Now that the flood of distressed debt has slowed to a trickle, vulture capitalists are having to look far and wide for their next big score. They say necessity is the mother of invention, and that certainly appears to be the case with Ice Canyon's new investment strategy. Perhaps encouraged by Elliot Capital Management's audacious seizure of an Argentinian naval ship, Ice Canyon wants to go big on defaulted Cuban debt.
Let me put this in perspective for a moment. Ice Canyon chief Nathan Sandler isn't talking about buying current Cuban debt. He's talking about buying ancient Cuban debt (call them Batista Bonds, for want of a better term) which basically suffered default by firing squad. The strategy (I guess) is to hopefully collect if and when Cuba ever normalizes relations with the US.
I'm curious as to what $1 million worth of defaulted Batista Bonds issued in 1958 would be worth today. Thirty-six bucks? Fifty? How would you ever go about collecting on it? Well, we may never know because as yet the US government won't allow him to make the buy (the whole Trading with the Enemy Act or something). He's currently appealing the decision, but it doesn't look good.
I'm fascinated by this particular sector of the market. I knew guys back in the day who picked up defaulted consumer debt for pennies on the dollar and absolutely cleaned up. Now we're seeing bold plays like Elliot's on the sovereign front. All in the name of getting deadbeats to pay, which is a good thing.
I wonder how you get investors to sign off on something like old Cuban debt, though. They have to figure they're going to lose every penny and they're just doing it on a lark. What do you guys think? Is pre-revolution Cuban debt worth anything? Or is this just another hedge fund manager too clever for his own good?
This is fantastic. Canyon's definition of multi-strategy is clearly a bit broader than most funds. I'm always impressed by Canyon, but this is a surprise even from them.
I guess the idea is like buying preferred shares of GSEs: potential losses are limited to your investment, potential upside is many times that. I mean those Cuban bonds are probably being used as historical records as opposed to financial instruments.
I mean the government might honor those bonds. Even for a country with Cuba's finances, paying a HF manager won't break the bank.
Very interesting, any idea what the face value he's trying to buy is?
This is crazy. If I had money in that fund I'd definitely be looking to get out.
However, as someone with no skin in the game I think it's pretty cool. It would be real interesting to see what would happen if they were able to purchase the bonds.
I remember reading a similar story about pre-war Liberian debt being returned at a 2,000%+ rate, so assuming you can stabilize relations with Cuba, I think it's an awesome albeit crazy idea. It's my understanding that the embargo is a bit outdated anyways, especially given the reforms being put in place since Castro's divestiture of power. There's a good chance of it happening too, I think, especially under Sandler's pretense of wanting "a seat at the table."
The only problem is, the defaulted debt is more than 30 years old. While it wouldn't be technically supporting the current government, it represents a Cuba in the 70's and 80's that was at ideological war with the US. I don't think that has much to do with the OFAC's rejection, though. Allowing a hedge fund to reap outsized returns on old Cuban debt but not allowing their citizenry to export consumer goods to the US seems hypocritical at best.
Actually, I'm pretty sure the "older than 30 years" comment was a nice way of saying "previous administration". I don't think he's trying to buy any of Castro's debt, I'm pretty sure it's all Batista's. Which makes it even less collectable to my way of thinking, because even if relations normalize (something of an inevitability at this point) the Cuban government will still disavow the debts incurred by the administration they overthrew. I could be completely wrong, though.
Super interesting! Not along the same lines, but an equally interesting story about David Martinez: http://dealbook.nytimes.com/2012/10/11/in-a-clash-of-two-billionaires-a…
I think you're right there, it's hard to imagine a contemporary regime willfully paying its predecessor's defaulted debt. And why Cuba? I imagine there are plenty of countries with similar opportunities and similar sovereign risk portraits. Leads me to believe these guys know or suspect something we don't.
I get the feeling it's strictly an affinity play. There are so many disaffected Cubans in America who would do anything to get back at the Castro brothers that these guys might be playing on that. Of course that's pretty cynical, but it seems like the easiest pitch in the world. "Hey, I know your family lost everything when they fled Cuba after the revolution, here's an outside chance to get some of it back..."
Good thing there's no one that cynical on Wall Street.
This just hit me, but China owns a ton of US paper. Let's hope the US navy isn't near China when another government credit event hits. They may have to take a few ships as "collateral".
lol strong user-comment correlation?
