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Wall Street nervous about Venezuela's ‘Hunger Bonds'

Goldman Sachs under fire over Venezuela bond deal - Watch enlarge video

NEW YORK/CARACAS
Petroleumworld 06 12 2017

The Venezuelan debt that Goldman Sachs Group Inc. bought last month may be known as “ hunger bonds ” to many in the international community, but they're earning a different moniker on Wall Street: repudiation bonds.

In the days since that controversial transaction, numerous investors have been approached by brokers putting out initial feelers to gauge their interest in the notes, and almost without exception, they say they're leery about securities that Venezuela's opposition calls illegitimate and says won't be repaid if it takes control of the government.

That they are so quick to bring up this concern marks a major victory for the band of lawmakers spearheaded by National Assembly President Julio Borges, which after being stripped of power by President Nicolas Maduro last year are seeking to wield influence in one of the only ways they can. The politicians say they're trying to keep the government from selling debt at pennies on the dollar and raising unapproved funds that are used to buy weapons to repress protesters. (Outside observers say the initiative also more broadly seeks to deepen the government's cash crunch and expedite its collapse.)

The risk of repudiation seems evident in the price Goldman Sachs Asset Management reportedly paid for the $2.8 billion of bonds from the state oil company PDVSA due in 2022 -- just 31 cents on the dollar, according to the Wall Street Journal. Venezuelan officials seeking cash knew they had to offer a discount because of the risk a future administration could disavow the deal, according to Francisco Rodriguez, the chief economist at Torino Capital.

“I do think that one has to convey to clients that there is a higher repudiation risk for these bonds than for other PDVSA bonds,” he said in an interview.

Investors' willingness to lend is critical for Maduro as he faces daily protests calling for his departure amid chronic shortages of food, medicine and other basic goods. Sixty-seven people have died so far in the clashes and scores more have been injured or thrown in jail. To get the dollars needed to make interest payments and fund import purchases, Maduro has put the country ever more in debt while raising relatively little cash. Lawmakers are concerned he could seek to sell an additional $5 billion of securities held by a state-owned bank or try to monetize the country's $7.6 billion of gold reserves.
In the latest sign of financial stress in Venezuela, the government failed to make a nearly $1 billion loan payment to its ally Russia for previous arms purchases.

Whyy Critics Call Venezuela's Debt ‘Hunger Bonds': QuickTake Q&A

The risks associated with buying the PDVSA bonds -- 90 percent of which are held by Goldman -- aren't reflected in the prices brokers are quoting for the securities, making them unattractive to potential buyers interviewed by Bloomberg. Investors say brokers have been quoting indicative bid prices of about 35 cents on the dollar, while a similar bond that lawmakers haven't threatened to repudiate is available for just a couple cents more.

Adding to investors' concerns is a question of whether they would be entitled to a full recovery in the case of a default or debt restructuring. Their worry is that the next government may try to pass a local bankruptcy law for PDVSA that would cap claims by saying the 2022 bonds were originally issued at a discount. Bondholders would stand to lose if a U.S. bankruptcy court agreed to enforce that petition in the states.

Equal Footing

And then there's the fact that the prospectus for the 2022 bonds hasn't been widely distributed, so questions abound regarding whether the securities are on equal footing with other PDVSA debt.

Despite the curiosity of external brokers, Goldman's asset-management unit hasn't offered any to dealers, according to Andrew Williams, a spokesman for the bank. The bank has defended purchasing the bonds, saying that it didn't deal directly with the government and that it hopes living conditions will improve in Venezuela.

“We have a government willing to hand over the assets of the republic,” said lawmaker Angel Alvarado, a member of the National Assembly's Finance Committee. “It is a government willing to sell anything to stay in power.”

Vice President Tareck El Aissami has said that the government will take legal action against Borges for his attack against Goldman Sachs, which included a public letter to Chief Executive Officer Lloyd Blankfein disavowing the bonds. He's attempting to cut off Venezuela from legal and transparent funding, El Aissami said, according to state-run Telesur.

“Borges is threatening investors so that they don´t come to Venezuela,” he said.

U.S. Law

While the repudiation concern is real, investors aren't sure that a U.S. court would go along with a declaration that the debt was illegal. Moreover, the next administration may decide in the end that it doesn't want to pursue a confrontation with creditors that could hurt its ability to get financing.

Even if repudiation passes “under local law, it is a heavy lift under foreign law,” said Anna Gelpern, a law professor at Georgetown University in Washington.

The issue could come to the fore again in Venezuela in coming weeks. Twenty-year bonds that the government sold late last year to state bank Banco de Venezuela SA and the central bank have also been shopped around. One investor saw the bonds offered for as low as 28 cents. The steep discount is due in part to the fact that the bonds aren't eligible for major international clearing systems, so fewer investors can own them.

The notes were issued two days before the end of last year under a debt program approved by the National Assembly in 2015, when it was still controlled by government allies. Opposition lawmakers have vowed they won't honor the debt if it's resold, saying the original sale was rushed and that reselling the bonds at a sharp discount now would make the country poorer.

“International banks, do you want to partner with criminals?” opposition lawmaker Rafael Guzman said Tuesday during a congressional session

Story by Katia Porzecanski, Christine Jenkins, and Noris Soto from Bloomberg.

bloomberg
06 09 2017

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