The battle between Cuba and a “vulture fund” over an unpaid debt from the Fidel Castro era

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 default 2002 and was seized by the frigate Libertad in 2012.

Its founder, the American Paul Singer, rejected the proposal to restructure the debt and got the Argentine State will 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 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.

Creditors awaiting the result

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 assetssuch as tankers and incoming wire transfers.

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

“We are still open to talk to the other partyeven at this late stage of the case,” he told Reuters CRF President David Charters.

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.

How did that debt come into the hands of the “vulture funds”?

Investors, called “vulture funds” by the Central Bank of Cuba, normally buy portfolios of distressed or defaulted debt and then they sue the debtor in international courts to be paid in full.

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

“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 rights to collect and demand the country, probably double or triple your startup costs“, Add.

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

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 debts are easy to collect”, Romero specifies.

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

The Financial Management professor also points out that “normally what vulture funds have is a very powerful lawyer template They know how to plead 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”.

More pressure for Havana

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

In 2015, Havana reached a agreement with members of the Paris Club of creditor countries for which approximately three quarters of their debt were cancelled.

But not having dealt with its trade creditors in the so-called London Club, the country remains excluded from international capital markets.

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