US and Cuba: Back to the table

Caribbean Funds

In the mid-1980s, Cuban leader Fidel Castro led a noisy international campaign against the foreign debt burdens of developing countries like his own, blasting them as “unpayable” and as a weapon of extortion wielded by “forces of imperialism” led by the US.

Three decades later, a Cuban government now headed by his younger brother Raúl Castro is not only engaged in a cautious rapprochement with its former enemy Washington, but has also successfully negotiated debt restructuring and forgiveness deals with major sovereign creditors in a move to unlock more international financing.

“I think times are changing,” says Rodrigo Olivares-Caminal, a sovereign debt expert who is trying to persuade the Cubans to go one step further and settle with private commercial creditors owed by the Communist-ruled Caribbean island.

Cuba is estimated to owe to private creditors $6 billion to $8 billion, stemming from loans contracted over decades by Havana with private investors, banks and financiers.

Olivares-Caminal, a professor of finance and banking law at London’s Queen Mary University who has worked as a debt expert for the United Nations and the World Bank, was appointed earlier this year by a group of private Cuba creditors to approach the Havana authorities about a possible settlement.

The group, known as the Cuba ad-hoc London Club creditor committee, and originally comprising of one trust and two funds - Stancroft Trust, Adelante Exotic Debt Fund and CRFI Ltd - holds obligations representing at least $1.2 billion of Cuban debt.

It’s an estimated face value, Olivares-Caminal says. The debt mainly stems from loans Cuba received from non-US private banks in the 1970s and 1980s, before Cuba defaulted in 1986. It also includes some trade credits and commercial debt – no bonds are involved.

Asked what those now holding the paper had paid for it in the secondary market, Olivares-Caminal says he cannot confirm a recent media report that they had paid as little as 1.5 cents on the dollar – however he says he believes the reported figure was excessively low.

Olivares-Caminal says he is seeking other investors, mostly European private banks, to join the committee, while he makes overtures to the Cuban authorities. He has sent letters to a number of official recipients in Cuba, including “at the highest level”, he says, although he declines to reveal who.

“We are working towards finding a way to have an open line of communication,” he adds. The Cubans have not responded so far, he says.

Logical step

Olivares-Caminal, whose experience includes involvement in other Latin American debt renegotiations, including that of Argentina, says it is a “logical step” for Cuba to want to settle with its private creditors “if they want to have access to finance and capital markets, if they want to attract investors”.

Shifting international dynamics affecting old and newer allies of Cuba could also help to nudge the island’s government towards a settlement, he says. Venezuela, which replaced the old Soviet Union as Cuba’s main political ally and economic partner, for the past decade has been supplying the island annually with billions of dollars of oil, payments for the services of Cuban doctors, and other economic subsidies.

But Venezuela’s internal turmoil means it is unlikely to be able to support its Caribbean ally to the same degree in the future. Brazil, another generous source of major investments and government credits for Havana, is also facing its own internal problems, as are China and Russia, both important trade partners of post-Soviet Cuba.

“There is a lot of instability right now among the typical allies of Cuba,” Olivares-Caminal says.

At the same time, the restoration of diplomatic relations with the US, announced by presidents Castro and Barack Obama at the end of 2014, underpins a wider move by the Cuban government to improve its trade and political relations with the Western world, including the settlement of defaulted debts.

“What we have seen is Cuba starting to build bridges with the West,” Olivares-Caminal says.

The upcoming US presidential election has injected an element of uncertainty, although most observers believe Obama’s signature legacy of restoring ties with Cuba will not be reversed.

Gustavo Arnavat, a former US executive director at the Inter-American Development Bank (IDB) under President Obama, says Cuba’s leadership seems keen to keep sources of finance and investment diversified, to avoid again becoming strategically dependent on one partner.

“I think they also continue to have doubts concerning the intentions of the US … especially in light of the upcoming US elections. And so the deals they are cutting with Europeans and others are a further hedge against having to rush into any deals with the US, especially while the US embargo continues in place,” Arnavat says.

Generous debt deals

Cuba’s wary rapprochement with the US still faces obstacles, such as the persistence of US economic sanctions cemented in place by embargo laws and competing claims from both sides for financial compensation for events following the 1959 revolution.

Nevertheless, Havana has moved decisively in recent years to resolve outstanding debt issues with its main non-US creditors.

The most recent example was the deal reached in December with an ad-hoc group of 14 Paris Club sovereign creditors, including France, Britain, Canada and Spain, in which they agreed to forgive $8.5 billion of outstanding payments, on the condition that Cuba pays $2.6 billion in arrears over 18 years.

The settlement with the creditors – which is not a full formal Paris Club accord because it does not involve all 19 members – was hailed as a sign that Cuba was finally moving back toward the international financial community.

French Finance Minister Michel Sapin said the agreement marked “a new era in relations between Cuba and the international financial community”, a point also stressed by Castro in a speech at the end of December, in which he linked the debt settlement to Cuba’s desire to access financing for much-needed investments on the island.

In the last few years, Havana has also achieved advantageous debt renegotiations with other sovereign creditors such as Russia, Mexico and China, involving the forgiveness of tens of billions of dollars of debt.

“It is a very positive cycle for Cuba,” says Jaime Reusche, an analyst at Moody’s. The US-Cuba rapprochement is “crowding in” international interest in Cuba from governments and private investors, he says.

Special treatment?

