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Defaulted Cuban loans appeal to frontier investors

Published:Wednesday | February 4, 2015 | 12:00 AM

Price of loans jumped after diplomatic breakthrough with US

By Madison Marriage

The unexpected strengthening of diplomatic ties between Cuba and the United States (US) in December has increased the appeal of defaulted Cuban loans for frontier market investors.

Kevin Daly, portfolio manager in the emerging market debt team at Aberdeen Asset Management, is considering buying Cuban loans in anticipation of further rapprochement between Cuba and the US.

The price of the loans, which defaulted in 1986, jumped from four cents on the dollar to nine cents after the diplomatic breakthrough between the US and Cuba in December, according to Mr Daly.

The agreement struck between the two countries included the easing of trade, investment and financial services restrictions for US firms, which have been in place since 1961, although trade sanctions remain.

Mr Daly said: "If the US removed the trade sanctions, this would allow US institutions to buy Cuban loans, potentially leading to a big rally. This makes for an interesting story - all of a sudden Cuba is in play.

"We have done this in the past, when, in 2003, we started to buy the untendered Argentine defaulted bonds that we then tendered in the 2005 debt exchange and again in 2006. In both instances we got prices of 50 cents on the dollar.

"Cuba is a much poorer country and you will not get the huge upside that you did with Argentina, but if you bought the loans today and participated in the debt restructuring down the road, you will definitely make money."

Political analysts believe Cuba will push hard to improve its relationship with the US given the growing difficulty for Venezuela, Cuba's main source of external financial help, to continue that support.

Venezuela suffers from a contracting gross domestic product, soaring inflation and a recent 30 per cent drop in the oil price, according to Business Monitor International, the research group.

Mr Daly said: "Clearly, the problems with Venezuela are getting worse, [which] is why the d├ętente with the US is interesting from an investor standpoint - you can actually start to think about buying these bonds.

"If you get removal of US trade sanctions allowing US investors to buy these [loans], they could double to 16 to 20 cents. That is considerable upside."

Dominic Bokor-Ingram, portfolio adviser in the frontier emerging markets team at Charlemagne Capital, agreed: "I would think the chances of [Cuba] paying out in full on the debt from 1986 is remote, but I am sure if you buy it today you will make a lot of money if there is some restructuring."

Mr Bokor-Ingram added that the US trade embargo would need to be lifted before a debt restructuring could be considered. "There is no question that Cuba could be very exciting at some point, but it is a long way from being investable," he said.

Another European investor, who asked to remain anonymous, said that despite the investor excitement around the improving US-Cuba relationship, his company will not buy the loans while the sanctions are in place.

"I am following the situation in the hope that something does change," he said.

(c) The Financial Times Limited 2015