Last week, London saw a fierce battle of words and fights in court. Illegally recorded videos, chaotic protests, and testimony from an imprisoned Cuban bank official marked the first week of a high-stakes trial in the UK High Court between Cuba and an investment fund.
According to reports, a UK-based fund has filed a lawsuit against Cuba over unpaid commercial loans totaling tens of millions of dollars from the 1980s, when Fidel Castro was still in power. The debts are so old that some are even marked in German Deutsche Marks, which was replaced by the euro in 2002.
CRF1, formerly the Cuba Recovery Fund, is the owner of more than $1 billion in face value of loans made to Cuba by European banks in the late 1970s and early 1980s; Cuba stopped making payments on these loans in 1986. This is being viewed as a test case by the UK-based fund. If Cuba loses the case, the losses would be in the billions.
The Cuban rebuke
The fund’s representatives repeatedly stated that they did not want to go to court but that it was their “last resort” because the Cuban government had repeatedly refused to negotiate for ten years. Cuba says that the UK based fund is raising an illogical demand as it is a ‘vulture fund’. For the unaware, a vulture fund is a type of investment company that hunts down and purchases securities from troubled investments, such as high-yield bonds that are about to default or are already in default or stocks that are about to go bankrupt.
The idea is to “swoop in” and purchase shares that are perceived to have been oversold at a low price in order to place high-risk but potentially lucrative bets. Cuba’s Central Bank (BNC) in court has stressed that it does not recognize CRF as a creditor.
The Cuban team also argues that the debt was not lawfully transferred or “reassigned” to CFR, which is registered in the Cayman Islands and has focused on technical aspects of Cuban law arguing that CRF does not have the right to sue Cuba based on Cuban law.
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The path forward
The hearings of the case have just started and no one knows as of now what exactly will be the outcome of the hearings. But, it has been recorded in history that investors in Cuba have their money stashed for decades. Despite the nearly 40-year-old defaulted debt of Cuba, there is a precedent for bondholders to have to wait even longer.
American investors are not allowed to own or trade Cuban debt as a result of the U.S. embargo, which frustrates some American managers of frontier-market hedge funds. If Cuba loses the legal battle in court, make no mistake, it must get prepared to pay billions to UK financiers, even if it’s a ‘vulture fund’.
Additionally, there’s a good chance that other cases like this will be brought against Cuba. That will undoubtedly be a major issue for Cuba as more financiers will line up to demand retribution from the country for its appalling actions toward them during the Castro Era; Cuba may be required to pay back more than a billion dollars as a result.
