Investing in Cuba: Another Vietnam!?

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As a leading expert on international compliance and trade, attorney Dr. Timothy Ashby has been involved in assisting governments and companies with post-communist transitions since the fall of the Berlin Wall.  Currently the CEO of Federal Regulatory Compliance Services, an international risk mitigation consultancy, and a Counsel for the global law firm SNR Denton, Dr. Ashby’s distinguished career has involved everyone from Ernst & Young to the US Department of Commerce.  In the past, he has assisted in making Costa Rica a top destination for American retirees and developed several successful privatization ventures in Eastern Europe.  Dr. Ashby was also one of the original drafters of NAFTA, and has been deeply involved in Cuba-related activities since 1983.

Nick Slepko:  Tell me about your involvement with Cuba.

Tim Ashby:  I was living on the island of Grenada after the Cuban-supported revolution there in 1979.  During that time, I met a number of Cuban engineers, military and intelligence personnel.  The experience led to my 1987 book, The Bear in the Back Yard, which analyzed Soviet and Cuban strategic activities in the Caribbean and Latin America.  Subsequently, I visited Cuba numerous times, including at an invitation from Cuba’s Ministry of Informatics and Communications (MINIT) to assess the island’s information technology development, which resulted in a Harvard International Review article titled “Silicon Island.”  More recently, I was the general counsel of a company, Siboney, that was founded to purchase US-certified claims from claim owners.  I’ve also published several articles about complications involved in settling the US claims, including a 2009 piece in the University of Miami’s Inter-American Law Review.

Slepko:  So, the company was buying up the claims because it thinks at some point it will be able cash out in the future, or is there some immediate value to the claims? 

Ashby: The idea was that we would accumulate enough claims to do a debt-for-equity swap with the Cuban government.  The Cubans have no money and will never be able to pay out the cash compensation, but they were interested in some kind of swap.  I had extensive conversations with the Cuban government about this.

Slepko:  Did it get swapped, or is it still in negotiation? 

Ashby:  No, we were shut down by the Bush Administration at the behest of former Congressman Lincoln Diaz-Balart.  He thought we were meddling in policy – even though everything we were doing was completely legal.  He got the Treasury Department to declare that we (as well as the sellers) needed licenses to complete the acquisitions.  So, he effectively shut us down when we were in the process of raising a USD 300 million fund to purchase many of the top claims, including those held by Coca-Cola, Foot Locker (which owns the F.W. Woolworth claim), Texaco, Chiquita Brands (NYSE: CQB), and Ford. We were having remarkable success, and were buying at about 28-cents on the dollar, which is the equivalent to distressed debt.  It would have been a pretty good deal if we would have exchanged it at the appraised value.

The interesting thing is that the Cuban government has never repudiated those claims.  They have agreed that they will compensate at some point when they can do so.  We thought it was a good business plan.

We fought Washington for a year when this edict came down.  Even the Obama Administration wouldn’t budge because they are terrified about losing Florida or New Jersey [states with significant Cuban-American constituencies].  So that was it.  The claims were parked offshore and there they sit, and the company is dormant these days.   (Which is unfortunate since an independent asset valuation company based in Europe valued the claims acquired by Siboney at roughly four times the amount paid for them.  Plus, our financial models indicated the real gains would come from the value added...)

Slepko:  What were some of the claims?

Ashby:  Two examples I wrote about were Chase Manhattan Bank [now JPMorgan Chase (NYSE: JPM)] which had a 1960-certified claim of USD 7.5 million for eleven confiscated Cuban branches, the bulk of which claim was for expropriated securities rather than real estate.  The last appraisal of any Chase branches was made in March 1960 and applied only to the Havana office. This appraisal valued the premises at $165,000, and the necessary adjustment to bring the book value for that property to market was stated as $54,800. Fidel Castro declared publicly that bond payments would range from $15 to $45 per acre, equating to just one-fourth of the 1958 value of rural agricultural properties. 

