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.

20 COMMENTS

  1. Dinosaur website does list the principals, a father-son team. Besides Javier, there’s another Miami based Venezuelan working for Dinosaur.

  2. There is another bond, the VEN 36 for USD 5 billion, which are being offered at 20% of their face value. These bonds were never approved by the National Assembly, as required under Ley Organica de Administracion Financiera del Sector Publico (PDVSA bonds do not need Congress approval). Apparently these bonds were issued on December 29 2016, but under article 97 of said Law, the Finance Commission of the National Assembly had to approve the terms of the financing. This approval was never granted (the National Assembly ceased to be controlled by the Government on January 4th of that year). This is why these bonds are and will remain in physical form.

  3. Toby, who, or what entity, is going to do an impartial investigation, and will there be access to the real facts of the commissions/corruption (signed, Doubtful)?

  4. Is there a distinction between PDVSA bonds (corporate debt) and Venezuelan bonds (government debt)?
    I ask this because sovereign debt never goes away. Argentina is a recent example. The funds that were called vultures by the government refused the settlement offer and it took many years for them to be paid.
    This was impeding Argentina’s reentry into the global debt markets and affected the interest payments on other bonds.
    If PDVSA could somehow go through a bankruptcy similar to Obama’s speedy screwing of everyone with GM’s pre-approved bankruptcy, would that get the oil infrastructure back on track?
    Is the government ownership of PDVSA a roadblock to a normal bankruptcy?
    Are the PDVSA bonds, that did not need approval from the National Assembly or any other PDVSA bonds, guaranteed by the Venezuelan government?

    • Baffled that people still don’t understand that it is unrealistic to expect that a government/company that is practically shut down from capital markets can go out in the market and sell $3bn. of debt at the same yields that existing debt, especially when it is $3bn. of illiquid debt that has never traded before and which the buyer is not sure how quickly will it take to sell. I lost count on the number of instances where the govt/PDVSA notified the market about a new debt issuance after which prices came down 3-5% to adjust and take into account the new supply in the market, ultimately affecting the price the govt. would sell in the primary market and the buyers would get when selling it abroad.

      Now the above is purely a financial consideration, then, if we take into account that everyone and their dog have been speaking and writing negatively about the country/company for years and that the govt.itself operates disregarding orthodox market practise, it becomes even clearer why prices are the way they are. It’s naive expect the govt. to get the best treatment in the markets. Similarly, you can’t expect to get the best brokers. And for those that keep pushing the default agenda, this situation will only become worst if a default does happen. No upside.

    • Wow…Going full Obama socialist on us…The GM pre-approved bankruptcy is one of the dirtiest and most anti-capitalist/free market processes I ever seen in a looooong time. Basically, bondholders’ debt was nearly wiped out (despite having the majority of the claims) to give the majority of the equity to the unions and the govt., effectively disregarding the capital structure of the company and the basic principles that govern corporate finance. I don’t see any difference between that, and the Chavista govt. expropriating farms and companies from “rich” people…Both are completely disregarding the spirit of private property..

      To briefly answer your question: the roadblock is the fact that you need to operate in an international market to sell oil, that is why we have seen sovereign countries default on their debt but not their quasi-sovereign oil companies (for instance, Mexico and Pemex). You need to have refineries placed abroad if you want to be competitive, etc. etc. And abroad, nor the TSJ nor banana law are in place. Therefore, if you issue NY law debt (as PDVSA has done), don’t think the issuer can go and disregard its debt without having its assets seized by creditors in the same country, its operations suffering, etc. etc.

      Moreover, PDVSA is a profitable company. In what parallel universe do profitable companies default because somewhere down the line 30mm of people want to live from handouts and subsisidies coming from the govt. managing the company? The only solution is for all local prices and restrictions on capital flows to be lifted so that capital can come back in the country and eventually make local wages competitive again.

      • Thanks Venny
        I’m not going Socialist on anyone.
        The GM bankruptcy was a giant screwing of everyone except the employees.
        Every creditor right down to the suppliers were shortchanged while the union members (Obama supporters), did not give up a dime in wages or benefits.
        I was dumbfounded how quickly that sailed through without any real oversight.
        I expect GM to be in the same position in the future.
        GM erased all their debts and have been heralded as being a profitable company. Most businesses would be profitable in the same situation.
        GM has not reduced their labor costs or significantly changed their business structure. Eventually they will be in the same situation in another down cycle.
        Auto sales are a cyclical business.
        As time has gone on I have become more invested in banking than manufacturing.
        The government will not let the banks fail and saves the stockholders equity time and again. At least with the big banks. Every time the government has the Fed produce money out of thin air to cover a defaulted debt it is to the benefit of the big banks.
        The rest of us pay with inflation and most people don’t realize it.
        At some point the Fed’s almost 400% increase in the money supply will need to be reckoned with.
        Outside of direct manipulation, there is no explanation for the price of gold and silver against the Dollar.
        Goldman Sachs is currently holding 600 million ounces of silver. I expect to see it go up.

