Eric St. Cyr, CEO of Cayman Islands-based Clover Asset Management, has revealed the existence of “Cuban trade finance assets” in a recent column in the monthly Cayman Islands Journal newspaper.

St. Cyr, a Canadian national with extensive experience in the Canadian and Cayman financial sectors, said these financial instruments — generated by Cuban entities — are payment obligations “such as deferred payment letters of credit, bills of exchange and promissory notes payable at a future date.”

St. Cyr, who says he’s dealt with Cuban trade finance assets for a long time, detailed how foreign investors can buy into transactions involving Cuba’s purchases of various imports such as food.

“[A creditor, such as a European food distributor] will sell its promissory note (or letter of credit, issued by a Cuban bank payable in six months) to a local bank at a discount. Investors buy the paper from the local bank and receive the payment six months down the road from the Cuban corporation.”

According to St. Cyr, certain Canadian and Trinidadian banks “offer this type of investment to their wealthy clients,” with each trade finance asset yielding 8% to 20%; larger returns are a consequence of the greater likelihood of late payment by the Cuban entity.

He also mentioned that the U.S. trade embargo against Cuba weighs heavily in favor of larger interest payments to investors, along with the fact that Cuba traditionally suffers from limited access to foreign capital.

St. Cyr recalled the Cuban cash crisis of 2009, when the island’s banking system blocked international investors’ access to their Havana bank accounts.

At that time, certain foreign-owned entities with day-to-day operations in Cuba, such as Alimentos Río Zaza (a fruit-juice manufacturer which at one time was owned by Chilean investor Max Marambio) were unable to cover their expenses. That seriously put into doubt these investors’ ability to profit in Cuba’s investment climate, resulting in some firms pulling out altogether.

Despite the outrage expressed by some long-standing foreign investors, St. Cyr downplayed that incident.

“The situation lasted for a few months [in 2009], but patient clients received all of their capital and interest, plus a bonus interest for the wait, which was a far better return than what most other investments provided.”

St. Cyr said he’ll become a manager with Sierra Maestra Ltd., a newly launched Cayman Islands registered mutual fund that claims to offer foreign investors “a diversified portfolio of Cuban trade finance assets” with “an attractive rate of return.” 

This brings to mind the London boutique trading firm Exotix Ltd., which was selling illiquid debt generated by the Cuban government when Fidel Castro was in power, going back as far as the late 1980s (see CubaNews, June 2008, page 11).

Much of that debt was generated with the export credit agencies of Spain (Cesce) and France (Coface), as well as similar entities in Canada, Japan, Germany and South Africa.

With such Cuban debt selling at a fraction of its face value through Exotix (say at 15¢), institutional and individual investors holding it have either resold it at a later date (when the value presumably rose by 5-15¢ more on the dollar), or are holding out for the improbable bigger payout, when a future Cuban regime honors the illiquid debt at total face value (done presumably as a pre-condition to re-entering international financial markets).

Certain deep-pocketed individual investors, like British multimillionaire Nicholas Berry, who by 2005 bought as much as €148 million in illiquid Cuban debt, are among those hoping for such a Lotto-like payday under a post-Marxist Cuba.

Unlike the previous Cuba-related debt instruments that Exotix was brokering, the trade finance assets St. Cyr is handling involve ongoing commercial activities with Cuban entities that are still in good standing or whose payments have fallen a few months late. It also represents a financial lifeline for the Cuban government to obtain food, machinery and other badly needed imports, albeit at a higher cost. 

Some observers say that by pitching this Cuba investment vehicle, St. Cyr is ignoring the treacherous environment the country now represents for at least some overseas investors with a stake in its economy. They cite the arrests of entrepreneurs Cy Tokmakjian, Amado Fahkre and Stephen Purvis for alleged unspecified corruption charges.

One European businessman who declined to be identified, warns investors about Cuba’s alleged practice of not honoring the financial obligations of foreign entities that fall out of favor with the regime.

“I don’t doubt that Cuba did some ‘weeding [out]’ to coincide with its payment defaults,” he told CubaNews. “One could even extrapolate that the said ‘weeding [out]’ allowed them to decide which investors they owed too much money to and thus had to eliminate, and also those they could now pay using seized funds from [the] accounts of others.”

That same executive also cited Canada’s Pizza Nova in questioning Cuba’s current business climate. In 1994, the Toronto-based pizza chain launched four restaurants in Havana and Varadero, adding another two later on. It received high ratings from visiting vacationers.

But in 2011, the chain abruptly pulled out of Cuba — a strange occurrence, since business appeared strong and there was no competition from other foreign pizza chains.
Pizza Nova’s owner, Dom Primucci, has refrained from comment, except to say that his departure from Cuba had “nothing to do” with President Raúl Castro’s ongoing anti-corruption drive, which shut down some foreign entities, nor Cuba’s previous cash crunches

The European businessman, though, insists that the Havana regime destroyed Pizza Nova’s profitable Cuban operations.

“It’s pretty clear he did not leave because business was booming,” he noted.  “Nor did he leave because things were going just great. If the Cubans are not honoring or delaying payments to the foreign partner, then they invariably pull the plug.”