NEW YORK (Reuters Breakingviews) - If a deal looks too good to be true, it may just be. Money managers at Goldman Sachs bought $2.8 billion face value of Petroleos de Venezuela bonds at a deep discount last week, attracting the ire of critics of President Nicolas Maduro. Investments aren’t necessarily moral choices, but they can hit reputations.
Venezuela could, on paper, be one of the soundest emerging-market credits given that it has the world’s largest oil and gas reserves. But the economy has been in precipitous decline since Maduro succeeded the late Hugo Chavez in 2013. Output has fallen by nearly a third over the past three years and inflation is projected to exceed 1,000 percent by the end of this year, according to the International Monetary Fund. Bare shelves and angry protests, met with violence, have become the norm.
The country’s opposition is angry that Goldman has, in effect, made life easier for the central bank – the previous owner of the state-controlled PDVSA’s bonds – thereby propping up Maduro’s regime. The Wall Street firm, however, says it bought the block of bonds, priced at about 31 cents on the dollar, through a broker and didn’t interact directly with the government.
It would, however, be surprising if the firm’s asset managers didn’t understand where the securities were coming from. While Venezuelan debt is a component of the most widely tracked emerging-market bond benchmark, JPMorgan’s EMBI Global Diversified index, and many investors hold it, these particular PDVSA bonds are different. Maturing in 2022, they aren’t in the index because they aren’t publicly held, according to JPMorgan. The face amount bought represents more than 90 percent of the $3 billion issue, according to Eikon data.
Goldman may earn a hefty profit if the Venezuelan economy bounces back. As with other controversial transactions, though, such gains may come at a cost. The bank earned extraordinary fees underwriting bond deals for 1Malaysia Development, known as 1MDB, earlier this decade. Today the U.S. Justice Department and Swiss authorities are investigating allegations of fraud and money laundering at the Asian country’s sovereign wealth fund. The bank also took heat from European authorities for arranging currency swaps that helped Greece mask borrowing ahead of its debt crisis.
With that track record, Goldman can’t be accused of naivete. By now, the firm ought to have a better nose for a problematic deal.
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