The agreement with the ad-hoc Paris Club group of nations and the other recent debt deals, Reusche adds, indicates an apparent willingness by sovereign creditors to extend favorable terms to Cuba, evidently in the hope it could lead to new opportunities for their companies and exports in the Cuban market at a time when competition from US rivals is looming.

“There has been very special treatment of Cuba,” Reusche says.

Moody’s latest credit note on Cuba in June maintains its Caa2 rating with a ‘positive’ outlook. It lists among the credit challenges facing Cuba a “limited access to external financing”, along with “high dependence on imported goods, low export prices … leading to balance of payments pressures and lack of data transparency”. Rising foreign currency revenues from a surge in tourists and falling dependence on Venezuela are strengths, the agency says.

Still, the Cuban government might take a different view of the London Club to its attitude towards sovereign creditors, Reusche says. The Cubans might view those holding private Cuba debt bought in secondary markets less positively, as “agents of capitalism”, he says. It is also less clear if a deal with private creditors could lead to immediate fresh funds, as had occurred with sovereign creditors.

Cuba’s deal with Russia, in which Moscow forgave Havana some $30 billion of debt owed from the Soviet era, was linked to the subsequent announcement of multimillion dollar investments by Russian companies in Cuban energy and infrastructure.

“The challenge of the London Club is to make the case that it is in Cuba’s interest,” Reusche says.

‘Not vulture funds’

Olivares-Caminal is keen to distance the creditors he represents from any comparisons with “vulture funds”, the label leveled by some against holdout hedge fund creditors of Argentina who campaigned aggressively for payment for more than a decade.

Those creditors obtained a settlement from Argentina in May only after elections replaced left-wing president Cristina Fernández with the more business-friendly Mauricio Macri.

“It is not the spirit of this group. They want to find a way in which this can be amicably resolved,” Olivares-Caminal says.

The creditors he represents do not want to “suffocate Cuba”, he adds. “They are flexible and open to negotiations. They are interested in contributing to the development of Cuba.”

This means that discussions on the amount of debt and interest owed, as well as recovery values, could include solutions such as debt-equity swaps, offering creditors participation in existing Cuban companies or assets such as hotels, sugar mills and factories, or other opportunities for investment in Cuba’s deteriorated economy, which urgently requires capital, technology and know-how.

“These could be combined with new money options that would make such exchanges even more attractive to the Cubans,” says Arnavat. “I could only imagine that the creditors would want to make those trades before US companies arrive on the island,” he adds.

Emilio Morales, a former Cuban finance sector official who is president of Miami-based consultancy The Havana Consulting Group & TECH LLC, says Cuban sectors like the sugar industry, manufacturing and tourism, which have racked up debts in the past and are in urgent need of upgrading and expansion, are potential areas for offers and opportunity in deals.

“Everything is open and on the table,” Olivares-Caminal says.

Questions over IFI membership

Debt experts say that if Cuba, whose revolutionary government left the International Monetary Fund (IMF) in 1964, joins a major international financial institution once again it would help give a seal of approval that could trigger more capital flows to the island.

“These organizations provide much-needed funding, on significantly better financial terms than Cuba could obtain in the capital markets, as well as technical advice and expertise that will enable Cuba to restructure its economy,” says Arnavat.

The country is not expected to look to the IMF and World Bank any time soon, given the long-held ideological hostility of Cuba’s leaders to these institutions, and the conditionalities that membership would imply.

“The question is whether Cuba is willing to subject itself to the conditions imposed by these financial organizations, especially those in which the US is a member and, as a result, affected by the Helms-Burton legislation [part of the US embargo on Cuba],” says Arnavat.

“The IDB presents a further complication, which is that its charter could be interpreted to mean that Cuba must be an active and participating member of the Organization of American States to qualify for membership, something that the Cubans have made clear to date they are unwilling to do,” he adds.

Arnavat and Olivares-Caminal believe it is more likely Cuba could eventually sign up to the Caracas-based CAF Latin American development bank, which is owned by Latin American and Caribbean countries.

“Because the US is not a member, and there is no OAS membership requirement, the CAF presents fewer restrictions,” Arnavat says.

The Havana Consulting Group’s Morales believes Cuba needs support from the multilateral lenders to be able to tackle the huge infrastructure investments it requires to modernize its economy and cope with the tourism surge underway. “They have no alternative,” he says.

‘Not your everyday debtor’

While Latin American debt renegotiations often shared similarities in the domestic nationalist sentiments they invoke and the risks they pose, Olivares-Caminal acknowledges the Cuban case has its own particularities, and that the Caribbean island, the last one-party communist state in the Western Hemisphere, “should not be rationalized as your everyday debtor”.

Non-US foreign investors who have tried their luck in the Cuban market since Havana allowed a limited economic opening after the collapse of the Soviet Union in 1991 have discovered that politics, or more specifically the Cuban priority of political control, often trumps economic logic in Cuba.

Many investors, tied with Cuban state partners who control the workforce, market access, and decision-making, have complained about difficulties and delays in getting paid. This was particularly notorious at the height of the 2008-2009 global financial crisis, when Cuba for a time froze payments and the accounts of foreign investors, before eventually renegotiating payment schedules.

Olivares-Caminal is realistic, but believes the recent developments, especially the ongoing US-Cuba thaw and the shifting international dynamics, create a favorable environment for obtaining a settlement with Cuba.

“I definitely think there is a window of opportunity,” he says.

He envisages a formal resolution could be achieved in the next 12-18 months. Moody’s Reusche is more cautious, saying the private creditors could face a “long haul”.

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