New U.S.-Cuba relations fuel investor interest

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.

New U.S.-Cuba relations fuel investor interest | Special Coverage |
Reuters (23 May 2009)

http://www.reuters.com/article/reutersEdge/idUSTRE54L5NB20090522?sp=true