By Kejal Vyas and Anatoly Kurmanaev in Caracas, Venezuela and Julie Wernau in New York
Goldman Sachs Group Inc. is on the defensive in Venezuela after
it bought bonds that had been held by the struggling country's
central bank in a transaction the government's opposition decried
as a lifeline to President Nicolás Maduro's embattled
administration.
Goldman's purchase of $2.8 billion in bonds, first reported by
The Wall Street Journal on Sunday, comes as Mr. Maduro's detractors
have recently pleaded with international financial institutions to
avoid any transactions that might help a government accused of
human-rights abuses.
On Monday, they 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," Julio Borges, head of
Venezuela's opposition-controlled congress, said in a 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."
Goldman Sachs's asset-management division last week paid about
$865 million for $2.8 billion worth of bonds -- or 31 cents on the
dollar -- that were issued by state oil company Petróleos de
Venezuela SA in 2014 and mature in 2022, according to people
familiar with the transaction.
The price represents a 31% discount to trading Venezuelan
securities that mature the same year -- and would imply an annual
yield of more than 40%.
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. It didn't negotiate the transaction with the government,
but instead bought the bonds from London-based brokerage Dinosaur
Group, people familiar with the sale said. Dinosaur Chief Executive
Glenn Grossman declined to comment.
Goldman has been steadily increasing its Venezuelan holdings in
recent months, betting that a change in government could more than
double the value of the debt if the country, which sits atop the
world's largest oil reserves, reforms its economy, two of those
familiar with the transaction said.
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.
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.
Two senior Venezuelan government officials confirmed the deal
but declined to give more details. "There was a need for hard
currency," one of them said.
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.
Venezuela's government, faced with low oil prices and the
effects of years of economic mismanagement, is so short of cash
that it has reduced imports by about 70% in the past three years,
leading to a growing humanitarian crisis and spawning two months of
almost-daily street demonstrations that have cost at least 60
lives.
"This government is killing us," said Santa Ojeda, a 50-year-old
homemaker who said she can't find drugs for her diabetic teenage
son. At a recent rally here, she held up a sign that read
"Venezuela Without Insulin S.O.S."
Amid the malaise, which has made hunger a palpable concern for
millions in the oil-rich nation, Mr. Maduro has committed to paying
its financial debts, partly because Venezuela wants to avoid the
risk of angry creditors trying to seize its international oil
shipments in the case of default. That has led some economists to
dub the country's securities "hunger bonds."
The situation also is reminiscent of Romania under dictator
Nicolae Ceausescu, who forced strict food rationing in order to pay
off loans. Generating widespread resentment at a time when
Communist regimes were falling across Eastern Europe, Mr. Ceausescu
eventually was overthrown and executed by firing squad in 1989.
Venezuela will spend nearly as much money this year servicing
its foreign debt -- about $10 billion -- as it will spend on all
non-oil imports, including food and medicine, according to
estimates by Nomura Securities.
Mr. Borges said the country's opposition-controlled National
Assembly -- which he heads -- 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."
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.
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.
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.
Write to Kejal Vyas at kejal.vyas@wsj.com, Anatoly Kurmanaev at
Anatoly.kurmanaev@wsj.com and Julie Wernau at
Julie.Wernau@wsj.com
(END) Dow Jones Newswires
May 29, 2017 19:44 ET (23:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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