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A Cautionary Tale in Cyprus

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A paradise for European tourists, Cyprus has been a never-ending nightmare for depositors and bondholders of local financial institutions. For quite some time, before the island’s financial crisis, Cyprus has marketed itself as an offshore financial center, aka tax haven. Between 2004 and 2010, Cyprus banks grew to 9x gross domestic product, a trait similar to other island banking nations. Scores of international investors placed money into Cyprus bank deposits and purchased securities. Unfortunately, in 2012, Greece defaulted on their bonds; many of these Cypriot financial institutions were major holders of Greek debt, in particular, Laiki Bank and Bank of Cyprus.

The financial results were devastating, with an estimated loss of €4 billion from the Greek debt restructuring. Acting fast, the Cypriot government wanted to raise debt to stabilize their financial system; however, ratings agencies like Moody’s and Standard and Poor’s downgraded Cyprus’s sovereign debt to junk, eliminating the hope of raising capital from debt markets. The troika, commonly known as the group consisting of the European Commission, European Central Bank and International Monetary Fund, agreed to provide Cyprus with €10 billion in funds.

Depositors

However, after going back and forth, the deal seeped out that Laiki Bank would be put down. Insured deposits up to €100,000 and other assets were moved to the Bank of Cyprus. Deposits over €100,000 were effectively confiscated. Deposits over €100,000 in the Bank of Cyprus were subject to a levy that was estimated to be as high as 47.5%. Furthermore, there were capital controls put in place to restrict withdrawals. Funds over €5,000 were frozen.

Bondholders

The bondholders, many Greek investors and other foreign allocators, were negatively affected. In July 2013, the Bank of Cyprus announced that holders of convertible bonds and various types of securities faced conversion to Class D bank shares – a conversion rate of €1 nominal amount for each €1 in principal amount of such subordinated debt claims. To make things worse, the nominal value of Class D shares were reduced to 1/100th of their original value. Foreign investors were composed of the majority of depositors in the two troubled banks. In 2014, private equity firm W.L. Ross, led by billionaire investor Wilbur Ross, invested about €400 million in Bank of Cyprus, getting 19% ownership.

Next Steps

A number of Greek investors, around 100 investors, in July 2014 filed a notice of dispute against the Republic of Cyprus for losses arising from Cyprus’ financial crisis and the subsequent March 2013 bailout of the country. These investors were mostly depositors and bondholders of Laiki Bank and Bank of Cyprus. Sovereign funds that are invested in the bank and have deposits have lost capital. For these depositors and bondholders, the losses were well over €50 million. Grant & Eisenhofer, Kessler Topaz Meltzer & Check and Kyros Law, along with public international law firm Volterra Fietta, have filed the notice of dispute as a group claim on behalf of the Greek investors to recover their losses. For example, Grant & Eisenhofer is representing an institutional in Luxembourg to recover losses.

SWFI First Read, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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Japanese Government Capital Provides Initial Life for Texas Bullet Train

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Dallas-based Texas Central Partners, LLC is the developer of a proposed high-speed rail system, dubbed the Texas Bullet Train, between Dallas and Houston. Project costs are estimated between US$ 12 billion to US$ 15 billion. The developer secured US$ 300 million in project loans from Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development (JOIN) and the Japan Bank for International Cooperation (JBIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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DOJ Investing Tesla Over Musk Comments

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The U.S. Department of Justice (DOJ) is conducting a fraud investigation over Tesla as its CEO Elon Musk made public statements on twitter. This is a criminal probe. In addition, earlier, SWFI reported the U.S. Securities and Exchange Commission (SEC) is conducting a civil inquiry into Elon Musk regarding his statements.

This all surrounds Musk tweeting in August that he was thinking of taking Tesla private and had “funding secured” for the transaction. Both government authorities are seeing if Musk misled investors and violated federal securities laws with his public statements.

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