In "Mysterious" Bond Sale, Venezuela Issues $5 Billion In Debt To Itself With China As Underwriter

Tyler Durden's picture

While Venezuela CDS suggest the country's default odds remain well over 90%, and its currency on the black market continues to plunge into the abyss of hyperinflation, something odd happened today: Venezuela’s government issued $5 billion in dollar debt for the first time in more than five years, selling bonds in an opaque transaction to the state bank Banco de Venezuela SA and the central bank, Reuters and Bloomberg report. What makes this "unorthodox operation" particularly strange, is that the government is effectively selling debt, and raising dollar funds from itself - it owns both the Banco de Venezuela and the central bank; it is also strange in that the transaction, according to Reuters, does not immediately bring in new funds for the cash-strapped OPEC nation.

State-run Banco de Venezuela bought the dollar-denominated notes issued on December 29, which had a 6.5% coupon and mature in 2036, in local currency at a heavily subsidized exchange rate of 10 bolivars per dollar, according to a Reuters source, meaning there was no net increase in hard currency for state coffers. The country's exchange control system sells dollars at 10 bolivars for preferential goods such as food and medicine and for 672 bolivars for other items. Dollars on the black market currently fetch close to 3,200 bolivars.

A branch of Banco de Venezuela in San Antonio del Tachira, Venezuela

Ever since Venezuela's economy entered into a hyperinflationary tailspin over two years ago, Maduro's government has struggled to borrow abroad because of investor concern that the country could default, sending its market-determined yields soaring and its default odds at almost 100%, which has made borrowing exceptionally expensive.

As a result, the dollar-strapped nation - struggling under triple-digit inflation, Soviet-style product shortages and low oil prices - has been forced over the past several years to reduce imports of essential items including food and medicine to stay current on its foreign debt obligations. As Bloomberg notes, In October, state oil company Petroleos de Venezuela executed a debt swap in which creditors holding $2.8 billion of bonds agreed to extend maturities after weeks of tense negotiations that included what was effectively an ultimatum from Caracas of a financial collapse should creditors hold out.

Maduro says his government is the victim of an international financial blockade and blames the country's problems on an "economic war" led by political adversaries. He says talk of default is a smear campaign against him.

But back to Venezuela's "mysterious" new bond issuance, about which Bloomberg admits that "few details are known" and which might be linked to Chinese lending, according to Francisco Rodriguez, the chief economist at Torino Capital in New York.

“My guess - but it’s just a guess - is that given uncertainty as to whether Venezuela would be able to deliver the oil necessary for repayment, the Chinese may have asked for the loan to be also guaranteed with a bond,” he told Bloomberg by email, adding that he had been expecting a disbursement of $5 billion related to the renewal of a loan from China.

Reuters adds some additional color, noting that Venezuela's first sovereign issue since 2011 was underwritten by China's Haitong Securities, according to two bond traders who had seen preliminary details of the issue. The country, meanwhile, kept the transaction under wraps: an official at the Finance Ministry, which coordinates the country's sovereign bond issues and oversees Banco de Venezuela, said there was no one available to comment.

Adding to the mystery, a central bank official told Reuters she had seen "no evidence of the operation taking place."

So will Venezuela see new funds emerge as a result of this deal? It appears that the answer is yes, if Banco de Venezuela were to sell the notes on the international market, though the total issue would only fetch around $2 billion due to the heavy discounts on Venezuela bonds. Currently, Venezuela's dollar-denominated 2038 bond issue prices near 43 percent of face value, according to Thomson Reuters data.

Meanwhile, bond traders are just as confused as reporters and analysts: Russ Dallen, a managing partner at Caracas Capital, told Bloomberg that "bond markets will likely react with “befuddlement” when they open back up on Tuesday after being closed on Monday for the New Year’s holiday.

“Taking place on Dec. 29 with no approval by the National Assembly and no promulgation notice in the Official Gazette, this smells of some kind of end of the year financial shenanigan from a government that is out of cash and is desperately trying to hide it,” he said in an e-mailed response to questions.

Which is why China's involvement is hardly surprising: recall that the last time Venezuela arranged a direct loan from China was in March of 2015, when a similar number of $5 billion was also floated.  This time it appears that both Caracas and Beijing decided to be even more opaque in how China funds its vassal oil provider, with what likely amounts to nothing more than vendor financing - China funds Venezuela by helping it to issue a few billion in debt, meanwhile it collects tens of billions in crude oil pre-sold at a price that is particularly beneficial to China.

With that assumption in place, we look forward to learning the details of just how China is now funding insolvent supplier sovereigns by the back door, and where else besides Venezuela is this arrangement in place.


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knukles's picture

No biggie.  Fed & Treasury been doin' this for years.
But Goldman'll sure be pissed.  But wait, there's more.  Goldman's already prepared the filings for Venezuela's debtor in possession financing later this year.
Just think of NYC being flooded with fine young ....

JackT's picture

Money for nothing and chicks for free.

CrazyCooter's picture

I bet it works something like this:



VWAndy's picture

 I was gonna post the plate spinning video.

silverer's picture

ZH'ers - you've got to watch CrazyCooters vid! You will laugh, guaranteed!

any_mouse's picture

I was worried until the closed captions kicked in.

