Looking for sugar in Cuban debt
14 październik 2005 -
This is more than a quirky exercise. Mr Berry sees a big potential pay-off at the end. He believes that Cuba, one of the last bastions of communism, “will be a dynamic economy one day”. He says: “It represents substantial long-term value.”
He is among a small number of investors who seek out distressed or highly illiquid debt for profit and diversification. Most of these are defaulted syndicated loans that countries, often with politically isolated regimes, either have refused or been unable to service. They take up the most exotic corner in the emerging market debt world and make up only a tiny part of the international bond market.
But, like distressed corporate debt, investments in debt owed by so-called pariah nations – including Cuba, North Korea and Sudan – can be bought for bargain prices and can offer spectacular returns. If these hardline regimes were to come out of the political cold sooner than expected, their debt prices would rise sharply ahead of either debt restructuring or debt-for-equity swaps.
That is a big if, however. While there have been some notable successes in the past, there have also been some dismal failures. Investors taking such a risky and extremely speculative bet can see their investments come to nothing, as was the case with Liberia and Nicaragua.
Vietnam is one example of a success. By the mid-1990s, Hanoi had re-established US diplomatic relations and come to a preliminary agreement with the London Club of private creditors. Over this period, an investment of 4 cents on the dollar surged to more than 100 cents. Serbia, another triumph for investors, went from a price of 5 per cent of face value to about 90 per cent in three years before being restructured into new bonds.
Mr Berry is hoping that Cuba, whose debt has been in default for two decades, will become another Vietnam. Recently, he teamed up with Exotix, the specialist London broker, to securitise the debt he had accumulated in an effort to increase the liquidity – which could lead to stronger demand and higher prices. Even a slight rise would mean a profit for Mr Berry, who picked up the debt for about 10 cents on the dollar.
Repackaging the defaulted bank loans and trade receivables into a special purpose vehicle that can issue certificates – which are tradeable and clearable via Euroclear – also would give access to more investors, who previously were deterred by a complicated settlement process. “We are democratising Cuban debt,” says Mr Berry. Initially, the certificates are to be issued in seven separate tranches to reflect the different underlying loan agreements, denominated in euros, Swiss francs or Japanese yen.
But the initial amount to be securitised is relatively small. According to Exotix, there is about $2bn-$3bn of tradeable Cuban debt out of $12bn-$13bn debt outstanding. It is unclear how much interest there is from other investors, because they also can buy unsecuritised debt. Peter Bartlett, managing director of Exotix, says: “More and more people are becoming interested in the Cuban story.”
Cuba’s economy appears to be in better shape than in 1991 when the end of Soviet assistance caused a collapse. Cuba’s nickel reserves are among the largest in the world, and it produces about 10 per cent of the world’s cobalt. There also may be offshore oil deposits.
However, there is little expectation of a warming of relations with the US, which has a trade embargo on Cuba, and US companies are restricted from doing business with Cuba. The certificates, for instance, cannot be sold into the US. Meanwhile, Cuban President Fidel Castro has strengthened ties with Venezuela and its president, Hugo Chavez, as well as with China. Some investors think this makes it unlikely Cuba’s government will make good its debts.
Investors in North Korean debt, for instance, are still waiting for the pay-off. In 1997, much of North Korea’s debt was securitised. Since then, the price has been as low at 7 cents on the dollar and as high at 60 cents but is now in the 20-21 cents range. “You did have a bullish market back then,” says one banker. “But the market shows no signs of having the same over-exuberance when it comes to these types of assets.”
Still, others argue that North Korean debt prices have looked good on paper, even though there have been no pay-outs. Andrew Chappell, associate director at Exotix, says: “In purchasing non-performing sovereign debt, there is money to be made if the timing and price is right.”
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