Here’s the easiest way to understand the BCV-Goldman Sachs bondmaggedon shitshow. PDVSA had something that today is worth $1,165,000,000 — $1.17 billion pa los panas. And what did BCV do with it? It sold it for $865,000,000.

That whooshing sound you hear is the Republic pissing away the difference: a cool $250 million that BCV put a bow on and handed off to Goldman Sachs.

(There’s some confusion about these numbers because the thing that BCV sold happens to be a formal commitment issued by PDVSA to pay back $2.8 billion, plus interest, by 2022, but that promise from PDVSA today isn’t really worth $2.8 billion. That’s what it would be worth if the bonds were worth 100 cents on the dollar, but they aren’t because they’re junk bonds that everyone thinks will default. Realistically, similarly structured bonds are going for about 40 cents on the dollar — $1.17 billion, i.e., $250 million more than Goldman Sachs paid for them.)

How does a regime willing to go that far to shore up a a few hundred million bucks just flush the same amount down the toilet for no reason at all?!

Now, here’s the crazy part. As Venezuelans, we’re conditioned to believe that whenever great big sums go missing, somebody in government is stealing. And that may indeed be the case: the Central Bank sold the bonds to Goldman Sachs through a shady intermediary named Dinosaur Group, and that part of the deal looks, smells, walks and quacks like a guiso. But the weird thing is that the BCV-Dinosaur component is a tiny shard of the money being pissed away here. Maybe on the order of $25 million. The much bigger chunk isn’t being divvied up between corrupt Venezuelans and shady intermediaries. It’s a straight-up gift to Goldman Sachs.

None of this makes any sense. If you’ll remember, the current bout of country-shaking protests was set off because PDVSA was running around like a chicken with its head cut off, scrambling to flush the constitution down the toilet so it could sell of chunks of a shady Joint Venture to a Russian oil company and raise…a few hundred million dollars. To stave off default. How does a regime willing to go that far to shore up a a few hundred million bucks just flush the same amount down the toilet for no reason at all?!

The cochinada hasn’t been consumated. Not quite yet.

Now, here’s the interesting part: Goldman Sachs just bought something it could sell right away for about $1.17 billion, for $865 million. But it hasn’t done so yet. Instead, it’s sitting there, holding those bonds. As of right now, nobody’s bought or sold any of these weird bonds on the open market.

The cochinada hasn’t been consumated. Not quite yet.

So Traders around the world are sitting behind their Bloomberg terminals just watching…and waiting. Yesterday, for a few minutes, a mysterious offer flashed across their terminals offering to sell PDV22s at 42.5 cents on the dollar — which, assuming it was a real move by Goldman and not some sick joke, would’ve made the cochinada worth $320 million! — nobody took it, and the offer was soon withdrawn.

This makes the experience of watching your bbg terminal weirdly like surveying the scene of a crime. A crime that hasn’t quite happened yet…but it could hit at any moment.

Bizarre. And disturbing.

41 COMMENTS

  1. Why to gave GS this gift? Whats the F reason behind it? Today I heard the real boss behind this deal is Leonardo Emperador, VP for Latin American markets for Dinosour. He is el dueno del circo, Perez Santaella is only one of the clowns. Anyone knows?

  2. that GS made this bet thinking the situation would get better – Do they really plan to hold it until 2022? Nos ven cara de gafos o que?

  3. Sigh…Toro, Toro…Here we go again…

    1) Why are you sure that the BCV could have gone to the open market instead and dumped those $2.8bn. without causing the price to crash and therefore not trade at 42.5%? Especially in the current environment. (You don’t have to answer the question)

    2) What is your source for that “mysterious” quote that flashed on people’s terminal today? I do hope it is definitely not the same one that told Bloomberg about those “mystery” bonds a few months ago (whose issuance was reported by quite a few people, even Bloomberg themselves, back in 2014). Let’s remember that it was the most recent appearance of quotes (bond prices) by BVAL on Bloomberg that led the uninformed to believe that these were “new bonds”. So, are talking about BVAL quotes again or? At this point in time, I could expect anything from the uninformed angry mob thirsty for bond holder blood, so I kind of have to ask (your answer on this question would be appreciated)

