An update from our investment manager, Sebastiaan Berger
25 November 2020
Cuba and Covid-19
Being amongst the best in class does not always pay off - immediately. Although, Cuba is tackling the Covid-19 pandemic in an exemplary manner and has reopened its international airports and part of its hotel inventory, worldwide travel restrictions and limited flights have resulted in a slow recovery of Cuba’s tourism sector.
Assets and Operations of CEIBA Investments Limited
As a result, the Meliá Varadero and Meliá Las Américas hotels in Varadero, in which CEIBA Investments Limited (“CEIBA” or the “Company”) has an interest remain closed for now, whilst occupancy levels in the Meliá Habana and Sol Palmeras hotels are starting to grow.
Occupancy of the Miramar Trade Center, Havana’s principal office and retail complex, remain steady in the high nineties, with an accumulated net profit so far this year that surpasses the net profit generated in the same period in 2019 (which was its best year ever).
Construction of the Meliá Trinidad Península hotel, a 400 room beachfront resort near Trinidad, Cuba, has continued at a slow pace throughout the year and is now for over 60% completed. The structural works on all main and secondary buildings and swimming pools, as well as roof weatherproofing and electrics are nearly complete. The modification of construction and finance schedules to adapt to changing circumstances are presently being discussed.
As announced previously, in December 2020, the Company expects to formalize its participation in a new multi-phase industrial park to be located in the Special Development Zone of Mariel, Cuba. The Company will acquire a 50% interest in GBM Interinvest Technologies Mariel S.L., which is on track to begin groundworks on the 11.3-hectare plot for the construction of the first four warehouses of the project by the end of the year.
President-elect Joe Biden and Cuba
It now appears highly unlikely that the efforts of President Trump to contest the results of the U.S. election will be successful and as a result it appears all but certain that Joe Biden will be inaugurated as President in January 2020.
President-elect Biden has repeatedly stated that he will ease the U.S. Cuban embargo and will “…promptly reverse the failed Trump policies that have inflicted harm on the Cuban people… “ and ”… immediately restore the Obama policy of engagement…”. We believe that this is good news for Cuba and for the Company.
Notwithstanding the outcome of two Georgia Senate seat elections that will take place on 5 January 2021, which could potentially result in the Republicans maintaining control of the US Senate, giving them the ability to block large parts of President-elect Biden’s legislative agenda, policy changes relating to the easing of the US Cuban embargo should be less affected since most of these changes can be implemented by Executive Order. In my view, the following changes to Cuba policy could be amongst the first to be expected under a new Biden administration:
US Travel to Cuba:
The Biden Administration could: (i) re-authorise all regularly-scheduled commercial flights to international airports in Havana and other international airports in Cuba; (ii) reinstate the general license for individual people-to-people contacts (established under the Obama Administration) permitted as one of the 12 authorized travel categories; (iii) eliminate or modify the so-called Cuba Restricted List and the Cuba Prohibited Accommodation List that presently prohibit persons subject to US jurisdiction from staying at hotels in Cuba; (iv) re-allow US cruise lines to operate in Cuba; (v) re-allow private yacht and plane travel to Cuba; and (vi) re-allow US hotel companies to apply for licenses to operate hotels in Cuba (Marriott managed a Four Points by Sheraton hotel in Havana from 2016 to August 2020 when the Trump Administration ordered its closure).
US Remittances to family members in Cuba:
The Biden Administration could remove the limits on money transfers introduced by the Trump Administration in 2019, and enable Western Union and other providers to transact remittances to Cuba.
US Exports to Cuba:
US companies (or international subsidiaries of US companies) could be permitted to export goods to Cuba, possibly with an emphasis on self-employed private persons and cooperatives;
Corresponding Banking and U-Turn Transactions:
The Biden Administration could authorise direct correspondent banking which would allow US- and Cuba-based financial institutions to maintain accounts and carry out electronic transfers in connection with authorized transactions. In addition, the ability to carry out so-called U-turn transactions (created under the Obama Administration) could be re-established. Basically this allows parties that are not subject to US jurisdiction to use the U.S. financial system (and the US dollar) for transactions related to Cuba that originate and terminate outside the U.S. where no U.S. party is involved.
Revitalising the US Embassy in Havana
The Biden Administration could in the future increase the consular staff of its Embassy in Havana and at a later stage possibly return to full staffing, replace its Charge d ’affairs ad interim and appoint an Ambassador. Diplomatic relations between the US and Cuba were re-established under President Obama in July 2015, but no Ambassador has been appointed since the last Ambassador terminated the mission and left the post on 28 October 1960. The appointment of a US Ambassador to Cuba will need to be confirmed by the US Senate.
