Goldman's Asset Arm Takes Big Hit On Venezuelan Bond Bloodbath

The fallout from the Venezuelan bond restructuring has claimed a major victim in Goldman Sachs Asset Management, or rather some of the “muppets” who trusted Goldman to invest their money. However, the route which led Goldman to losing a chunk of client money wasn’t just a case of bad judgement, being riddled with the usual mixture of greed, questionable ethics and government intervention. As we detailed in “Goldman Accused Of Funding Maduro’s Dictatorship”.

Goldman controversially purchased $2.8 billion of 2022 bonds in May 2017 in the state-owned oil producer PDVSA, for about $865 million - or about 31 cents on the dollar. This prompted Julio Borges, President of the National Assembly and head of Venezuela’s opposition, to accuse Goldman of “aiding and abetting the country’s dictatorial regime.” Borges threatened that any future democratic government would not recognise or pay on the bonds. In true Goldman fashion, however, the deal was just too lucrative to pass up, or so it seemed at the time, as Goldman paid a then 30% discount to other Venezuelan bonds with a similar maturity.

 

Goldman’s ”defence” was that it did not buy the bonds directly from PDVSA, consequently it did not transfer funds directly to the Venezuelan regime.

To make matters worse, when the Trump White House extended sanctions against Venezuela over the Summer, including a ban on trading Venezuelan debt, Goldman’s bonds were mysteriously exempt. As we argued here.

“the logic is that if Goldman was forced to liquidate the bonds, or worse was stuck holding them as Venezuela went bankrupt, it would take a huge hit on the nearly $3 billion notional position. As such, Goldman's advisors to Trump made it quite clear that any sanctions against Venezuela would have to be Goldman Sachs revenue neutral first and foremost. That's precisely what happened.”

We have to acknowledge, however, that the next comment of ours was only half correct.

“Of course, Venezuela's default is just a matter of time, but it won't take place before Goldman dumps its bond holdings to some unwitting retail investor or some German widows and orphans.”

It turns out that Goldman had only dumped part of its holdings prior to the expected default, and is sitting on a sizeable loss, as the FT explains.

Ricardo Penfold, a senior portfolio manager at Goldman Sachs Asset Management, earlier this year swooped on a big slice of a bond issued by PDVSA, Venezuela’s state oil company, people familiar with the matter say. Mr Penfold paid $865m for bonds with a face value of $2.8bn — a price of just under 31 cents on the dollar — reflecting the elevated risks of a default even at the time. While GSAM has since sold off chunks of the bond, it was still listed as the single biggest overall owner of the PDVSA bond maturing in 2022, with a face value holding of $1.3bn at the end of the third quarter. But with Thursday’s announcement that Venezuela would seek to restructure all its foreign bonds, the bond is now trading at 25 cents on the dollar, down from 29 cents at the start of last week. That would translate into a paper loss of $54m in just five days if GSAM has not reduced its stake since the end of the third quarter…

 

GSAM is listed as the single biggest overall owner of PDVSA debts, according to Bloomberg data based on fund filings, with $1.8bn of face value holdings.

 

A Goldman spokesman said: “We are monitoring this situation closely.” The summer deal was particularly controversial, attracting condemnation from the Venezuelan opposition and US senator Marco Rubio, because it in effect constituted a cash infusion for the increasingly autocratic government led by Nicolás Maduro. GSAM bought the bond via an intermediary, but it was sold by the central bank.

As we said, and other analysts agree, Goldman should have seen it coming. From the FT article.

Many investors who had been betting that Venezuela would manage to avoid defaulting are nursing losses. Venezuelan bonds suffered a drubbing in the wake of Mr Maduro announcing plans to restructure the country’s $89bn debt pile. “This has been a well-telegraphed train wreck,” said Robert Koenigsberger, head of Gramercy, an emerging markets-focused asset manager.

 

“There are reasons to expect that prices will go even lower from here.” GSAM and other big Venezuelan bond investors — such as Fidelity, T Rowe Price and Ashmore — could still end up making money from their Venezuelan bond purchases, as analysts expect the ultimate “recovery value” on Venezuelan debt to be higher than where the bonds are trading at now.

While the article suggests the possibility of a more favourable exit for Goldman in due course, the restructuring of Venezuelan debt is not going to be a “plain vanilla” variety. Indeed, it might be more complicated than any previous sovereign debt restructuring. The irony for Goldman, as the FT explains, is that the extension of sanctions by the US Government will make it much harder for the bank to recover its losses.