    • Dinosaur would be the fool for selling to GS, if the bonds were worth more. I’m totally guessing here, but I wouldn’t be surprised to learn that GS was offered the brokerage or syndication of the batch and refused, so it went to Dinosaur, very probably for less commission, but GS saw an opportunity to keep what would have been their optional share of bonds had they managed the batch (and took all of them) – possibly approached by Dinosaur, who already had their fee, wanted out, and lacked the ability to float them. E.g PDVSA couldn’t get an A-team (GS) so they went with a B-team (lower commission but lower price), and the A-team stomped them. I don’t see how anyone can fault anyone for buying a batch of bonds already openly traded. That smacks of “precio justo” and all.

      • Plausible Gringo…Not a crazy reasoning.

        There are so many wrong things with the generic oppo view on this that it’s embarrassing:

        1) Borges writing to GS saying that they won’t recognise those bonds in the future. Extremely uninformed statement because not recognising the 6% 2022 would trigger a default in the entire curve (due to cross-acceleration clauses). So there is no such thing as “those bonds”, it’s the entire stock. Failing to recognise legitimately issued debt is not the best way to create a business-friendly law abiding atmosphere post-Maduro. Thinking that all debt should be repudiated and that the IMF will be our saviour is wishful thinking (Exhibit A. Greece). It won’t happen without significant austerity measures being imposed on the country and therefore the population (same or worse than now). So let’s be real here for once. Defaulting doesn’t solve any issue, it makes the entire picture worse.

        2) The more I think about the 31% sale to GS (and now Nomura), the more I remember about the times when PDVSA and the sovereign issued all those bonds in the 2007-2014 period which locals could buy in Bolivares and then sell abroad at a discount in $.Terrible business for PDVSA and the country but a way to both feed $ to the local market and allow some people to save in hard currency should they decide to keep the bonds after issuance. I don’t have the exact numbers from back then but I suspect that in local currency, at the black market rate equivalent, PDVSA probably didn’t get something too different at the issuance of the 6% 2022 in 2014 when compared to the amounts they typically raised in the 2007-2014 period. So all in all and despite all the multiple players involved, it doesn’t seem very different from what happened many times in the past. This doesn’t make it right though or turns it into a good business for the country and PDVSA, but it does remove the whole shocking and surprising aspect to it (which is precisely what the opposition needs for political purposes).

        3) And the most moronic argument of all: buying bonds is financing the government so it should be condemned. Well, then for consistency purposes and following that line of “reasoning”, oppo should also condemn the US purchase of Venezuelan oil, the payment of taxes to the govt. by both companies and the people, the export of Venezuelan chocolate and rum which would generate $ that will feed the BCV, etc. etc. Completely destructive way to behave which will yield no upside to the oppo nor for the government. Same paro petrolero mindset that put the opposition in a terrible corner in the first place. They don’t seem to ever learn

        • 1.Borges didnt say that the bond sale would not be recognized only that the operation would be studied to determine any harm to the countrys interests and whether it might legally be subject to legal challenge …..the first action is a first step towards determining the responsability of officials authorizing the deal under Venezuelan Law (which migh accrue even if the operation is declared lawful) and also to scrutinize the economic wisdom of the operation . To establish the feasibility of a legal challenge one cannot discard the many legal cumplexities that these deals present and how a cunning lawyer can come up with a line of reasoning which finds an angle from which to attack the legality of the operation…….

          2. then is then now is now , the regime is now openly acting in ways that offer a clear and direct menace to the continuity of democratic institutions and under conditions that make it the subject of clear international condemnation for civil and human rights violations which undermine its legitimacy , the country is evidently in a state of civil disorder brought about by regime actions and the country is facing a crisis such as few countries have to face ……what might have passed as tolerable in the past has now become untenable …the financial situation is one of extreme distress and living conditions have become nightmarish to say the least for most Venezuelans ……going along with the regime that existed 3 years ago is not the same as collaborating with the regime that we have now…..

