Controversial ‘Hunger Bonds’ Make Their Way Onto the Market

  • Notes offered on the secondary market after Goldman purchase
  • Brokers said to quote bid prices on bonds of about 33.5 cents

Venezuela’s “hunger bonds” are now on the market.

Goldman Sachs Asset Management, which purchased $2.8 billion of the notes issued by the nation’s state oil company in a controversial transaction in May, began selling some of its holdings over the past few days to create liquidity, according to people with knowledge of the matter. Multiple Wall Street banks are now quoting the securities at bid prices of about 33.5 cents on the dollar and they’ve started to change hands, according to brokers and money managers who asked not to be identified because the matter is private.

Top Venezuelan lawmakers say the investment arm of Goldman Sachs Group Inc. bought almost all of the $3 billion in bonds -- originally issued by Petroleos de Venezuela SA to the central bank -- for 31 cents on the dollar late last month. The opposition legislators have decried the deal, saying it provided a lifeline to an authoritarian regime selling national assets at fire-sale prices and threatened to refuse to honor the debt if they come to power.

After the transaction, several banks engaged in so-called price discovery, asking investors what they would pay should the bonds make their way onto the market. At the time, Goldman Sachs said that the asset-management unit known as GSAM hadn’t offered them to any dealers. Andrew Williams, a bank spokesman, declined to comment on whether the bonds were now trading. A spokeswoman for Nomura Holdings Inc., which purchased a small amount of notes at the same time as Goldman, also declined to comment.

GSAM, which has multiple funds that need to be measured on a daily basis, is selling some of its holdings in multiple small transactions to figure out a value to assign the securities, the people said.

While the prices at which GSAM has been selling its bonds is unknown, they would today mark a profit of about $70 million at the levels being quoted by traders. But the bonds are still trading well below similar PDVSA securities that were issued in a more conventional matter, reflecting investors’ concern about the opposition’s threat to repudiate the securities, as well as risks to their reputation for holding the debt that has come under so much criticism. PDVSA notes due in 2024 fetch 37.25 cents on the dollar.

A small group of hedge funds in London and New York picked up at least $300 million of the notes from Goldman for about 32.5 cents on the dollar, the Wall Street Journal reported Friday, citing a person familiar with the matter.

The term “hunger bonds” for Venezuelan government debt took off after the Goldman deal, with critics arguing that President Nicolas Maduro’s decision to keep servicing overseas notes is inhumane given shortages of food, medicine and other basic goods. The argument among supporters of the movement is that providing financing to the government props up an administration whose corruption and incompetence have ruined a nation that’s home to more untapped oil wealth than any other country on earth.

Julio Borges

Photographer: Carlos Becerra/Bloomberg

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Julio Borges, the head of Venezuela’s National Assembly, last week asked U.S. authorities to investigate the transaction, saying that it fleeced the country for the benefit of political elites. In a detailed account addressed to the U.S. Securities and Exchange Commission, the Financial Crimes Enforcement Network and Financial Industry Regulatory Authority, Borges said that "there is enough evidence of wrongdoing for the U.S. government to start an investigation against Goldman Sachs and Nomura” under the Foreign Corrupt Practices Act.

Goldman has said that it bought the bonds for asset-management clients via a broker, and didn’t provide money directly to the government. The situation “is complex and evolving” and life in Venezuela has to improve, the bank has said.

In a letter to Goldman Chief Executive Officer Lloyd Blankfein on May 29, Borges said that he intended “to recommend to any future democratic government of Venezuela not to recognize or pay on these bonds.”

— With assistance by Christine Jenkins, and Dakin Campbell

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