Cuba’s battle against a ‘vulture fund’ for Castro-era debt

In the 2000s, a vulture fund brought down an entire country in international markets, denying it access to them for 12 years. It was the case of Argentina against Elliott Management Corporation.

The group of investors won the lawsuit against the Latin American country after the 2002 default and even seized the Libertad frigate in 2012.

Its founder, American Paul Singer, rejected the proposal to restructure the debt and managed to get the Argentine state to pay him US$1.3 billion for bonds he bought for US$40 million during the economic crisis.

Cuba is now facing a similar scenario after the CRF1 Ltd fund has sued the country and its central bank in the London courts.

The venture capital fund, established in 2009 in the Cayman Islands, is demanding payment of a debt of more than US$78 million for two loans and their interest that were originally granted to the island country by European banks in the 1980s.

That is, more than three decades ago.

Originally, this trade credit was granted in German marks (a currency that no longer exists) to a government still led by Fidel Castro.

CRF launched the claim almost three years ago, after Havana rejected a debt write-off made by the fund and some other bondholders in 2018.

The write-off is a portion of a debt that the creditor renounces in order to ensure the collection of the rest. But the Cuban government did not accept.

The Central Bank of Cuba (BNC) said in a statement that it does not recognize CRF as a creditor.

“CRF is not a creditor of the BNC or of Cuba and never has been,” said the institution’s superintendent.

The trial is expected to last eight days.

If Cuba loses, experts say, it could cost the island nation billions in back payments to other entities and, in the worst case, lead to the seizure of government-owned assets such as oil tankers and incoming wire transfers.

The case is being closely watched by other creditors who in total are trying to recover US$7 billion worth of loans from Havana.

“We are still open to talking to the other side, even at this late stage of the case,” CRF chairman David Charters told Reuters.

According to the World Bank, Cuba’s gross domestic product in 2020 was $107 billion, slightly more than New York City’s budget, according to CNBC calculations.

Investors, dubbed “vulture funds” by Cuba’s central bank, typically buy portfolios of distressed or defaulted debt and then sue the debtor in international courts to get paid in full.

“In general they are private equity funds, venture capital, which what they do is buy debt that is damaged and for that reason they pay less. When the matter goes well, they are super profitable operations,” Manuel Romera, director of the Fund, explains to BBC Mundo financial sector at IE University.

“They will have paid something relatively low for it. They buy the debt at auction price. The bank that gave the loan in the first instance recovers a part without getting into an international arbitration process and for its part the vulture fund, which keeps the collection rights and lawsuits to the country, probably double or triple their initial costs,” he adds.

The Cuban authorities believe that CRF did not legally acquire the Cuban debt and that the operation does not appear in the institution’s records.

The amount of what CFR allegedly paid for that portfolio of debt has not been disclosed.

“The key is that when the operation is badly damaged and there is a great improbability of collection, less is paid than when the debts are easy to collect,” says Romera.

“The term vulture fund is a very derogatory way of calling them. Actually, the proper term to designate them would be private equity funds. A well-managed fund of this type is enormously profitable because you pay very little for a debt for which, if you recover it, it charges a lot in a very short time,” he says.

The Financial Management professor also points out that “normally what the vulture funds have is a very powerful staff of lawyers who know how to sue very well. You have to be very good” to work in this type of entity.

“The best-known vulture funds in Spain are Blackstone, Apollo, Lone Star and Cerberus. They are the four most active, especially in the part of bank portfolios.”

This is not the first time that Cuba has been involved in a debt-related situation.

In 2015, Havana reached an agreement with the Paris Club members of creditor countries whereby approximately three quarters of its debt was cancelled.

But by not having dealt with its trade creditors in the so-called London Club, the country remains locked out of international capital markets.

The trial in London will put more pressure on the island after the covid pandemic and that its main allies and partners worldwide -such as Venezuela or China- are going through economic turmoil as well.

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