A very risky bond deal with a huge yield.
It didn’t take long for sparks to fly after the Wall Street Journal reported on Sunday that, “according to five people familiar with the transaction,” the asset management division of Goldman Sachs had bought Venezuelan bonds with a face value of $2.8 billion from the Central Bank of Venezuela that it had held as part of its international reserves.
The sale of the bonds – issued by state-owned oil company Petróleos de Venezuela S.A. (PDVSA) in 2014 and due in 2022 – was completed on Thursday, according to the sources. That day and on Friday, the central bank’s international reserves jumped by $749 million, to around $10.86 billion, Reuters reported today. According to Reuters’s sources, including one at Goldman – oh my, all these leaks – the negotiations took place via middlemen in Europe.
This cash, as the Wall Street Journal put it, is “a lifeline to President Nicolás Maduro’s embattled government as it scrambles to raise funds in the midst of widening civil unrest.” The Journal describers the economic and social situation the Maduro regime is presiding over this way:
Mr. Maduro’s increasing authoritarianism coupled with critical food and medicine shortages have spawned two months of almost-daily street demonstrations, costing at least 60 lives. The economy is also suffering, having shrunk 27% since 2013. Venezuela is saddled with what the International Monetary Fund estimates will be an inflation rate of 720% this year.
Goldman paid 31 cents on the dollar for the bonds, or about $865 million, according to the Journal, amounting to a 31% discount on other Venezuelan bonds that are currently trading with a maturity date in the same year. And it apparently wasn’t the first time:
The people familiar said the deal is part of the asset manager’s steady increase in Venezuelan holdings. They said Goldman is betting that a change in government could more than double the value of the debt, which trades at deeply discounted rates with yields around 30% due to chronic default fears.
The government is desperately short on foreign currency, to service its foreign-currency debt and to import essentials. So this sale came in handy. But the opposition is not amused.
“Goldman is putting itself on the wrong side of history with this deal,” Angel Alvarado, opposition lawmaker and member of the congressional finance committee, told the Wall Street Journal. “This is a bad decision not just from the ethical, but also from the business perspective,” he said.
On Monday, Julio Borges, president of Venezuela’s Congress, sent a letter to Goldman CEO Lloyd Blankfein, cited by Reuters, accusing Goldman of “aiding and abetting the country’s dictatorial regime”:
“Goldman Sachs’ financial lifeline to the regime will serve to strengthen the brutal repression unleashed against the hundreds of thousands of Venezuelans peacefully protesting for political change in the country.”
“Given the unconstitutional nature of Nicolas Maduro’s administration, its unwillingness to hold democratic elections and its systematic violation of human rights, I am dismayed that Goldman Sachs decided to enter this transaction.”
The Venezuelan Congress would open an investigation into the transaction, he wrote. He would also recommend “to any future democratic government of Venezuela not to recognize or pay these bonds.”
Goldman’s bet is based on Maduro’s total commitment so far to honor the country’s foreign currency obligations – no matter what the costs, such as not being able to import enough food for the people or equipment and supplies to keep oil production and exports up at its money machine, PDVSA. Venezuela has to pay $4.6 billion to service its debts in 2017, according to the Journal. Doubts have been swirling for years about its ability to do so, and as a consequence, its bonds trade with huge yields. But Venezuela has managed to muddle through so far, such as by mortgaging Citgo Petroleum, its US network of refineries, gas stations, and convenience stores.
As for Goldman, it’s just another unique opportunity to capitalize on highly risky bonds that might soar in value if the bet works out or might get crushed if it doesn’t. The rest, as is so often the case, is irrelevant for Goldman.
Worst-case scenario ahead? Read… Why I think Stocks Won’t Crash Spectacularly but May Zigzag Lower in Agonizing Ups-and-Downs, Possibly for Decades