          3. As to the continuing purchase of crude by the US , this is an ongoing continous practice of many decades where Venezuela receives the full price of the oil it sells, not a one off deal where the interests of the country are apparently so harmed that there are grounds for considering that some hanky panky is involved …..An international financial entity can forego doing this deal but for a venezuelan company or person to stop paying its taxes ( which a part of the oppo in fact spouses as a gesture of civil disobedience) is to face very drastic retaliation ……..

          Same goes for a rum exporting company which needs to survive……by exporting some of its products !!

          I Too am not convinced that legally the operation is voidable , but knowing lawyers can be certain that if they have enough of an incentive they will find different fronts from which to attack its enforceability.

          • Bill, thanks for your prompt response.

            1) I am quoting Borges’s letter to Blankfein: “I also intend to recommend any future democratic government of Venezuela not to recognize or pay on these bonds”. It is pretty clear to me that he is singling out the bonds involved in this transaction and as I said, there is no way to “unbundle” them from the whole pool of bonds

            2) Again, what you see as collaborations is the regular course of business for investors and financial institutions. Then we can also start arguing that those holding US treasuries and USD currency are complicit with a government that invaded Iraq and killed innocent civilians in the pursuit of weapons of mass destruction that were never found. So if we are going to be moral, let’s apply this across the entire spectrum please. And lets also go with asking S&P 500 to take out tobacco and weapon companies from its index and ask everyone to stop investing in S&P 500 until then. In fact, aren’t the pensions of many people linked to S&P 500, they are also inmoral too. And talking about weapons, who are the largest producers of weapons? Aren’t those the leading western economies? Why are people going and doing tourism and settling families there in the first place? Gimme a break…

            3) You do understand that the value that Hausmann, Borges, Toro, Muci, etc. of 41% that is being floated in articles is merely a theoretical value? There is actually no evidence that the govt. could have achieved that price in the market. As I said, they probably wouldn’t have been able to do so due to the large volume. If they would have achieved 41%, the opposition would probably have complained too because there was still a discount regardless. And in fact, CITGO doesn’t receive Venezuelan oil at the full price (which is one of the reason why the arrangement between both companies have always been so controversial). And again, a financial entity foregoing this deal (which doesn’t actually have any issue) is just foregoing doing their regular business. Given the negative scenario (both locally and externally due to oil prices), PDVSA is a price taker when it comes to issuing debt. I do get your point that for a local co to stop paying taxes is disobedience, but isn’t that what this is all about in the first place? How is repudiating legally issued bonds any different? And so the financing of the capital structure of a company such as PDVSA is not part of its survival? But in any case, those bonds were issued in 2014 so this is not even up for debate.

            By the way, I don’t disagree that all the transactions should be scrutinised in more detail, transparent, etc..But that is another matter. That is what the opposition should be focussing on: the strategy behind it, the timing, etc. etc. as opposed to fixating on 41% and whatnot and then jumping to the next hot topic.

    • But did it occur to you that with a bit of planning they could have run an auction and sold it at a significantly higher price rather than gift it to the giant squid? Of course, would have been more gradual and wouldn’t raise all the money at an instant. But then the question is – are they really that close to kicking the proverbial bucket? Still pi55 poor planning if that were the case. There isn’t anything remotely normal about these transactions with GS and Nomura. The bonds were firm 33.50/41.00 market FYI, not BVAL. Fair value well into 40s, i.e. where the bonds could have been sold, on the margin at least…

      • Yes Meerkat, indeed. However, since when have Venezuelans been known by being highly organised and consistent? I wish it weren’t the case but it is the reality. Does it justify anything? No it doesn’t, again, I am just being realistic.They run the country like a corner bodega…We will see if people jump to buy them at 41%.

        By the way, not much has changed in a loooooong time. I invite you to get some popcorn and read about our public administration’s legacy with bond offerings and restructurings:

        codigopetkoff.blogspot.com

        • Ha ha, ok thx… it’s incredible this bodega has not gone belly up just yet, but on the basis of this event not too difficult to imagine that it may eventually be an accidental trigger for a formal default as they cannot complete a sale of whatever illiquid crap they can still fetch in time…

  4. I understand your analysis of what is worth now and how Goldman Sachs can make a killing (or well, for them it may be just another day) in just a moment right now.

