Goldman Sachs Begins Selling Some of Controversial Venezuelan Bonds -- 2nd Update

By Matt Wirz and Liz Hoffman Features Dow Jones Newswires

Goldman Sachs Group Inc. has begun offloading some of the $2.8 billion in Venezuelan bonds it acquired in a controversial deal involving the country's central bank, according to people familiar with the matter.

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The Wall Street firm's asset-management arm sold at least $300 million face amount of the debt to a small group of hedge funds in recent days, people familiar with the trades said.

The firm's purchase of the bonds in May drew harsh criticism from Venezuelan opposition leaders, some investors and U.S. Sen. Marco Rubio (R., Fla.) for supplying cash to authoritarian President Nicolás Maduro. He is widely unpopular and has been subject to regular protests in a country suffering food and medicine shortages, spiraling inflation and an economy in near free fall.

Goldman Sachs Asset Management sold the debt to promote trading of the bonds, which the firm hopes will push up prices and legitimize the securities in the eyes of other investors, people familiar with the trades said.

The trades come as Goldman closes its books for the second quarter on Friday, and could justify a higher valuation for the bonds, both in the price bump and by easing the "illiquidity discount" that is often applied to bonds that trade infrequently.

The sale of even a sliver of the firm's holdings shows that some on Wall Street remain eager to trade in Venezuela's high-yielding debt.

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Four or five hedge funds in London and New York bought the bonds of state-owned oil company Petróleos de Venezuela SA, or PdVSA, due in 2022 from Goldman for about 32.5 cents on the dollar, slightly more than the 31 cents the firm paid when it purchased the bonds from Venezuela's central bank in May, according to people familiar with the matter.

Goldman now has company in what has proven to be a controversial investment. In recent weeks, some firm executives have said privately that Goldman's chief mistake wasn't in buying the bonds -- which fund officials felt were a good deal for their investors -- but in going it alone, buying nearly all of the $3 billion issuance. That focused the blowback squarely on Goldman, which is already a lightning rod in the public square, and left it with a shallow market to trade and value the bonds going forward.

Wall Street brokers, including Barclays PLC, Morgan Stanley and Nomura Holdings Inc. quoted the bonds around 34 cents on the dollar Thursday, investors said. The new buyers are hoping prices will soon rise in line with PdVSA bonds that were issued before Mr. Maduro became president in 2013 and trade around 40 cents, according to people familiar with matter.

The discount between the bonds due 2022 and PdVSA'S pre-existing debt partly reflects uncertainty about whether the new debt would be treated equally if Venezuela defaults. Opposition lawmakers have threatened to repudiate the debt should they rise to power.

Hedge funds that bought the bonds from Goldman hired lawyers to compare the contracts of the new debt and found them to be virtually identical to those of pre-existing debt, giving the investors confidence that their claims in a default would be the same, the person said.

Investment banks have been courting GSAM for weeks to arrange the trade, anticipating the firm's need to create a market for the bonds. Sam Finkelstein, the firm's head of emerging markets, selected the U.K.-based broker Liquidity Finance because of his relationship with the firm, according to a person familiar with the matter.

Liquidity Finance in 2013 hired Goldman's then-head of Latin America credit trading, Robert MacDonald, according to its website.

An official for Liquidity Finance said the firm declined to comment.

Goldman and the new buyers of the debt are betting a regime change in Venezuela could lift bond prices even if the country defaults. But so far more traditional institutional investors are steering clear of the debt.

Write to Matt Wirz at matthieu.wirz@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

June 30, 2017 17:40 ET (21:40 GMT)