Suspension of Title III of the Helms Burton Act
The Biden Administration could suspend once again Title III of the infamous Helms Burton Act, a piece of extraterritorial legislation that came into force under President Trump in April 2019 – after being suspended for 23 years (since adoption of the law in 1996). This legislation has been strongly opposed internationally because it provides US persons the right to launch civil proceedings against both US and non-US persons for using or benefitting from Cuban properties that were confiscated by the Cuban government following Cuba’s revolution. The effectiveness of the legislation has yet to be seen and the strong international opposition, in combination with the fact that many of the defendants in pending court cases are US companies that carried out activities in Cuba that were allowed by the Obama Administration, makes me believe that the Biden Administration will indeed use its authority to suspend same.
That the Biden Administration will “promptly” implement part of the aforementioned changes appears clear, but the question as to what part, when, and how profound these positive changes will be will likely also depend on the attitude of the Cuban government and its willingness to establish constructive bilateral relations and find common ground. And one day, that should also include negotiating a resolution to the issue of the certified claims against Cuba, fully normalizing relationships and ending the US Cuban embargo altogether.
WARNINGS, DISCLAIMERS AND OTHER IMPORTANT INFORMATION
Special Investor Warnings
The U.S. Cuban embargo legislation presently in force prohibits U.S. Persons from investing in, owning or otherwise holding Ordinary Shares in CEIBA Investments Limited. U.S. banks, custodians, depositories and other intermediaries may reject or block payments, the transfer of securities, and the distribution of dividends. Shareholders should ensure that they do not directly or indirectly use U.S. banks, custodians, depositories or other intermediaries, in any capacity, to hold Ordinary Shares in the Company or to receive dividend distributions or other payments.
General: The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future results./Country: Cuba remains subject to a very high degree of control over economic matters by the Cuban government (extensive regulations that impact business and the ownership and operation of assets and properties, such as the hotel and office properties in which the Company is invested). Any changes in government policy may adversely affect the Company or its investments in Cuba./Joint Ventures: All of the Company’s investments in Cuban real estate assets are made through Cuban joint venture companies in which Cuban government entities hold an equity interest. Due to present Cuban government policy, the Company is not able to obtain majority control over these Cuban joint venture companies and therefore does not exercise control over the joint ventures or the underlying assets./Currency: Currency exchange rate fluctuations may have a positive or negative impact on the value of your investment (the Company is exposed to risk associated with currency fluctuations, particularly between Pounds Sterling, Euros, the U.S. Dollar, and potentially the Cuban Convertible Peso (CUC) or the Cuban Peso (CUP))./ Liquidity of investments: All direct investments in Cuban joint venture companies and other foreign investment vehicles are generally illiquid investments./Dependence on tourism: The Company holds significant interests in Cuban joint venture companies that own hotel properties, which are highly dependent on tourism in Cuba (operations and properties are subject to operating risks inherent to the tourism industry)./U.S. Cuban Embargo: U.S. government restrictions relating to Cuba have a negative impact on the Cuban economy and, as a result, also have a negative impact on the business of the Company, as well as its access to capital and finance and limiting the extent to which third parties will deal or transact with the Company./Property investments in Cuba: U.S law penalizes foreign persons allegedly “trafficking” in property formerly owned by U.S. citizens but confiscated by Cuba after the Cuban revolution. Although, due diligence has been carried out and no notice of alleged “trafficking” has been received by the Company, given the broad definitions and terms of the law, there is no certain way for the Company to diligently verify whether any future litigation may arise in respect of a particular property./Projections & Estimations: All projections, estimations, target returns, indicative terms and the like in this document are illustrative and involve significant elements of judgement and analysis using certain assumptions described herein, which assumptions, judgements and analyses may or may not prove to be correct./Discount: Ordinary Shares of the Company may trade at a discount, the market price of the Ordinary Shares may rise or fall rapidly - general movement in local and international stock markets, prevailing and anticipated economic conditions and interest rates in, and investor sentiment towards, Cuba and general economic conditions may all affect the market price of the ZDPs and Shares. To optimise returns, holders of Ordinary Shares may need to hold the shares for the long term./Advice: Investors in the Company are expected to be institutional investors, professional investors, high net worth investors and professionally advised and knowledgeable investors who understand the risks involved in investing in the Company and/or who have received advice from their fund manager or broker regarding investment in the Company.
For limited Professional Use Only
The views expressed in this document should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information is being given only to persons who have received this document directly from Aberdeen Standard Fund Managers Limited (ASFML) and must not be acted or relied upon by persons receiving a copy of this document other than directly from ASFML.
No part of this material may be copied or duplicated in any form or by any means or redistributed without the written consent of ASFML. Issued by Aberdeen Asset Investments Limited, a company authorised and regulated by the Financial Conduct Authority in the United Kingdom. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. CEIBA Investments Limited is listed on the Specialist Fund Segment of the Main Market of the London Stock Exchange. The Company is a registered closed-ended collective investment scheme pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and the Registered Collective Investment Schemes Rules 2015 as issued by the Commission. The AIFM: Under the terms of the Management Agreement, the Company has appointed Aberdeen Standard Fund Managers Limited, with effect from Initial Admission, as the Company’s alternative investment fund manager for the purposes of the AIFM Rules. The AIFM has delegated portfolio management to Aberdeen Asset Investments Limited as Investment Manager.