    But that promise to pay the full thing is out there now.

  5. Dinosaur is not “shady.” Do you know the definition of “shady?” Porque no te gusta la vaina tienes que descalificar a Dinosaur con ad hominem attacks. Dinosoaur con sede en NYC, booked the sale through it’s London office….does not really matter why. Aqui hay un Venezolano bien conocido en este mundo.

    • And who is that Venezuelan within Dinosaur with the contacts in BCV? Can you shed some light in this? We are not naive, this is a deal that HAD to be offered between corrupt Venezuelans.

  6. Hausmann hopes/thinks the FBI should investigate. Dinosaur, just because it has NYC/London offices, is a puny player for the size of this deal, which calls into question its “respectability”. The whole deal reeks of excessive commissions/inferior pricing by intermediaries. GS finally bought the bonds through their asset manager division; Blankfein will simply plead innocence at criticism, pleading lower-level discretionary decision-making in his firm

  7. Quico, this is from http://www.cnbc.com/2017/05/30/goldmans-venezuelan-bond-deal-a-cynically-opportunist-bet-fmr-goldman-managing-director.html

    “Steve Hanke, a professor at Johns Hopkins University, doesn’t buy “this massive geopolitical story.”

    “They’re on the secondary market. Somebody’s going to own them. Whether Goldman owns them or somebody else it really doesn’t make any difference,” said Hanke, also a senior fellow at the Cato Institute.”

    My question is, was this really a secondary market transaction? I.e. did BCV “buy” these bonds from PDVSA when they were originally issued, or since these bonds were issued from PDVSA to BCV, is this sale to Goldman Sachs not really a secondary market transaction, but akin to an issue of the bonds?

    Because in my view the Venezuelan state didn’t have this liability until BCV sold these bonds to GS is this correct?

    • We wrote about this bond back in March 2016. Funny to read back on it now:

      Check it out.

      Here’s what we wrote about it way back then:

      The bond is most likely being held now by the Central Bank, but again, it’s difficult to know. This is important, because as long as it’s held by a public entity, the government can engineer another transaction to erase the debt from PDVSA’s books without the company paying one dollar in cash.

      The only limit to their trickery is their imagination.

      But if and when that bond is sold to a private investor, PDVSA would have to make payments to its new owners, in dollars. Those additional payment obligations in dollars would be news, to everyone. Probably even to PDVSA’s finance department.

      As of yesterday, the bond was priced below 30 cents on the dollar. If the whole bond issue is sold at those prices, the Central Bank would receive about one billion dollars to shore up foreign reserves. PDVSA gets nothing, and would be on the hook for $3 billion.

      Ouch.

      These bonds might be sold at some point during 2016 as a frenzied way to acquire much-needed dollars. Analyst speculations point to two potential uses: paying off way-overdue dollar obligations to importers, and as a source of dollar supply for the DICOM currency system.

      It would be another example of this government’s frantic financial carelessness: saddling PDVSA with $3 billion in payments, in exchange for $1 billion in return.

      Steve Hanke is, not for the first time, spewing BS about this…

  8. It was a private placement done in 2014 with PDVSA placing these bonds with BCV. They were not in the secondary market. It is tantamount to raising cash (i.e. borrowing fresh money) by moving the bonds from the CB ownership, i.e. effectively state, to secondary market.

  9. Borges recommendations means that if the lawyers find a chink in the legal armour of the deal to attack it they will use it to attack it , perhaps to very distressing consequences for those that buy it , Banks have this naive idea that all deals are iron clad if they have been legally vetted , they really dont know the law or lawyers , seen it too many times that the purportedly most iron clad of deals gets trounced when it reaches court.. the cunning of lawyers can be as sharp as that of the most savvy of financial proffessionals if not more !!

