The Ambassador in Cuba (Guggenheim) to the Secretary of State

No. 402

Sir: I have the honor to report that negotiations between the Cuban Government and the contractors for the Central Highway (Warren Brothers and the Compañía Cubana de Contratistas) for financing work done or to be done on the Central Highway in the amount of $19,000,000 are about to be completed.

A copy of a memorandum under date of October 14, 1930, containing the terms proposed by the Contractors was handed me by Dr. Fernández, at the suggestion of President Machado. Copies of this memorandum and of a translation thereof will be sent the Department within a few days.28 As yet this Embassy has had no word from Warren Brothers.

It will be recalled that in February, 1930, the Cuban Government authorized the issuance of Special Public Works Gold 5½ per cent Bonds, maturing in 1945, in the amount of $80,000,000, upon the security of the revenues of the Special Public Works Fund established under Law of July 15, 1925; that the Chase National Bank took $40,000,000 of these bonds at 95 per cent of par in payment of Public Works Certificates previously discounted by the Bank and subsequently issued the bonds on the New York market; that the Bank simultaneously opened a credit of $20,000,000 for the continuance of the Public Works Program, the advances under this credit to be secured by the remaining $40,000,000 of bonds; and that the Bank [Page 692]received an option, good to August 8, 1930, to purchase all or any portion of these bonds at 95 per cent of par.

Because of the difficulties encountered in placing the first $40,000,000 of the bonds and because of unfavorable conditions in the New York bond market, the Chase National Bank did not exercise its option under the contract made last February. In the meantime, the $20,000,000 credit has been exhausted, but the Contractors have continued work on the Central Highway. On August 31, 1930, there was due the Contractors for work done the amount of $8,937,331.95, according to figures furnished by the Department of Public Works.

Negotiations with the Chase National Bank were reopened in September, when Mr. Eddy, a Vice President of the Chase Securities Corporation, and Mr. Mudge, attorney for the Corporation, came to Habana. These negotiations, which continued for several weeks, had no result, two propositions submitted by Messrs. Eddy and Mudge being rejected by the Cuban Government. Thereupon the Contractors offered to arrange for the financing of their work.

The essential features of the proposals made by the Contractors are as follows:

The Cuban Government shall at once issue to the Contractors Obligaciones del Tesoro al Portador (payable to bearer), for work done to August 31, 1930, and additional Obligaciones of the same character on October 20, November 20, and December 20, for work done to the end of September, October and November, respectively.
The Obligaciones to be taken at 95 per cent of par and to carry interest at the rate of 5½ per cent per annum.
The Obligaciones to be issued in the total nominal amount of $20,000,000.
The Obligaciones to be secured by
The unissued $40,000,000 Special Public Works Gold Bonds now deposited with the Chase National Bank. (The proposed contract refers to these bonds as subject to a lien in favor of the Bank but provides that they shall not be sold except for the purpose of obtaining cash with which to redeem the new Obligaciones);
The unpledged surplus of the revenues of the Special Public Works Fund for the years 1931-1935, inclusive;
The unpledged surplus of the said revenues for the years 1935–1945, in so far as they may be required to pay in full the principal and interest on the Obligaciones;
The credit of the Cuban Government.
The Contractors not to issue the Obligaciones payable to bearer prior to December 31, 1930.
If the Obligaciones payable to bearer should be retired by payment in cash prior to December 31, 1930, the Contractors shall receive 95¼ per cent of par for them.
If the Government should sell the bonds pledged as security for the Obligaciones, it must apply at least 70 per cent of the proceeds to retirement of the said Obligaciones, being free to dispose of not more than 30 per cent for other purposes, including the payment of interest accruing up to June 30, 1933. If by December 31, 1930, the Government should have made provision for the payment in cash of the Obligaciones al Portador to be issued as above indicated, in payment for work executed up to September 30, 1930, the Contractors agree to accept in payment for work executed after that date 5½ per cent Obligaciones Nominativas (registered obligations) in an amount sufficient to pay the cost of the work executed after September 30, 1930. These Obligaciones Nominativas will be issued in the name of the Contractors and may be negotiated only with two endorsements.
If, on the contrary, the Government should not be able to provide full payment in cash to each Contractor on or before December 31, 1930, for the work done prior to September 30, 1930, Obligaciones Nominativas will not be issued and the Contractors may freely dispose of the Obligaciones al Portador which they may have received and which they may thereafter receive.
The interest due on the Obligaciones for the period ending December 31, 1932, shall be paid on June 30, 1933. If, in the period between the issuance of these obligations to the Contractors and June 30, 1933, the Government should effect any financial operation respecting the $40,000,000 in bonds pledged as security for the payment of these obligations, the Government shall set aside from the 30 per cent corresponding to it the amount necessary for the payment of the entire accumulation of interest due on these obligations up to June 30, 1933. This amount shall be deposited with the fiscal agent immediately upon the conclusion of the sale of the bonds.
The Obligaciones, whether Nominativas or al Portador, to be issued to the Contractors will mature June 30, 1935, or at any interest date prior thereto, if sufficient funds should become available from the sale of the Public Works Bonds. Likewise, the Government may retire these Obligaciones at any time between interest dates at 102 plus accrued interest. The total nominal amount of the Obligaciones that may be issued in accordance with this agreement may not in any case, without previous understanding with the Contractors exceed $20,000,000.

Yesterday (October 21) I had a long conference with the President, which I shall make the subject of a subsequent despatch. In the course of this interview the President brought up the question of the proposed financial arrangement with the Contractors. He stated that, since the Chase National Bank was not prepared to issue any [Page 694]part of the remaining $40,000,000 of Special Public Works Bonds, some other arrangement was urgently required, if the work on the Central Highway were to be completed. I told the President that personally I perceived only one vital objection to the proposed agreement with the Contractors but that it would be necessary for the State Department to pass upon the matter before a definite statement could be given him. The principal objection raised by me was with regard to the right of the Government to apply not more than 70 per cent of the proceeds from the sale of the Special Public Works Bonds, in excess of the $20,000,000 required to retire the outstanding credit of the Chase National Bank, to the payment of the Obligaciones to be taken by the Contractors. This I told him would be tantamount to increasing the total indebtedness secured upon the revenues of the Special Public Works Fund to an amount in excess of the $100,000,000 which had been regarded as the maximum in the discussions of last January and February. The President argued that the revenues available in the period between January 1, 1933, when the amortization of the $20,000,000 of Deferred Public Works Certificates offered in the United States in 1929 will have been virtually completed, and July 1, 1935, when amortization of the Special Public Works Bonds commences, would be more than ample to provide for the Obligaciones to be taken by the Contractors plus the deferred interest payments thereon. I then called his attention to the marked decline in the Public Works revenues in recent months and suggested the need for great caution in issuing additional obligations secured thereon. I stated that my Government would probably reserve judgment with respect to any increase beyond $100,000,000 of the total indebtedness charged upon the Public Works revenues.

I suggest that if the Department perceives no objection in this financing, it would be appropriate for me to address a letter to President Machado in the sense of the following:

In reference to the proposed bases for the financing of the Central Highway operations, set forth in the “Minuta Número Dos”, of October 14, 1930, which was handed me by Doctor Fernández and which you discussed with me when I had the pleasure of visiting you at your finca on October 21, my Government has instructed me to advise you that as the Obligaciones del Tesoro to be issued under the proposed financing appear to be merely substituted, for the present, for one-half of the forty millions of the authorized but unsold Special Public Works Bonds to the sale of which my Government offered no objection, when the latter was brought to its attention last January, my Government will not interpose any objection to this financing. I am directed to say, however, with particular reference to certain provisions of the proposed contract the execution of which might involve the issue of bonds and obligaciones in excess of $100,000,000, that the absence of objection by my Government at this time does not imply the approval of any increase beyond $100,000,000 of the total indebtedness charged upon the Public Works revenues.

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In view of the urgency of this matter, I venture to suggest that the Department instruct me by telegraph with respect to any action which it may desire me to take.

Respectfully yours,

Harry F. Guggenheim
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