woensdag 7 juni 2017

Venezuela's "Mysterious" Bond Deal Reappears, This Time China Wants Out

As its foreign reserves dwindle to less than $10 billion, the government of Venezuela, desperate for any kind of financial lifeline - has partnered with a Chinese brokerage to try and resell $5 billion in bonds that it initially issued at a deep discount, according to the Wall Street Journal. The brokerage, Haitong Securities USA, a unit of China’s Haitong Securities, is quietly marketing the bonds to yield-starved hedge fund managers. What makes today's news particularly notable is that the original bond transaction in question was highlighted here back in January when in a post titled "In "Mysterious" Bond Sale, Venezuela Issues $5 Billion In Debt To Itself With China As Underwriter", we reported that the Maduro government appeared to be effectively selling debt, and raising dollar funds, from (and to) itself with China as an intermediary; as Reuters added at the time, the deal was peculiar in that the transaction did not bring in actual new funds for the cash-strapped OPEC nation. Quoted by Bloomberg in January, Francisco Rodriguez, the chief economist at Torino Capital in New York, said that "my guess, but it’s just a guess, is that given uncertainty as to whether Venezuela would be able to deliver the oil necessary for repayment, the Chinese may have asked for the loan to be also guaranteed with a bond,” he told Bloomberg by email, adding that he had been expecting a disbursement of $5 billion related to the renewal of a loan from China.
Bond traders were just as confused as reporters and analysts: Russ Dallen, a managing partner at Caracas Capital, told Bloomberg that "bond markets will likely react with “befuddlement. Taking place on Dec. 29 with no approval by the National Assembly and no promulgation notice in the Official Gazette, this smells of some kind of end of the year financial shenanigan from a government that is out of cash and is desperately trying to hide it,” he said. As we concluded at the time, "With that assumption in place, we look forward to learning the details of just how China is now funding insolvent supplier sovereigns by the back door, and where else besides Venezuela is this arrangement in place." Five months later, we may have gotten the answer, and it now appears that Haitong had simply kept the bond without syndicating to end buyers, and - for whatever reason - is now desperate to dump them to any willing purchaser, a move which bodes poorly for China's ongong relationship with Venezuela. Reports that Venezuela is shopping around the bonds arrived just a week after Goldman Sachs Asset Management inadvertently ignited a PR crisis when it bought $2.8 billion worth of Venezuelan bonds issued by state oil company PDVSA from an obscure UK brokerage. Opponents of the brutal regime of Nicolas Maduro accused the bank of buying “hunger bonds” and Venezuela opposition leader Julio Borges accused it of “aiding and abetting the country’s dictatorial regime.”
As we noted last week, it appears that Goldman turned around and sold those same bonds, which it bought at a discount, for a tidy profit. Haitong is reportedly offering the bonds at an even deeper discount than the 31 cents on the dollar that Goldman paid. But the latest batch of bonds currently on sale is different from those purchase by Goldman (and Nomura) as they remain unregistered with clearing organizations like Euroclear and the Depository Trust & Clearing Corp., which is required for the bonds to trade electronically. Aside from the illiquidity issue, potential buyers have other reasons to be wary of lending to the Maduro regime: The political opposition has argued that the bond sales are illegal because they were never approved by the legislature. Some would-be buyers told WSJ they're afraid that if Venezuela defaults, the owners of the 2036 bonds wouldn’t have the same claim on the country’s debt as other bondholders because the bonds were issued through an intermediary. Of course, any potential buyer should probably be concerned about the huge sheer size of the discounts. “It’s like they’re having a going out of business sale,” said Russ Dallen, a partner at Brokerage Caracas Capital. “And that’s what buyers should be worried about. Either they’re really desperate, or they’re just filling up their credit card with no plans of paying back.”
There is a reason for Venezuela's desperation: after nearly two decades of economic mismanagement, the largest global banks refuse to do business with the insolvent socialist country, which has on numerous occasions tried to lease or sell outright some of its gold reserves - making it impossible to plug holes in its budget by issuing debt. Instead, the country must rely on small and often little-known institutions to peddle its bonds. That, and of course, hyperinflating away its debt. Venezuela’s economy has shrunk by an estimated 27% since 2013. The International Monetary Fund says inflation this year will hit 720%, and the country’s central bank hasn’t publishing basic economic indicators like balance of payments and gross domestic product since September 2015, rendering the country’s basic economic indicators, let alone calculations of its capacity to repay, a giant question mark for investors and credit rating firms alike. With that in mind, we’re curious to see who, if anyone, is willing to step up and buy the latest batch of "hunger bonds" in the aftermath of the shock treatment that Goldman received after it was revealed that Blankfein's firm may have been covertly funding Maduro's central bank. But the far bigger question is whether China, as the Haitong firesale appears to suggest, has finally given up on the melting Venezuelan ice cube, also known as one of its main foreign crude oil vendors. If so, Maduro's days are indeed numbered....