Credit Markets: Investors Bid Up Venezuelan Debt -- WSJ

By Julie Wernau and Kejal Vyas Features Dow Jones Newswires

Despite protests over private Goldman deal, some see way to perhaps avoid default

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Venezuelan bonds rose Tuesday as investors bet that the government could reduce the chances of a near-term default by raising additional capital through private deals like the recent one with a unit of Goldman Sachs Group Inc.

The Wall Street Journal reported Sunday that Goldman Sachs's asset-management division last week paid about $865 million for $2.8 billion of bonds issued by state-owned oil company Petróleos de Venezuela SA and owned by the central bank.

The Venezuelan government hasn't made an international public bond offering in several years since capital markets are essentially closed to it as its economy has shrunk 27% in four years, its oil production has declined rapidly and investors have become increasingly worried about the growing likelihood of default.

But some analysts suggest the government may be able to raise new money through private transactions, like the one with Goldman, that rely on selling existing bonds through the secondary market.

Local state-run and private banks hold about $15.5 billion in debt, according to investment bank Torino Capital. The government has the power to order the banks to turn over their securities to the central bank in exchange for bolivar-denominated notes, a currency considered all but worthless.

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Venezuelan officials could then raise about $5 billion to $6 billion by selling these bonds at a deep discount. This fundraising would be enough to service the country's debt payments for an additional eight months, according to Torino.

"A lot of people have had their eyes on Venezuelan assets, including these bonds," said Francisco Rodriguez, chief economist at Torino Capital. "You find a government that has a need for money, and you find ways to make a deal."

Goldman wasn't the only firm to do a private deal recently that helped the government raise funds. The Venezuelan central bank in April also struck a deal with Fintech Advisory Inc. The government received a loan of around $300 million from the New York-based hedge fund and pledged Venezuelan bonds as collateral, said a person familiar with the deal.

Fintech didn't respond to a request for comment.

In Tuesday's trading, bonds issued by Petróleos de Venezuela, commonly known by its acronym PdVSA, and due in 2022 rose 0.8% to 61.35 cents on the dollar, moving higher despite a drop in crude-oil prices. Other Venezuelan bonds also rallied, traders said.

Firms transacting with Venezuela recently have been able to command very favorable terms. Goldman paid about 31 cents on the dollar for PdVSA bonds issued in 2014 that mature in 2022, according to people familiar with the matter. That represents a 31% discount to other Venezuelan securities that mature in 2022, these people said, and implies an annual yield of more than 40%.

But Goldman's move was met with criticism inside and outside Venezuela. Detractors said Goldman is providing cash to and helping prop up a failed government that has been starving its people. Venezuela's international reserves rose by $749 million last Wednesday and Thursday following the transaction, according to official government figures.

The Venezuela government information ministry didn't respond to a phone call seeking comment.

A small group of protesters gathered outside Goldman's Manhattan headquarters on Tuesday holding signs referring to Venezuelan President Nicolás Maduro that said "Goldman Sachs Supports Maduro's Dictatorship."

Goldman, in a statement Monday, said it bought the securities, which are held in funds and accounts it manages on behalf of clients, from a broker and didn't 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."

The bonds, held by Venezuela's central bank, weren't released to the public after lack of investor interest in bonds of this struggling country.

"Goldman is giving new money to a dictatorial regime that's killing its own people," said Russ Dallen, a managing partner at investment bank Caracas Capital Markets in Venezuela.

The U.S. State Department is trying to persuade countries across the Americas to pressure President Nicolás Maduro into reinstating democratic norms after he tried to dissolve Congress.

U.S. officials also said Venezuela's government may not be able to depend much longer on deals like the one with Goldman Sachs.

"It may get them through the day," a senior U.S. official said Tuesday, "but the longer-term consequences seem to be quite damaging for the institutions as well as for the society."

Other investors are also distancing themselves from investing in the country because of the association it would carry with the Venezuelan government. "We don't want to make a quick buck and take on reputational risk," said Michel Del Buono, managing director at Makena Capital Management, which makes investments on behalf of endowments and has forgone Venezuelan debt.

--Carolyn Cui contributed to this article.

Write to Julie Wernau at Julie.Wernau@wsj.com and Kejal Vyas at kejal.vyas@wsj.com

(END) Dow Jones Newswires

May 31, 2017 02:47 ET (06:47 GMT)