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Goldman's Venezuelan Bond Crisis Reflects Danger of High-Yield Risks

Goldman's Venezuelan Bond Crisis Reflects Danger of High-Yield Risks
(DreamsTime)

By    |   Wednesday, 31 May 2017 08:03 AM

Goldman Sachs Group Inc.’s controversial decision to buy $2.8 billion of Venezuelan bonds for pennies on the dollar illustrate how big investors have been willing to assume increasing levels of risk for high-yield investments.

Bonds issued by Venezuela’s national oil company, Petróleos de Venezuela, or Pdvsa, "have attracted some of world’s most sophisticated investors," the New York Times explained. "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."

Goldman recently bought $2.8 billion worth of PDVSA bonds maturing in 2022, at a 70 percent discount to the market price.

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.

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

Goldman has defended the deal, saying that many other investors, including mutual funds and exchange-traded funds.

Goldman, in a statement late Monday confirming the purchase, said its asset-management arm acquired the bonds "on the secondary market from a broker and did not interact with the Venezuelan government," Reuters reported. "We recognize that the situation is complex and evolving and that Venezuela is in crisis. We agree that life there has to get better, and we made the investment in part because we believe it will."

The New York-based investment bank came under fire from Venezuelan politicians and protesters in New York opposed to Maduro, who said the deal provided the cash-strapped government hundreds of millions of dollars in badly-needed hard currency. The deal, first reported by the Wall Street Journal, made Goldman complicit in alleged human rights abuses under the government, they said.

"As hard as it may try, Goldman Sachs ... cannot put lipstick on this pig of a deal for Venezuelans," Borges said.

The opposition-led National Assembly later on Tuesday voted to ask the U.S. Congress to investigate the deal, which they called immoral, opaque, and hypocritical given the socialist government's anti-Wall Street rhetoric.

Goldman shares fell nearly 2 percent on Tuesday and were the biggest drag on the Dow Jones Industrial Average, which fell 0.24 percent.

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, the New York Times explained.

“There is a lot of interest in this trade,” Carlos de Sousa, an economist at Oxford Economics, a research company based in London, told the New York Times. “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, the Times reported.

“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,” the Times explained.

With Venezuela's inefficient state-led economic model struggling under lower oil prices, Maduro's unpopular government has become ever more dependent on financial deals or asset sales to bring in coveted foreign exchange. Venezuela's international reserves rose by $749 million on Thursday and Friday, reaching around $10.86 billion, according to the central bank.

In New York, about two dozen protesters chanting "Shame on you Goldman Sachs" picketed outside of Goldman's headquarters in lower Manhattan on Tuesday afternoon.

"By giving $900 million to a dictatorship, they are funding a systematic human rights violator, they are funding immorality and for Maduro to stay in power while he keeps killing people," said Eduardo Lugo, 23, a Venezuelan attending college in New York and a leader of the protest.

Another protest was planned for Miami, home to a large community of Venezuelans who have fled the country's economy crisis, on Thursday.

In Venezuela, Maduro's critics have for two months staged street protests, which have left nearly 60 people dead, to demand he hold early elections. Maduro says the protests are a violent effort to overthrow his government, and insists the country is the victim of an "economic war" supported by Washington.

Meanwhile, emerging market bond market participants familiar with Venezuelan debt said there was no effective secondary market for the bonds in question, which were first issued by the state-owned oil company PDVSA in 2014 and held entirely by the country's central bank until recently.

Goldman paid 31 cents on the dollar for the bonds, which mature in October 2022, Borges' letter said. At that price, the bonds would yield more than 40 percent compared with their stated coupon of 6 percent.

Goldman acquired the bonds from Dinosaur Financial Group, two sources familiar with deal told Reuters. A person answering the phone at Dinosaur's New York office said the firm had no comment on the matter.

Opposition lawmakers said they wanted to investigate intermediaries in the deal.

"We're going to put a magnifying glass on this financial middleman. This small company called Dinosaur, who is behind it, what power does it have?" said lawmaker Carlos Valero before the vote.

One U.S. broker deeply involved in trading Venezuelan securities told Thomson Reuters IFR that fair value for the bonds should be around 44 cents to 46 cents on the dollar, based on where other bonds issued by PDVSA and the Venezuelan government were trading on Tuesday.

The broker said he did not expect the bonds to trade unless Goldman chose to sell them. At $2.8 billion of face value, the firm now owns the vast majority of that series of bonds originally issued by PDVSA, which totaled around $3 billion.

(Newsmax wires services contributed to this report).

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Goldman Sachs Group Inc.'s controversial decision to buy $2.8 billion of Venezuelan bonds for pennies on the dollar illustrate how big investors have been willing to assume increasing levels of risk for high-yield investments.
Goldman, Sachs, Venezuela, Bond, High, Yield, Risks
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2017-03-31
Wednesday, 31 May 2017 08:03 AM
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