Interest in Cuban Bonds

New U.S.-Cuba relations fuel investor interest
Fri May 22, 2009 2:59pm EDT

By Manuela Badawy - Analysis

NEW YORK (Reuters) - Investors in high risk assets are setting their sights on Cuban securities now more than ever given the cheap prices and the overtures made by the U.S. government toward the island.

Since U.S. President Barack Obama pledged to recast U.S.-Cuba ties in April, investors in high risk bonds have shown interest in Cuban securities as a means to accessing a market that has been closed to U.S. capital for almost half a century and is ripe for investment.

The extremely illiquid Cuban paper had halved in price to single digits by the end of 2008 when the global economy spiraled down and investors moved their money away from risky markets into safe-haven assets.

Thus, with Cuban assets valued at around 8 cents to the U.S. dollar high-risk investors see the latest U.S.-Cuba policy move as a reason to get into the Cuban securities market.

"The conditions in the U.S., with the arrival of the Obama administration, and in Cuba, with the move to economic reform in the last three years, are driving people to be very interested in the Cuban story," said Stuart Culverhouse, chief economist at Exotix, a London-based brokerage firm specialized in illiquid bonds and loans of emerging markets.

The U.S. government in April eased restrictions on Cuban American travel, and remittances to Cuba, and on U.S. telecommunications business with the island. But the Obama administration urged Cuba to reciprocate by releasing detained dissidents and allowing greater political freedom.

Experts say the conciliatory gestures need to evolve into a full lifting of the embargo which would help to improve the quality of life for Cubans by opening the country to trade and foreign investment.

"This would also facilitate bilateral trade opportunities with the U.S., an invaluable market for any exporting nation," said Lilly Briger, research associate at the Council on Hemispheric Affairs.

Energy, tourism, infrastructure and mining are just some of the sectors prime for development. Companies from Canada, Europe, China and other countries are already reaping rewards, while U.S. investors are still locked out by the embargo.

If the embargo on trade and investment restrictions were to be lifted by the United States in the coming years, Cuba would see an avalanche of money by creditors and U.S. investors.

In 1986 Cuba stopped servicing bank loans it took in the 1960s and 1970s to finance industrialization. The original principle was around $1 billion, but since the Caribbean government has not paid interest on the defaulted debt, the amount outstanding is already over $3 billion.

These defaulted commercial loans, often referred as London Club debt, are still held by a few European investors who trade on the expectation that Cuba will have to reach an agreement with their external creditors in order to access capital in the future.

"Investors are persuaded by the Cuban story, and if that is so then there will be a recovery on the paper," Culverhouse said adding that the loan used to trade 20 cents on the dollar in 2007.

However, the embargo is likely to remain in place as long as Raul and Fidel Castro stay at the helm of the island or unless they make some drastic changes, said Heather Berkman, Latin America analyst at Eurasia Group in Washington, D.C.

Yet, there is a lot of opportunity in Cuba given that there's so much interest among American investors and that the island has been blocked for so long.