Posted by on May 30, 2017 2:50 pm
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Categories: Americas Blackrock Bond Business BWIC Central Bank of Venezuela China Congress Creditors Crude default Economic policy of the Nicolás Maduro government Economy Economy of New York City Emerging Markets Bond Fund Finance goldman sachs Goldman Sachs Asset Management Harvard University JPM EM Bond Lloyd Blankfein Maduro government Maduro's government National Assembly national government Nicolás Maduro Nicolas Maduro's administration None PDVSA PIMCO Politics Rockefeller Center Subprime mortgage crisis Venezuela Venezuela’s central bank Venezuelan government Wall Street Journal

In late April, the Venezuela opposition slammed attempts by the Maduro regime to liquidate some/all of the nation’s gold in order to buy his crumbling regime some additional time with much needed liquidity.

As we reported then, in a letter sent by National Assembly President and head of the Venezuela opposition to US banks, Julio Borges, the politician wrote that “the national government, through the central bank, is going to try to swap gold held as reserves for dollars to stay in power unconstitutionally. I have the obligation to warn you that by supporting such a gold swap you would be taking actions favoring a government that’s been recognized as dictatorial by the international community.”

Fast forward to this weekend, when the Wall Street Journal reported that Goldman Sachs had bought some $2.8 billion in bonds issued by state oil company PDVSA that mature in 2022, paying 31 cents on the dollar or around $865 million. The price represented a 31% discount to trading Venezuelan securities that mature the same year, and would result in a staggering annual yield of more than 40%.

The purchase came as Maduro’s detractors have been pleading with international financial institutions to avoid any transactions that might help a government accused of human-rights abuses. It also prompted Julio Borges to accuse bank Goldman Sachs 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,” wrote Julio Borges in a letter to Goldman Sachs President Lloyd Blankfein.

“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 letter also said that Congress will open an investigation into the transaction and that he will recommend “to any future democratic government of Venezuela not to recognize or pay these bonds.” Furthermore, on Monday, Venezuela’s opposition parties upped the ante, threatening that a successor government could forgo paying the debt.

“It is apparent Goldman Sachs decided to make a quick buck off the suffering of the Venezuelan people,” Borges said in his public letter to the New York bank’s chief executive, Lloyd Blankfein. “I also intend to recommend to any future democratic government of Venezuela not to recognize or pay on these bonds.”

Of course, there was one particular nuance: Goldman did not buy the bonds from PDVSA directly, but from a third party, as a result no money was transferred directly from Goldman to Venezuela… although there is a “yeah, but” as explained below.

In a statement, Goldman said it bought the securities, which are held in funds and accounts it manages on behalf of clients, from a broker and did not interact with the Venezuelan government. “We recognize that the situation is complex and evolving and that Venezuela is in crisis,” the bank said.

“We agree that life there has to get better, and we made the investment in part because we believe it will.” In other words, while Goldman did not fund Maduro’s government in any way, its “excuse” was that it was was investing for Venezuela’s brighter future. Incidentally, Goldman Sachs Asset Management manages $750 billion of fixed-income investments for mutual funds, pension funds and other investors, about $40 billion of which is dedicated to emerging markets.

Some more details: the so-called PDVSA bonds that Goldman picked up last week had until recently been in the possession of Venezuela’s central bank since they were issued in a private placement in late 2014. It is unclear whom Venezuela sold the bonds to or how many investors held them before reaching Goldman. One thing is clear: Venezuela bonds have been a stellar performer in the JPM EM Bond index:

Furthermore, the WSJ does, however, note that Goldman bought the bonds from London-based brokerage Dinosaur Group, people familiar with the sale said. Dinosaur Chief Executive Glenn Grossman declined to comment. It is also worth noting that the Central Bank of Venezuela’s international reserves jumped $442 million to $10.8 billion on Thursday, the day the bond deal was completed, according to official figures. Furthermore,last week, Oil Minister Nelson Martinez said his government was looking at “all options” to raise money it owes to key allies like Russia and China.

So if Goldman did in fact plan to “fund” Maduro, it did so in a complex scheme using at least one third-party agent with the intention of covering up its tracks.

Or maybe it was just a BWIC that was just too good to pass by. In any case, while this interesting interlude in Venezuela’s otherwise relentless death spiral demonstrates that when it comes to the bond market, governments remains confused about funding mechanics, it does highlight something else more relevant: at least according to Goldman, Venezuela will not stop making payment on its debt any time soon, stiffing creditors – such as Goldman – with defaulted bonds.

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None of this mitigated Borges’ anger, however, and he said the country’s opposition-controlled National Assembly would launch an investigation into the Goldman transaction. He also warned that any future opposition government “would not forget where Goldman Sachs stood when it had to choose between supporting the Maduro dictatorship and democracy for our country.

Meanwhile, large institutional debt investors have been reluctant to pass on the hefty returns because Venezuelan debt forms a significant part of the major bond indexes against which money managers are compared. As a result, the securities are everywhere, including emerging-market debt funds run by Fidelity Investments, BlackRock Inc. T. Rowe Price Group Inc., HSBC Holdings PLC and Pacific Investment Management Co. Representatives for BlackRock, Fidelity, HSBC and Pimco declined to comment.

Speaking to the WSJ, Mike Conelius, portfolio manager for the T. Rowe Price Emerging Markets Bond Fund, which has about 6% of its portfolio in Venezuela, said he believes the country will have a regime change that will bring about an economic recovery—a change he would welcome.

“As unpalatable as holding Venezuela risk may seem, this is precisely the type of time that long-term investors typically want to accumulate exposure,” he said.

Ceasing bond payments would be detrimental to a country that runs almost completely on oil exports, opening crude tankers and foreign assets to seizure by investors looking to recoup their losses. But many fear Mr. Maduro’s populist policies could also lead the country down the path of default.

“Given Venezuela’s intense reliance on imports, disrupting the credit markets with a default is likely to cost the country far more than it saves,” Bulltick Research said in a recent note.

Also according to the WSJ, Ricardo Hausmann, who is a former Venezuelan planning minister and a critic of the Maduro government, last week urged J.P. Morgan Chase & Co. to remove Venezuelan bonds from its benchmark emerging-market debt index. That would permit investors who trade entire asset classes to avoid holding debt issued by a government accused of rights abuses, the Harvard University economist said in an essay published on the website Project Syndicate. J.P. Morgan declined to comment.

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For now the biggest quandary about Venezuela’s funding priorities remains unanswered: why does the insolvent nation still continue to put the needs of its foreign creditors over those of its own population, which has been engaged in daily, and deadly, protests against the government, and where the words “civil war” and “revolution” are uttered increasingly more often.

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