Venezuela’s New Best Friend – Goldman Sachs

Courtesy of The Financial Times, an interesting report on Goldman Sachs’ recent involvement with Venezuela:

Socialist Venezuela would never sell out its friends to Wall Street, right? Yet it appears that is exactly what Caracas wants to do. Pressed by the oil price collapse, rattled by fears of default, facing rising social tension as imports collapse due to lack of foreign exchange, and seemingly unable to put its economic house in order, the country is trying to raise desperately-needed cash by selling debts owed to it by the Dominican Republic and Jamaica on to Goldman Sachs. Chavismo turns to the vampire squid?

The idea has been circulating for a while in the investment banking community. But now details have emerged in the press, as reported by El Nuevo Herald, and Petroleum Argos. Essentially, the trade involves Venezuela securitizing debts owed under its $3.5bn a year subsidised oil program, called Petrocaribe.

In this case, that reportedly means selling the $4bn owed by the Dominican Republic for $1.75bn to Goldman Sachs. The DR will then issue fresh bonds, and with the proceeds buy the debt off Goldman. The US investment bank is also reportedly holding conversations about doing the same for Jamaica’s Petrocaribe debts. Along with Nicaragua, these two countries account for $10bn of the total $14.5bn owed to Venezuela under the 13-country program that, in the past, has bought Caracas valuable support in fora such as the United Nations and the Organisation of American States. But not for much longer, it seems.

There are three main consequences stemming from this piece of financial footwork that was perhaps dreamed up by Venezuela’s own financial advisor, Lazard, an investment bank with deep expertise in sovereign debt re-profiling.

First, Venezuela gets some cash coming in – although not much compared to its financing needs. Bank of America reckons that the oil price collapse means the country needs $25bn of fresh external finance a year to maintain imports even at current depressed levels. But taking the Dominican Republic deal as a template, securitizing all of the past Petrocaribe debt would bring in a total of just $6bn. Binning the whole program completely, including Venezuela’s strategically-important Cuba program, would provide the equivalent of another $3.6bn a year.

That is not enough. More measures, therefore, will be needed. Hence the current trip by Rodolfo Marco Torres, the finance minister, to Beijing to try and drum up more funds, although Bank of America is “skeptical that [this] plan to tap international lenders, including China…will yield any tangible results.” Markets already have their view: spreads on Venezuelan debt are now comparable to Russia’s before its infamous 1998 default.

Second, Goldman Sachs gets a $1.7bn bond with a reported 11 per cent coupon – a nice little earner, so long as the debtor pays. But will it or, more to the point, what price will be paid — 100 per cent? The Dominican Republic and especially Jamaica are struggling under hefty debt loads. (Goldman Sachs and PdVSA had no immediate comment.)

And third, Venezuela’s effective ending of the Petrocaribe program provides the US with a chance to step in with alternative offers of help. It’s a golden opportunity for a strategic realignment in the Caribbean, especially as not all of Venezuela’s program was ideologically-based; some of it (as to Haiti) reflected genuine need. Will Washington take it?

This entry was posted on Wednesday, December 3rd, 2014 at 10:28 am and is filed under Venezuela.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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