What right to they have to assets after a default? Surely Cuban courts have jurisdiction over, not only Cuban assets, but also the original Cuban debt.
Imagine if I was a foreign bondholder of an American company that was restructured through Chapter 11 but I didn't agree with the American court ruling that wiped out half of my par value. Would I have the right to seize that company's assets outside of the US (infrastructure, IP, cash, etc... any asset)? What about the off-shore bank accounts?
Any lawyers care to comment on my example? Is it not an appropriate analogy? Does it not show how absurd this situation is?
Another thought...
Anyone who has read Reinhart & Rogoff's excellent "This time it's different" will be aware that most developed and Western countries have defaulted several times since independence. For those who haven't read the book, check out page 30 of their essay here for a nice list. Some of those default were to external debt holders...
What I find uneasy about this discussion isn't just the moral blindness of the idea that a foreign bondholder (of unsecured sovereign debt no less) should have right over sovereign assets, but this fantasy world where creditors feel that they have a right to capital preservation and interest. Creditors have been bailed out too many times in the past 40 years. That's not how capitalism is supposed to work for it to be useful or efficient in allocating capital. It should be you make a dumb loan, you lose your money. Better luck next time... But that's not how American Capitalism seems to work anymore...
The difference (as I see it) is that a sovereign nation (and its government) is a going concern, whereas a bankrupt company is not. In other words, if you've managed to keep your country afloat you should pay your bills. If you run your company into the ground and take the creditors who were dumb enough to loan you money with you then its their tough luck.
Agree with you a thousand percent though that private bailouts in the US are morally bankrupt and every single investor in the major investment banks should have lost every penny in 2008. It won't be long before we crash through the thin ice created by all that moral hazard.
Depends on the governing law of the bonds. If you haven't reached a voting threshold to force me to accept a settlement or have no ability to force a settlement on me at all, I don't have to accept what you offer and my debt will forever remain outstanding until you pay up. Where you have foreign assets, courts in that jurisdiction can grant me your assets as collateral till you pay what you owe me or offer me an acceptable solution.
In your chapter 11 example, the equivalent would be a US debtor not getting the 2/3 votes required to force a plan on dissenting creditors, yet ignoring this outcome and proceeding with the plan regardless. In Argentina, the courts could take the view of "you snooze, you lose" but international jurisdictions will still recognize that creditors claim against the debtor nation.
United States: 0 defaults and/or restructurings since independence.
We must be doing something right...
False. FDR fucked over bond holders, paid them back in dollars when the covenants stipulated gold.
It all comes down to might makes right. The reason other countries wouldn't seize our ships is because we would bomb them into oblivion. If Argentina had half a sack they would declare the seizing of a military craft an act of war and attack Ghana.
But they don't even have a tenth of a sack. Falkland Islands case in point.
Cuba might have more levers to pull since they have friends and allies in more powerful positions. Argentina, not so much.
Interesting that France and Denmark are the only countries that have been independent since before 1000AD. Also hilarious that France defaulted 8 times between 1500 and 1800, many times at the peak of their power, and that one French finance minister said one "should default at least every 100 years in order to restore order." It would be pretty wild if the US took that view today.
Worthless paper. No payouts will happen.
it's not hard to imagine a scenario in the future where these kind of asset seizures result in asymmetric responses... i.e. assassinations, terrorism, mob hits, etc... its easy to see political/diplomatic conflicts even without these kinds of responses.
i don't think the Argentinians or Cuban's have it in them, but i can see other nations or non-state actors going for it... might make an interesting science fiction/hypothetical-future film or short story...
Hate to break it to you, but this is actually done with boring regularity here in France. Rather than strike, workers will take a CEO "hostage" (he'll be locked in his office with porn and a bottle of scotch) until he capitulates to their demand for another 15-minute break or whatever. True story. Happens here all the time.
Eddie,
Kinda related, but not really...have you tried buying recent chapter13 or chapter7 notes on LendingClub? There's not enough datapoints available on how these perform 2-4 months after filing, but I've heard whispers of people getting anything from a few cents to full principal in recoveries.
I know that in cases with assets, a Chapter7 might actually pay off handsomely in certain states. But I dont know much about chapter13 and how often all of the unsecured get completely discharged.
Have you tried your hand at this yet?
I think those bonds would make awesome pieces of art...especially with unclipped coupons.
Would buy for a couple of benjamins
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