Venezuela’s plans to restructure its debts are riddled with complications. The mess of bonds issued by the country and PDVSA are hard to disentangle, and oil exports — the country’s sole financial lifeline — are vulnerable to seizures from litigious creditors. However, the biggest wrinkle is the US government’s sanctions on Venezuela, unveiled in August after the GSAM deal. In practice, they prohibit any US institutions from involvement in any Venezuelan debt restructuring.

 

“Sanctions will prevent a conventional exchange offer,” said Lee Buchheit, a senior partner at Cleary Gottlieb, who has represented a series of countries when they restructure their debts. “It’s really not clear what Maduro has in mind, or whether he even has anything in mind."

 

Venezuela owes about $750m in bond arrears and is facing a further $965m of interest payments over November and December, calculates Patrick Esteruelas, global head of research at Emso Asset Management. If Caracas has run out of money — and Russia or China decline to extend more loans to Venezuela — it will have to default. But as long as US sanctions remain in place, this will push Venezuela into financial purgatory of a protracted, unresolvable debt default. “In a world where you can’t pay and you can’t restructure, all you can do is default,” Mr Koenigsberger said. “Even without the sanction, this would have been an exceptionally tough debt restructuring. It will now be exponentially harder than anything we have seen before. And I don’t think that is priced in yet.”

It will be tragically amusing to watch what extraordinary measures the heavily Goldman-influenced White House takes to bail the bank out of its latest predicament.

Comments

LetThemEatRand Tue, 11/07/2017 - 03:42 Permalink

"To make matters worse, when the Trump White House extended sanctions against Venezuela over the Summer, including a ban on trading Venezuelan debt, Goldman’s bonds were mysteriously exempt."And I thought matters could not be worse after too big to jail.  It's about time someone at Marvel or DC Comics came up with the Kryptonite for Goldman Sachs.  Oh wait, one of the superhero creators is DC comics.  And Goldman runs the Whitehouse (again), and Goldman likes Crypto.  

Manthong ShabbosGoy Tue, 11/07/2017 - 04:03 Permalink

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 Hmm… Don’t those schmucks have most of dead Hugo’s gold?

In reply to by ShabbosGoy

BigCumulusClouds Tue, 11/07/2017 - 04:32 Permalink

So Goldman Sachs was not able to exercise its CIA put this time? Looks like they got the Trump put exercised though with the sanctions loophole. To bad the rest of don't get these puts paid for by the US taxpayer. Who in their right mind would buy Venezuelan debt without them?

Cockoo Tue, 11/07/2017 - 04:44 Permalink

Oil price collapse in 2014 and Saudis flooded the market with cheap oil lead to Venezuela's default plus Maduro refused neo-liberal economic austerity to privatize, de-regulate etc. Sure, the vulture capitalist and others will rape Venezuela as soon as they can enter the country. Besides oil, they have gold, freshwater reserve, and coltan. 

Norma Lacy Tue, 11/07/2017 - 06:00 Permalink

So apparently the murkan gov is perfectly ok with starving Venezuelans (remember "make the economy scream"????)  but heaven forbid the GSucks should loose a penny.   Send in the Marines!!  GSucks lost some sheckels and BTW, the vultures are slavering over Venezuela's natural resources, so one two three four what are we waiting for.It's sickening really.   Another rape in plain daylight.

Not if_ But When Tue, 11/07/2017 - 08:32 Permalink

GS got nice deals on the overnight switch from an investment house to a bank holding company to pig out at the gov't emergency programs open bar, had Hank Paulson bail them out of their AIG loss, etc, etc, etc.  If the GS-led current White House economic team does ANYTHING to help them in this situation, then all the fucking attention given to BS Russian interference in everything American should be dropped in order to investigate the hold GS has over our country.  And any politician who promotes such an investigation and gets his/her name "attached to it" would be profoundly backed and have a jumpstart on any 2020 presidential bid plans.  There is a shitload of people who've had enough of this bankster gov't perverted lovefest.                 CPL593H

silverer Tue, 11/07/2017 - 08:45 Permalink

Somebody didn't get the paperwork right. I thought the bonds would guarantee them assets in the event of default. Those greedy bastards are slipping, lol.

surf@jm Tue, 11/07/2017 - 09:49 Permalink

Big Wow........Goldman will just write off the loss on their US taxes........And so the U.S. middle class taxpayer, will have to cover the loss.......

dunce Wed, 11/08/2017 - 00:14 Permalink

Goldman is not nor will be realy suffering unlike the Venezuelan people not that they did not cause the whole horrid scheme and deserve all the death and destuction they voted for.