        • I thought you were advocating for a GM-style of bankruptcy. Apologies if I misread your position. In any case, I fully agree with you on GM and have exactly the same reading: most companies will instantly become profitable if their debt is entirely wiped out. And we agree, nothing good will come out of it, in a few years, they will be in the same hole for many reasons including, as you highlighted, labor costs, but also a change of consumer behaviour.

          Interestingly enough, Ford was in trouble at the same time but had an excellent CEO, muddled and eventually pulled through quite well! But what matters is that this is proof that the capitalist mechanism was broken back then, poor performers were allowed to avoid the consequences of their actions…

          I did profited quite handsomely with the bankruptcy though but was forced to give up significant upside due to Obama’s confiscatory measure, which is why I am still upset about it today and remember every detail (I even have a printout of the proposal).

          With regard to general market and other assets, I think I agree with you. But careful with banks, you may get wiped out every now and then (Lehman, WAMU, etc…) so allocate accordingly.

    • PDVSA is a corporation, as such, it is entitled to bankruptcy protection. Creditors may opt for a chapter 7 type of bankruptcy (liquidation) or chapter 11 (restructuring). A liquidation would not include oil underground, that belongs to the State.

  5. The question is not whether those bonds are worth their facial value, evidently they are not (for all the reasons venny has mentioned) but whether it they could have sold at a better price than they got………., this second question is yet to be answered but lots of people appear to be dubious about the price paid being a credible market price for those bonds ……!!

    There is probably not one right answer but many different answers depending on who is the judge , my bet is that under Venezuelan Law and for a Venezuelan Judge the answer will be that they were under priced…which of course has consequences for those officials who took the decisions …..

    I have reason to doubt that Pdvsa is a bona fide profitable company , that lots of accounting and other funny gimmics are used to make it appear that its actually solvent , able to pay the mass of its creditors what it owes them , its not just the bond holders but lots of other creditors that Pdvsa must pay…….that means that Pdvsa can be declared insolvent if just some of those creditors bring action against Pdvsa before a US or another international court…..!! A question of time ?? probably …time will tell!!

    For capitals to come into the country lots of things have to happen (Im not excluding Chinese and Russian capitals) that improve substantially the countrys outlook , there is no sign that the current regime will allow any believable changes in policy and practice that will make the return of foreing capitals the least bit likely ….., so what can we expect for the future if the regime remains the same ……even venny knows the answer to that one…!!

    • PDVSA has outstanding debts in the billions to US oil service companies. These companies have stopped servicing the wells, resulting in an accelerated rate of production decline.
      OPEC’s latest reports shows Venezuelan production at 1.9 mm bpd.
      PDVSA may not be profitable. High labor and lift costs coupled with the lower realized price of Venezuelan oil take a big cut out of the bottom line.
      PDVSA could be very profitable if it were run as a competitive business and not an arm of the government.
      The neglect of the PDVSA infrastructure will require a lot of time and money to restore to capacity. Not an easy task for a heavily indebted company.

      • John, at the top line, PDVSA IS profitable…The problem is that at some point (via dividends to the state) the revenues get diverted to maintain the heroin addiction of its drug addict child, Venezuela…

        Bill, I am convinced that the bonds couldn’t have been sold at a higher value than they did. Just because it’s 10 points difference on YTM basis, which in my view is a rational cushion for GS who is buying $3bn. of illiquid debt from a country which is in much worse shape than 3-4 years ago. Why is no one buying the bonds now at 41% then??? If it is so easy to flip them as most people suggest, why is it not happening?

      • PDVSA (is / is not) profitable.

        Does there exist a comprehensive P/L Statement, or even a Balance Sheet, prepared by a trusted (international) accounting firm, that we can all hang our hats on? I mean a 150+ pager.

        If not I think it is anybody’s guess, but my gut tells me they are tits up.

        • Just go to http://www.pdvsa.com and look at the latest financial statement and debt overviews.

          I doubt a lot of people here have gone through it in detail. The financial statement is quite a large PDF file, 100+ pages long and signed off by KPMG (are they trusted enough for you?)

  6. For years Pdvsa was able to grow , produce high profits and provide the state with most of the income it needed to provide for the population …….., not just a question of high prices but of rational management andbusiness practices and a state that although overgenerous in its clientelism still held to some limits ……..thats certainly not the case know ., Pdvsa is broke , we all know it , the kind of financial transactions it does know are evidence of this ……if Pdvsa is broke is there any doubt that the govt which depends on its revenues is also broke , now the money formerly used to fund the regimes crass clientelism goes to try to pay the mountain of debt owed its creditors……

  7. This deal or trade was sourced by Commonwealth Bank who then used their brokers Roberto Keaton and Javier Contreas at Dino Securities New York to cross the trade with Goldman. Both are being investigated by the seci and Finra as to why they booked the trade with their london based broker instead of New york. A common pratice used to circumvent the US authorities jurisdiction. The same thing the other bichitos like Luis Miguel Gonzalez Ocque at Morgan stanley do I.e Pdvsa pension fund buy back of Pdv 15 via Arca capital. Most times firms look the other way when commision are rolling in This time is a bit different no one is going to look the other way

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