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

Goldman Buys $2.8 Billion Worth of Venezuelan Bonds, and an Uproar Begins
By LANDON THOMAS Jr.MAY 30, 2017

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."

Nicholas Casey contributed reporting.

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