The PDVSA 22s Must be Investigated

Without a proper, impartial investigation we’ll never know who walked off with hundreds of millions of the Venezuelan public's money in this plainly improper transaction.

It’s rare for a bond story to burst the banks of the financial sphere and permeate Venezuela’s broader political discussion, but that’s what happened this time. Since the Wall Street Journal reported that Goldman Sachs had purchased $2.8 billion (face value) of PDVSA 2022 6% bonds from the Venezuelan Central Bank, for just $865 million, Venezuela’s political sphere has finally awoken to just how irresponsibly our debt is being handled.

Now, as evidence mounts that the Venezuelan taxpayer got taken for a ride, it’s time to call for an impartial investigation of a transaction that just doesn’t pass the smell test.

To date, neither the Maduro administration, nor the Venezuelan Central Bank have confirmed the transaction, much less given details about prices, spreads and identities of the buyers.

The report triggered strong protests by Venezuelan opposition leaders and others who (rightly) charged that Goldman Sachs had thrown the Maduro administration a financial lifeline.

Only Caracas Chronicles seems to have put its finger on the real question here: the corruption angle.

But let’s put numbers into this discussion. What commissions were paid here, really? The following is a guesstimate.

Let’s see: the original, $3.0 billion bond, was issued on Dec. 29, 2014, as part of a PDVSA/Finance Ministry/Central Bank window dressing operation. There were no buyers.

Japan’s Nomura Securities reports that it did acquire $100 million (face value) of these bonds. Who else?

PDVSA gave over the bonds to the Central Bank as “payment” for cash advances received from the Central Bank during 2014 — it was, in other words, the accounting workaround to the monetization of PDVSA’s deficit. Of course, there was no public announcement.

It wasn’t until PDVSA published its audited debt statement in February 2015 that Russell Dallen (head of Caracas Capital Markets brokerage; Latin American Herald Tribune publisher) noted the existence of a previously unreported bond issue in that financial statement. Even so, it wasn’t until February 2016 that Bloomberg included it in its database, in large measure because Dallen supplied them with the information.

When the news did come out, Goldman Sachs botched its public relations reaction. Among others, it said that it had bought the bonds “on the secondary market from a broker and did not interact with the Venezuelan government.” But there was no secondary market in anything but the most formal terms: the bonds had never traded before.

As it turns out, there was an intermediary, though: Javier Pérez Santalla of Dinosaur Securities, a small, heretofore unknown, New York investment firm. (Dinosaur’s webpage does not give the names of the firm’s principals.)

Goldman Sachs also alleged that no one in the firm’s senior management had advance notice of the upcoming transaction. If true, it could be because Goldman Sachs may not have been the buyer. The purchase reportedly was by Goldman Sachs’ Asset Management (GSAM) unit which normally acts as an intermediary for the firm’s clients and which is not subject to the same restrictions as are the units that buy and sell for Goldman Sachs’ own account. If so, the question would be “who?” is, or are, the buyer(s). Japan’s Nomura Securities reports that it did acquire $100 million (face value) of these bonds. Who else?

PDVSA gave over the bonds to the Central Bank as “payment” for cash advances received from the Central Bank during 2014.

The Maduro administration also botched its public relations. It could, for instance, have argued that the $865 million were earmarked for food and medicine imports. It didn’t. It just clammed up.

There is considerable confusion as to the pricing of the transaction. Goldman Sachs and/or the government would have us believe that the 31% price was closely related to the market price for other PDVSA bonds.

That’s not right. Until now, the only PDVSA 2022 bond on the market pays 12.75% annual interest. Trading at around 60%, the bond offers a yield to maturity of around 30%. The “new” PDVSA 2022 bond pays 6.0% per year; at 31%, the yield to maturity works out to approximately 40%. Confusingly, if the “new” PDVSA 2022 was to sell at 41%, the yield to maturity would be on the order of 30%.

In other words, a market-related price would have been 41%; BCV was paid 31%. The 10% difference is worth some $280 million.

So the question boils down to who got paid what? How much of those $280 million were the discount Goldman Sachs obtained from the Central Bank? Were Pérez Santalla and Dinosaur the only intermediary? What was their take? Who else was involved? How much of the public’s wealth did they walk off with?

These are the questions that deserve an answer. Venezuela’s public purse has been ripped off too many times. Only a proper, impartial investigation will get to the bottom of this.