Mai 31, 2017

Goldman Buys $2.8 Billion Worth of Venezuelan Bonds, and an Uproar Begins

Venezuelan bonds would seem to be an unlikely target for global investors. The country is in near revolt and has barely enough ready cash to feed its people, much less pay the billions of dollars in debt that the government owes to its foreign lenders.


Venezuelan bonds would seem to be an unlikely target for global investors.

The country is in near revolt and has barely enough ready cash to feed its people, much less pay the billions of dollars in debt that the government owes to its foreign lenders.

Yet bonds issued by Venezuela's national oil company, Petróleos de Venezuela, or Pdvsa, have attracted some of world's most sophisticated investors. They are betting that the government will use its dwindling supply of dollars to pay bondholders instead of importing food and medicine for its people.

Now, Goldman Sachs' decision to snap up $2.8 billion worth of Pdvsa bonds maturing in 2022, at a 70 percent discount to the market price, has struck a nerve.

The investment has caused a political uproar in Venezuela, where opposition forces have taken to the streets to protest the autocratic rule of the nation's unpopular president, Nicolás Maduro. Nearly 60 people have died in clashes, mainly between protesters and the police, in Caracas and other cities in recent months.

Julio Borges, the opposition lawmaker who heads the National Assembly, wrote a letter of protest to Lloyd C. Blankfein, the chief executive of Goldman Sachs, accusing the Wall Street firm of looking to make a "quick buck off the suffering of the Venezuelan people."

Goldman Sachs has defended the deal, saying that many other investors, including mutual funds and exchange-traded funds, own the bonds and that its asset management division bought the securities on the secondary market, without interacting with the Venezuelan government.

Nevertheless, the transaction highlights the extent to which investors are willing to take on increasing levels of political and economic risk as they seek high-yielding investments when interest rates still hover near zero.

"There is a lot of interest in this trade," said Carlos de Sousa, an economist at Oxford Economics, a research company based in London. "We are in a low-rate environment, and these are dollar bonds with really high yields."

Among the large holders of Pdvsa bonds are BlackRock, T. Rowe Price, Fidelity, JPMorgan Chase and Ashmore, an emerging market specialist based in London.

But none of those firms carry Goldman's reputation for being politically influential and financially opportunistic — a combination that has made it an easy global punching bag.

At the root of what makes the bonds so attractive to investors, beyond their more than 20 percent returns, is the crucial role played by the Venezuelan oil company in providing foreign exchange to the embattled Maduro government.

While Venezuela has been in economic crisis for more than two years, the surge of people to the streets began after its Supreme Court, which is loyal to Mr. Maduro, tried to dissolve the country's National Assembly in late March. The group of lawmakers, controlled by opposition parties, is considered the only government institution independent of the president.

Mr. Maduro's growing authoritarianism is only the beginning of mounting grievances against Venezuela's ruling leftists, who have governed since President Hugo Chávez took control of the country in 1999.

Falling petroleum prices and years of economic mismanagement when oil revenues were high, have led to triple-digit inflation and left a majority of Venezuelans hardly able to buy sufficient food and other necessities. Even those who can afford meals most days have trouble finding basics like bread, eggs and sugar because of rampant shortages.

Pdvsa brings in about 95 percent of the economy's dollars, so foreign investors believe that the government, even in a worst case, will do all it can to keep the company functioning.

Mr. de Sousa also points out that unlike pure sovereign bonds issued by the government, Pdvsa securities lack legal mechanisms, like collective action clauses, which can help a government negotiate favorable terms with foreign bond holders if it defaults on its debt.

Moreover, investors have noted that in the last year, as Venezuela's economic situation has deteriorated sharply, the government has paid out billions of dollars to foreign investors holding the oil company bonds.

The Pdvsa trade is the latest sign that foreign investors are becoming bolder in investing in the bonds of governments in far-flung locales.

In recent months, higher risk countries such as Turkey, Russia and Brazil have been at the forefront of this trend.

Driving the bet, analysts say, is a view that emerging market economies, regardless of their political and economic challenges, are no longer willing to face the wrath of bond investors by defaulting on their debts.

That is because global investment giants like BlackRock and Goldman have become ready sources of financing, quick to lend billions in dollars or even local currencies, to governments in Africa, Latin America and Asia that in the past relied on banks.

Perhaps no country is as reliant on the kindness of risk-happy foreign bond investors as Venezuela. According to the research firm Exotix, Venezuela has a financing requirement of $17 billion in 2017, yet its central bank reserves are a paltry $10 billion.

As investors see it, if you can buy a Pdvsa bond at 30 cents on the dollar, which also provides a double-digit yield, even if this government — or another for than matter — has to default, the gains made on the investment would be enough to overcome any loss.

While Goldman Sachs defended its trade by saying that it bought the bonds on the open market from a broker, bankers and traders say the money ultimately ended up in Venezuela's treasury because the seller was an institution with ties to the government.

Nonetheless, the threat by Mr. Borges, the opposition leader, that a new government would not make good on these bonds seems unlikely.

That is because these bonds carry covenants aimed at preventing an issuer from favoring one bond holder over another. So paying BlackRock or JP Morgan and not Goldman would open Venezuela to lawsuits.

All of which suggests that, despite the controversy over the Goldman trade, foreign investors will keep lining up to buy Pdvsa bonds.

"This is the only source of foreign currency the government has," said Mr. de Sousa, the Venezuelan expert at Oxford. "So I think the government will continue to sell more of these types of bonds to foreign investors."

Los Angeles Times