we say, ‘Because there’s nothing else. There’s no stock market, there’s no bonds.’ “So that’s the only way to do it — to get that clear portfolio exposure.”