Bloomberg
If anyone in the US knows the market for defaulted Cuban debt, it’s Leo Guzman.
The walls of his Coral Gables, Florida-based brokerage firm are covered with the remnants of a market that once flourished in the US: There are dozens of original prints of the island’s defaulted sovereign and municipal debt as well as bond and stock certificates of Cuban railroads and sugar mills. He followed the market for three decades, putting on a trade here and there along the way, until it was brought to a halt by legislation that strengthened the US embargo in 1996.
So when Guzman, 68, says that investors’ sudden interest in snapping up the debt for pennies on the dollar is premature, it’s worth listening to.
While the US and Cuba pledged last week to mend relations, spurring speculation that trading in the securities will resume and that the island may seek to restructure its debt, the 18-year-old statute that prevents US citizens from investing in Cuban assets remains intact. And because it can only be lifted by the Republican-controlled Congress, not unilaterally by President Barack Obama, Guzman doesn’t see the market opening up for investors anytime soon.
“Investing could be a complicated issue,” said Guzman, a Cuban immigrant who came to the US two years after Fidel Castro swept to power. His company, Guzman & Co, specialises in institutional brokerage and investment banking. “The move by Obama is largely symbolic. I would think that his chances of getting congressional approval are low and certainly not immediate.”
Hours after Obama’s announcement last week, Marco Rubio, a senator from Florida, said that he and his fellow Republicans would “use every tool” they can to block the re-establishing of ties with the communist island.
At this point, it isn’t just Americans who have been squeezed out of the market. Trading by investors in Europe and the rest of the world has slowed to a trickle as the Obama administration stepped up its crackdown on global financial firms that were found to be violating US sanctions.
Since 2010, trading of defaulted Cuban debt has averaged just $13mn a quarter - equal to about $200,000 per day. That’s down almost 90% from an average $100mn a quarter in 2009, according to data compiled by EMTA from institutions that aren’t subject to US bank regulations.
Just how much of the debt is out there and what price it trades at requires a certain amount of guesswork.
Phillip Blackwood, whose London-based firm EM Quest has held defaulted Cuban bank loans since 2008, said he hasn’t spotted any trades in the securities in about two years. The last he saw, they were priced at about 9 cents on the dollar. Because of the US restrictions, Erik Herzfeld said his company opted to value the defaulted debt held in its Cuba-focused Herzfeld Caribbean Basin Fund at zero.
The Obama push is “certainly positive but it’s not a game- changer,” Blackwood, whose firm advises Copenhagen-based Sydbank A/S on about $3.2bn of emerging-market debt, said in a telephone interview. While he suspects prices are climbing some already, he said they’ll only really surge in value if the full US sanctions are lifted and if Cuba says it’s seeking to restructure the debt.
There are many defaulted securities out there. There’s pre-Castro-era debt, like a 40-year bond issued in 1937 at an interest rate of 4.5%, and Castro-regime debt, like the bank loans. In July, Russia agreed to write off 90%, or almost $32bn, of Cuba’s Soviet-era debt.
In total, Cuba’s external government debt is about $19bn, according to estimates by Moody’s Investors Service.
Moody’s rates Cuba’s foreign bonds at Caa2, eight levels below investment grade.
Raul Castro, who succeeded his brother as president in 2008, said he welcomed Obama’s decision and urged the US to end a five-decade economic embargo against the Caribbean island. Castro has been working to diversify the economy away from longtime patrons Venezuela and Russia, which have been squeezed by plummeting oil prices.
So far, though, he has said nothing publicly about restructuring defaulted debt or paying $1.9bn in claims by US citizens and companies for expropriated property. Until that happens, trading in the securities will remain muted, according to Oliver Takacs, founder of London-based Terium, which invests in and advises on illiquid assets.
“It depends massively on how the government or domestic players act and if they start trying to find a solution with existing lenders,” Takacs said in a telephone interview from Salzburg, Austria. “Then the liquidity comes back to the market. But before then, I can’t see it frankly.”