Goldman Sachs Under Fire for Venezuela Bond Deal

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)