Also in 1960, during one of the largest of the multi-phased expropriations of sugar lands, the United Fruit Company [now Chiquita Brands] informed the Cuban government that it valued its nationalized land at approximately USD 90 million. In reply, the Cuban government asserted that the United Fruit lands were worth instead approximately USD 17 million (in 1960 US dollars). The Cubans therefore deemed the property to be worth approximately 19% or less than one-fifth of the amount claimed by the original owner.

Spain’s USD 350 million in claims were eventually settled for about USD 40 million in 1994.

Incidentally, of the past 43 claims settlement programs concluded by the US government, very few provided compensation for the full certified amount of the confiscated asset – and none paid the full amount of interest.  Also, with the exception of Vietnam, none of the post-1975 international settlement agreements provide for any interest – not even nominal interest.

Slepko:  Why hasn’t the Cuban government repudiated those claims?  What’s their motivation?  Do they not even want to acknowledge that they exist?

Ashby:  I talked to their justice minister about this.  They do believe that they have an obligation under international law and have stated this as official policy.  Also, they are trying to attract foreign direct investment to the island.  They want to reassure investors these days that if the state decides to exercise its right to expropriate that the owners will be compensated under international law.

As you probably know, sovereign states can expropriate the assets of foreigners, but they have to pay compensation.  Ironically, the US expropriated the assets of exiled Tories during the American Revolution and never paid a penny of compensation, even though the Canadian descendants of those people have sought payment up until recently. 

As I wrote in my article, the Cubans did offer compensation years ago, but the US government and corporations reasoned that the Castro regime could not remain in power for long and that accepting a settlement would constitute an accord and satisfaction, which could render the assets irretrievably lost even if the Cuban government was overthrown.  Back then the Cuban government had money (and even offered a billion dollars and a release of all political prisoners through a secret communication through the Swiss ambassador), but they have no money these days.

Slepko:  What about Freeport-McMoRan’s (NYSE: FCX) claims against Sherritt International (TSX: S) [which is operating Freeport’s confiscated assets]?

Ashby:  They are considered off balance sheet assets and Freeport is definitely still sitting on the claim.

Slepko:  So, let’s say both Castros die, and Cuba magically overnight becomes a capitalist democracy.  How do you see a claim like Freeport’s playing out?

Ashby:  First of all, the Cubans would be willing to offer compensation.  As I wrote in my article, the US government actually stated at the time of the confiscations/nationalizations that the Cuban government had the right to take those assets, though they had to pay compensation of some sort.  The question is how much value they would put on those claims.

Talking with Cuban decision-makers, they would like to see large-scale US investment in the country.  I think, and this is my speculation, they will do some sort of deal with Freeport that says, “Look, we can’t give you any money or pay you for the claim, but we’re willing to give you some sort of special concession to come back if you are willing to invest X-millions.”

Slepko:  What will happen with Sherritt?  Will they have to share their Moa [mining] operations with Freeport?

Ashby:  Well, that’s interesting.  There could be some sort of legal battle, in the Cuban or US courts…Of course, if the Cubans negotiate a deal with Freeport and they offer a different asset than the one Sherritt is currently operating, that might be the way that Freeport might avoid taking further action against Sherritt.

Slepko:  Are there other examples with publicly-traded companies around the world where this sort of situation works out?

Ashby:  Yes, in Eastern Europe, where I’ve also worked on privatization and transition issues.  The debt-for-equity swap approach has worked, and is often preferred – the Cubans even favor it.  In other places, transition governments basically say, “Since we can’t pay you cash, we’ll give you this 50-year concession if you’re willing to kick in USD 50 million and hire 500 people then we’ll all consider it cleared and settled.”  I think they’ll do deals like that.

Slepko:  Is it Freeport or Mosaic (NYSE: MOS) that has the 1960s Freeport claim currently? 

Ashby:  I don’t know where the actual claim is held or who actually holds that.  I can tell you this though, some other companies, such as American Sugar (Amstar), have spun off special purpose vehicles simply to hold the claims which makes it easy for them to sell the claim at some point.

[continued in part 2]



Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus