Scared Money

The reaction of U.S. investors to Cuban Prime Minister Fidel Castro's power-rate slash a fortnight ago was swift and direct. Two days before the rate cut was announced, an offering of $15 million worth of 6% convertible debentures by American & Foreign Power Co., majority owner of Cuban Electric Co., went on the market and was oversubscribed. Then came Castro's command to reduce rates 21%.

The First Boston Corp. and Lazard Freres & Co., heading a syndicate of in underwriters, figured that the rate slash would have cut revenues by about $16,700,000 in Cuba last year, leaving the subsidiary with a $3,000,000 loss. During the week the $100 par debentures--quickly dubbed "Castro convertibles"--tumbled to $87. Last week American & Foreign Power officials met with the two chief underwriters, agreed that the situation of the company had changed so drastically that, to be fair to investors, the entire debenture offering should be canceled.

At the time he ordered the rate cut, Castro ordered Cuban Electric to go ahead with expansion plans. The question American & Foreign Power is sure to ask the Cubans: With rates cut and development cash hard to come by, where is the money for expansion in Cuba going to come from?

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