    From a practical perspective a deal that looks cool or promising can sour if it attracks too much adverse public opinion , so its not just a question of meeting certain legal formalities , but of avoiding attracting the ill will of people or organizations that have MANY WAYS of getting to you and making you regret your routine business decision …

    Ona moral plane Im not much of a puritan ,but there are lines drawn by public opinion of what is acceptable and what is not ……..and a company with so much exposed skin has to careful in doing things that can give rise to so much ire as this transaction…….. Detterding would have loved to keep doing business with Nazi Germany but he discovered that however profitable the dea there are boundaries to the magnitude of the violations the world will tolerate…!!

    One thing that catches my attention is the pronouncement that Citgo buys venezuelan oil at less than the market price , this has very dangerous US tax and legal implications for both Citgo and Pdvsa, transfer pricing whether vertical or horizontal is a very explosive subject for the US. Wonder what keeping US tax authorities from acting ….maybe they are just bidding their time …….this is a well researched subject and Im amazed that Citgo lawyers havent looked into it …….!!

    On what the real price of these bonds might be in an open market is something which isnt easy to determine , but prima facie the terms do appear to be much inordinately more favourable to the purchasers that to the BCV. so much so that they give ground for suspecting that some hanky panky may be involved , where such determination isnt very clear there is room for an authority to conclude that something nasty has been going on ……

    • Indeed, public opinion matters. But it shouldn’t be everything nor the basis behind all decisions, especially in these times where we have seen how public opinion (fueled by fake news or not) has driven many important political outcomes in developed nations. In any case, I am being pragmatical here. Does Borges thinks that the best use of his resources currently (and perhaps Post-Maduro) should be employed to fight with creditors? Sure, then he will have to meet them in court. Good luck with that but I can tell you from experience: it sure won’t be smooth. Also, where is the letter to Nomura? Or has the circus audience already forgot and moved to the next hot topic?

      There is no comparison between Chavistas and Nazis. It’s just out of this world that such similitude can be drawn at this point in time.

      With regard to CITGO, I thought you knew! This, by the way, is not new. I don’t know the exact mechanism via which is achieved but it is not secret. Why do you think Chavez questioned CITGO so much in the first place? This goes waaaaay back. Since the early nineties, the thesis of the previous managers of PDVSA was that PDVSA had to put that product in the US market by any means possible (as if it wasn’t just mere oil…). There was quite a lot of obscurity on how all this process worked. We can agree in that old PDVSA was much more professional but no less obscure than the current one.

      As always, a pleasure debating with you!

      • Thanks for the prompt response ……not going again over the other points …but one thing I have absolutely clear , and please check it out yourself if you have any lawyer friends , buying Pdvsa crude at below market price is for Citgo and Pdvsa one very dangerous practice ….with all kind of dangerous implications, it they are doing it …..it can blow in their faces !! !

        • If CITGO is buying crude at below-market prices from PDVSA, it would certainly give them an unfair advantage against other US refiners.

      • “We can agree in that old PDVSA was much more professional but no less obscure than the current one”.

        Really? C’mon.

        • Carlos, sorry to break it for you. If you are looking to come here to only read about what you have always thought has been “the truth”, then you are not in the right place. The comments section is a place for debate.

      • “We can agree in that old PDVSA was much more professional but no less obscure than the current one”.

        Really? C’mon.

          • Bill, I guess you would also call Petkoff’s dodgy bond dealings in the 90’s “daylight”. With regard to the “old” PDVSA, me canso…It’s amusing to see how people fail to see a relationship between a country that was bankrupt in the early 90’s with the lack of profesionalism in the government and consequently, in the always obscure PDVSA, or “la industria”, how the old elite used to call it.

            Have you ever read Los Doce Apóstoles written by Pedro Duno? Is that also daylight?

  10. Saying the US shouldn’t buy Venezuelan oil “because it helps this regime” makes as much sense as Maduro threatening to stop selling oil to the US to somehow inflict pain.

    It’s funigble. Sell it to the US or someone else. In the end it’s all the same.

  11. How fungible is Venezuelan oil? I think embargoing Venezuelan oil would be highly disruptive and would likely only find a market in China to which Venezuela is already in enormous arrears. There are few refineries capable of processing most Venezuela oil as I understand it.. I thought that the sound argument is that the immediate impact of such an action would exacerbate the humanitarian crisis. Maybe we are beyond that point now. U.S. opposition is probably economic/political coming from the U.S. -based refiners and distributors.

