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    Very patient investors hope to get paid on Cuban debt

    Very patient investors hope to get paid on Cuban debt
    “It’s like buying fine wine or vintage cars—you need to know the
    specific features of each asset well,” says one debt holder.
    Michelle Caruso-Cabrera | @MCaruso_Cabrera

    As the United States prepares to hoist its flag at an embassy in Cuba
    for the first time since the late 1950s, a small group of investors lies
    in wait, hoping to finally get paid after holding defaulted Cuban debt
    for as long as 15 years.

    Julian Adams, of London-based Adelante Asset Management, is one of those
    investors—a small group of mostly British risk-takers who bought the
    debt a decade ago or longer and are now watching political developments
    on the communist-run island closely. Adams wouldn’t disclose how much he
    owns, but with the debt trading at between 8 and 10 cents on the dollar
    for more than a 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 one has the event, which in this
    case would be the lifting of the embargo, the debt restructuring, the
    economic reforms, then you get a pop in the value of the old debt.”

    Adams believes the debt, which Cuba stopped paying in 1986, could be
    settled for anywhere between 27 cents and 49 cents on the dollar,
    depending on the methodology used in a final settlement. For a brief
    period during the Clinton administration, when it looked as if relations
    were improving, it traded as high 35 cents on the dollar.

    Getting paid on very old, defaulted debt isn’t without precedent. Iraqi
    debt traded for between 8 and 10 cents on the dollar for a decade, and
    then settled for roughly 32 cents on the dollar after the U.S. invasion
    in 2003. Liberian debt traded for 3 cents on the dollar in the
    1990s—creditors received 21 cents on the dollar for it in a 2008 buyback.

    “We get asked when we go to Havana: ‘Why do you invest in our debt?’
    Because they don’t like it, really—they try to forget about it. And we
    say, ‘Because there’s nothing else. There’s no stock market, there’s no
    bonds.'”
    -Julian Adams, Adelante Asset Management

    The portion of Cuba’s total debt owned by Adams and hedge fund investors
    is impossible to pin down, because it’s difficult to ascertain how much
    Cuban debt exists in the first place. It comes in many varieties, and
    its issuance and payment have sometimes been managed in ways that are
    financially unconventional.

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

    “There’s a lot of different types of debt. You can buy 25 to 50
    different loan agreements all with different jurisdictions and
    covenants,” said emerging market debt specialist Peter Bartlett, who
    estimates that he paid 5 to 10 cents on the dollar for Cuban debt he’s
    owned for more than 10 years. “It’s like buying fine wine or vintage
    cars—you need to know the specific features of each asset well.”
    Another holder of the debt, Nicholas Berry of London-based Stancroft
    Trust, said he owns roughly $140 million in face value, which he started
    accumulating 15 “long” years ago. There could be as many as five
    significant holders, most of them in London because U.S. investors and
    firms are prohibited from trading in the debt due to the U.S. embargo
    against Cuba.

    Berry put the total outstanding face value on Cuba’s defaulted debt from
    the 1980s at around $1 billion. It’s estimated that when past-due
    interest is included, the amount could rise to as much as $5 billion.
    Complicating that calculation is that some of the debt is denominated in
    a currency that don’t exist any more—the Deutschemark.

    Generally what happens in the case of such debt is the actual principal
    is written down sharply—in the case of Iraq, it was slashed by 80
    percent—and then investors make money on the accumulated past-due
    interest, or what’s known in the restructuring world as PDI.

    They would not necessarily receive cash. There’s precedent for payment
    in the form of a financial instrument that “isn’t worth a lot right now
    but can be extremely valuable in the future,” Berry said. For example,
    what are known as GDP warrants have been used in other debt
    restructuring deals—those are instruments that pay more as the GDP
    grows. Another option is a “debt for equity swap,” an arrangement under
    which debt holders receive equity in some kind of infrastructure or
    investment project that they believe will grow in value.

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

    Both he and Berry see themselves not as vulture investors, but as
    investors who are interested in capitalizing on a slow-going reform
    process on the island.

    “We get asked when we go to Havana: ‘Why do you invest 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 this is the only way of doing it—of
    getting that clear portfolio exposure.”

    Source: Very patient investors hope to get paid on Cuban debt –
    http://www.cnbc.com/2015/08/11/very-patient-investors-hope-to-get-paid-on-cuban-debt.html