By Landon Thomas Jr.
Venezuelan bonds would seem to be an unlikely target for global investors. The country is in near revolt and has barely enough cash to feed its people.
Yet bonds issued by Venezuela’s national oil company, Petróleos de Venezuela, or Pdvsa, have attracted some of the world’s most sophisticated investors. They are betting that the government will use its dwindling dollars to pay bondholders instead of importing food and medicine.
Now, Goldman Sachs’ decision to snap up $2.8 billion worth of Pdvsa bonds maturing in 2022, at a 70% 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 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 it bought the securities on the secondary market, without interacting with the Venezuelan government.
The transaction highlights the extent to which investors are willing to take on increasing political and economic risk as they seek high-yielding investments. “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 holders of Pdvsa bonds are BlackRock, T. Rowe Price, Fidelity, JPMorgan Chase and Ashmore, an emerging market specialist based in London.What makes them so attractive, beyond more than 20% returns, is the role played by the Venezuelan oil company in providing foreign exchange to the 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 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 grievances against Venezuela’s ruling leftists, who have governed since President Hugo Chávez took control in 1999. Falling petroleum prices and economic mismanagement have led to triple-digit inflation and left a majority of Venezuelans hardly able to buy necessities. Even those who can afford meals have trouble finding basics like bread, eggs and sugar because of rampant shortages.
Pdvsa brings in about 95% of the economy’s dollars, so investors believe that the government will do all it can to keep the company functioning.
The Pdvsa trade is the latest sign that foreign investors are becoming bolder in investing in government bonds. 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 economies are no longer willing to face the wrath of bond investors by defaulting on debts.
That is because global investment giants like Goldman have become ready sources of financing, quick to lend billions, to governments in Africa, Latin America and Asia that in the past relied on banks.
According to the research firm Exotix, Venezuela has a financing requirement of $17 billion in 2017, yet its central bank reserves are only $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—has to default, the gains made on the investment would be enough to overcome any loss.
The threat by Mr. Borges that a new government would not make good on these bonds seems unlikely. That is because they carry covenants aimed at preventing an issuer from favoring one bond holder over another. So paying BlackRock and not Goldman would open Venezuela to lawsuits. All of which suggests that foreign investors will keep lining up to buy Pdvsa bonds.
“This is the only source of foreign currency the government has,” Mr. de Sousa said. “So I think the government will continue to sell more of these types of bonds to foreign investors.”
Opponents of Goldman’s bond buy argued that it supports Venezuela’s autocratic president, Nicolás Maduro.
Protesters at Goldman Sachs headquarters in New York opposed its purchase of Petróleos de Venezuela bonds.
© 2017 The New York Times