Unknown User's picture

This article is based on BS claims like Venezuela owns the central bank, etc. BS.

flyingcaveman's picture

Spent it all on the same doesn't-cover-shit dental plan that I have.

directaction's picture

Great idea!
The self-funding magic act has kept the USA afloat for the past eight years.
This should work well for Venezuela, too.  

l8apex's picture

How do they compare to Joos and jig-a-boos?

WillyGroper's picture

so now it's the chicoms vs our spooks for the heavy crude.

what could possibly go wrong.

VWAndy's picture

 Backed by phantom rebar?  Rehypothocated subprime auto loans?

Ajax_USB_Port_Repair_Service_'s picture

I've tried to pay my credit card with my credit card. The transaction never goes through.

Let's see what happens in Venezuela on Tuesday.

indygo55's picture

You need one middle man to pull that off. At 26% interest of course.


HokumYTrader's picture
HokumYTrader (not verified) Jan 2, 2017 4:58 PM

Kinda like the US Treasury selling bonds to primary dealers who then turn around and sell those bonds to the Fed.

It is the magic of financial intermediation.

any_mouse's picture

"Kinda like the US Treasury selling bonds to primary dealers who then turn around and sell those bonds to the Fed."

Those transactions are covered under monetary kosher rulings.

HokumYTrader's picture
HokumYTrader (not verified) Jan 2, 2017 5:00 PM

Big Trouble in Little China

Mr. Bones's picture

Maduro blames the country's problems on an "economic war" led by political adversaries. He says talk of default is a smear campaign against him.

Then go on state TV and show assets and revenues vs outlays and debt.  Just because the numbers are big doesn't make the math hard.  I'm sure foreign investors would appreciate the candor and finance even more debt!

GRDguy's picture

Borrow 5 to spend 2: somebody made out like a bandit. JPM, GS, Citi, etc. etc. etc.

But the ordinary folks have to eventually pay off the 5 + interest.

Seems like the good ole USA.

Last of the Middle Class's picture

future oil production at $1.00 a barrel to their new chinese masters?


MJ4Vets's picture

With a no stopping production clause, when it gets turned into diesel, marine fuel, JP5, etc.

China sure as hell ain't gonna be using it for industrial trade goods production.

Dilluminati's picture

spent all their money on coke and hookers, ohhh well

Dominus Ludificatio's picture

Wall street will never ever figure out how creative Chinese financing can be.

any_mouse's picture

Have they already forgotten Chinese Copper Financing? 2014 was so long ago.

Rehypothecation in the best City of London tradition.

Now applied to Venezuelan debt.

Grandad Grumps's picture

Lol ... FIAT THIS!

peippe's picture

Like the bond traders outside Vene & China wanted to touch this "deal" or "offering"?

Wun! Wun now!  : O  Wun fo yo wives!

cry-me-a-libaturd's picture

....but i thought the ven. prsident confiscated all the capital of both public and private companies mid last yr....u mean that didnt worrk???

Downtoolong's picture

Goldman must be in the middle of this somewhere. Keep looking.


Dark Daze's picture
Dark Daze (not verified) Downtoolong Jan 2, 2017 6:13 PM

Goldman holds Venezuelan gold that they leased/purchased.

NoWayJose's picture

Coming to Amerika! The USA debt train is too big to stop - and after all - isn't this pretty close to QE?

wet_nurse's picture

I bet China used it as an opportunity to dump US treasuries while locking in cheap oil. Paper for real shit. Buy those bonds everybody 

Yog Soggoth's picture

And if there is war? Those bonds that you speak of are only a couple billion. This is indeed a ploy to get cheap crude to keep the Chinese junk afloat. They still believe that communism can exist indefinitelly. 2036? There and in Venezuela? I wonder if war reparations will go away worldwide this year.

Dark Daze's picture
Dark Daze (not verified) Jan 2, 2017 6:12 PM

Well, you know why China is doing it, to make sure the vipers in America don't get their hands on it. As for some kind of secretive plot to hide insolvency I really don't think anything in the last 8 years has been particularly hidden.

Tell me what the difference is between what the national government of Venezuela is doing and what the Fed(s) do(es) over and over again. 

Sorry, but I ain't taking part in another ripoff. Brazil is so destabilized now it's going to blow again soon too. Stay the fuck home yanks.

tarabel's picture



Sounds like a great way to evade China's new currency controls. Guarantee a fake circular overseas loan that is solid-rock-certain to fail and then you will have to pay off on the bond guarantee. You and the Venezuelan officials splitting the actual proceeds, of course.

Sort of a Sino-Venezuelan remake of "The Producers".

indygo55's picture

Why are they issued in dollars? Why not Yuan? Is the discount the reason and so they can liquidate them?

sinbad2's picture

That's an interesting question.

silverer's picture

I see Chinese military bases coming soon in Venezuela.

any_mouse's picture

Just like the Chinese military bases in Africa.

I think you morally equivalenced the ChiComs with the USA.

sinbad2's picture

Nah, that's America's game, bases in every country. China is more subtle than a gun to the head.

Vinividivinci's picture

Dang, can i issue a few million in debt to myself?...yah, didn't think so.

Weirdly's picture

China has found another way to buy oil outside of the US Dollar. 

g'kar's picture

I like I-Booze

sinbad2's picture

"What makes this "unorthodox operation" particularly strange, is that the government is effectively selling debt, and raising dollar funds from itself"


The US does that every bond auction.

Jack Oliver's picture

Venezuela is 'mimicking' the US - 'Creating' money out of thin FUCKING air - I knew it would catch on !!

It's like the 'yo-yo' craze !!!