    • If the Venezuelan government were interested in actually looking out for a way for the country to get out of this crisis, it would have to admit that the only real option is either default or massive debt restructuring.

      But that would mean having to accept 2 things. One, all the conditions that institutions like the IMF and other countries will ask for help in that. Two, and more importantly for them, accepting for everybody to see that they really screwed the country badly.

      Instead, they will do more stuff like this, selling something very cheaply today to pay for the debts of yesterday and tomorrow have even more debt.

  12. Como siempre, interesante información sobre estos asuntos que no aparece en otros medios y por tanto los complementa. Algo así siempre es de agradecer.

  13. Francisco’s article is enlightening, eloquent and fun, as always. At the heart of the matter is the fact that some warmed-blooded animal sold an asset (lets discard the nature of the asset, for now), and someone bought the asset, at a price that is significantly below the observable price for the same asset in a transparent and organized market. This is a trader’s dream come true, a criminal, despicable “guiso de inmensas proporciones”, or both. In order words, you open the newspaper one day to see that the car you want trades at X, but you are lucky enough to know a fool, an idiot, or a guy desperate enough to sell you that car at 25% less than the going price.

    This trade between Venezuela and Goldman can be called many things, but perhaps the most apt name is “Stupidity-Despair Arbitrage”. Stupid because the seller, the Venezuelan Central Bank, for instance, could have and should have organized a BWIC, for instance, or sold the bonds in the market through several traders in smaller chunks over a sensible period (I am not a trader and do not know the typical trade volume for these bonds). To be sure, a massive sell order commands a discount in price. Absolutely. But a 25% discount walks like a “guiso”, smells like a “guiso” and looks like a “guiso”.

    On the other hand, here’s the beauty of the “Stupidity-Despair Arbitrage” or SDA, this new arbitrage category created by the Bolivarian Republic of Venezuela: it is a perfect, hard to fund arbitrage and, as such, completely independent of the nature, risk, creditworthiness, price and volatility of the underlying asset. What you do and what Goldman did (should have done or in the process of doing) is actually hedging their bets by shorting the same bonds (or bonds with similar credit, coupon and maturity). This wouldn’t be difficult to do as PDVSA and Venezuelan sovereign bonds are held by numerous institutional investors and therefore easily loaned to a creditworthy counterpart like Goldman. Finance 101 tells you that once you have a long and short position of the same underlying asset (or asset type), you just don’t really care what happens with the asset; you just watch the price logically and capitalistically converge to a single price, while the short and long positions offset each other. The only thing that remains is a cool, elegant, riskless “arbitrage margin” that the arbitrageur pockets, followed by a fat bonus for the trader at the end of the year. Nice!

    In our case, the SDA can also be captured by selling other Venezuelan bonds of the same maturity and coupon, as the prices for these bonds typically move in tandem due to the “cross collateral and default acceleration provisions”. So, Francisco, look for any sale of Venezuelan bonds maturing in or close to 2022 in the Bloomberg terminal, not just the ones that GS bought. That may be Goldman Sachs locking the SDA spread. Actually, perhaps GS short-sold $2.8 billion in bonds before funding the transaction. Who knows.

    In closing, for Goldman it shouldn’t be so difficult to find this fool willing to sell you a car at 25% below its market price. In December of 2014, just months after the infamous “diálogo” that followed the bloody, massive student-led protests of 2014 and the incarceration of Leopoldo López, Venezuela sold $4 billion worth of oil debt owed by the Dominican Republic for 41% of its value to Goldman Sachs. Nobody will ever know if that money was used to shore up “la Guardia Nacional” from 30,000 to 70,000 recruits, while the kiddos from Primero Justicia repeated “solución pacífica y electoral”.

    Clearly, Goldman Sachs does not care about franchise or reputational risk, provided, however, that the margins are enticing enough and that the public exposure is nonexistent or under control. For instance, I am sure that they wouldn’t finance human trafficking or weapons trade. Therefore, exposing and denouncing GS for these rogue SDAs with a criminal, autocratic regime such as Venezuela is highly commendable.

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