Citywire - For Professional Investors

Register to get unlimited access to all of Citywire’s fund manager database. Registration is free and only takes a minute.

Bond buying backlash: EMD managers tackle Goldman's dubious Venezuela trade

Bond buying backlash: EMD managers tackle Goldman's dubious Venezuela trade

Despite the backlash against Goldman Sach's purchase of Venezuelan bonds, politics remains only one factor for investors as they analyze the soundness of putting their money in Venezuela, which faces a mounting economic and humanitarian crisis.

The firm came under fire after The Wall Street Journal reported on Sunday that it had bought bonds of state oil company Petróleos de Venezuela held by the country's central bank.

Critics said the firm's purchase of $2.8 billion worth of bonds for $865 million was a financial lifeline for Venezuela's controversial government, which has been the target of protests as the country's humanitarian crisis aggravates.

Japanese asset manager Nomura Securities also hit the headlines for buying $100 million worth of Venezuelan bonds for $30 million as part of the same transaction as Goldman.

Investors hadn't considered the potential political backlash of investing in Venezuela before the news emerged, said Jim Barrineau, co-head of emerging market debt at Schroders.

'I don't think anybody assumed that if they did a quiet private transaction buying debt […] that they would get the spotlight put on them.'

'I think now that no investor would give fresh cash to the government without thinking twice because of the negative publicity that might occur to them,' he said. 

Goldman later said it had bought the bonds from the secondary market and not from the central bank, challenging the idea of whether the firm had bolstered the government's coffers. 

'There's a big difference in that because whatever you do in the secondary market has no impact on the government's ability to carry on, but if you purchase assets that the government already has at a deep discount you’re giving the government cash it did not already have,' Barrineau said.

Shamaila Khan, a manager for Alliance Bernstein's Emerging Markets Debt fund, wouldn't speak directly to Goldman's purchase because it dealt with a competitor. However she said the calculation about buying Venezuelan bonds goes beyond the potential political fallout.

'Generally when we look at those things we are very careful as an institution that we're not buying something that could be deemed illegal,' Khan said. 'But that's a careful evaluation of the facts, not headlines.'

The fund Khan co-manages had a 3.57% exposure to Venezuela as of the end of April and traded its securities in the secondary market, Khan said. 

A sound investment?

Beyond optics and the law, Khan and Barrineau shared deeper concerns about investing in Venezuela. The central bank's reserves have dipped in recent years and oil production has slowed down, all as citizens protest against the country's ever-growing food and medicine shortages.

'In Venezuela, the situation is really not sustainable in the long run, and I think the most important thing that has to happen is a policy change so they can encourage investment so the country doesn't have to import food and medicine,' Khan said.

'That's one thing to keep in mind -- it's not a country that doesn't have resources. There's no fundamental reason that this country should be in this position.'

Schroders used to have a 3.81% Venezuela position in its Schroder ISF Emerging Market Bond fund, but it sold its exposure about a month ago when the country met a $2.2 billion debt payment, Barrineau said.

In his view, investors have bought Venezuelan bonds so they can sell them before the country defaults or in hopes that an eventual restructuring would benefit them. Investors counting on the second scenario might be disappointed.

'The ethics anyone can debate, but it's also logically dubious to think you’ll have a restructuring from a government that's willing to sell bonds to anyone at 42% interest rates,' Barrineau said.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Events
  • Citywire Miami 2018: all the pics from day one

    Citywire Miami 2018: all the pics from day one

  • Selector soccer stars: all the photos from the Citywire Miami 2018 matches

    Selector soccer stars: all the photos from the Citywire Miami 2018 matches

  • Citywire New York 2017: All the pics from our fund selector forum

    Citywire New York 2017: All the pics from our fund selector forum

  • Citywire Latin America 2017: check out the pics from day two

    Citywire Latin America 2017: check out the pics from day two

  • Citywire Latin America 2017: all the pictures from day one

    Citywire Latin America 2017: all the pictures from day one

  • Citywire Santiago 2017: all the pics from our fund selector forum

    Citywire Santiago 2017: all the pics from our fund selector forum

  • Citywire Mexico 2017: all the pics from our fund selector forum

    Citywire Mexico 2017: all the pics from our fund selector forum

  • Citywire Miami 2017: all the photos from day one

    Citywire Miami 2017: all the photos from day one

  • Citywire Miami 2018: all the photos from day two

    Citywire Miami 2018: all the photos from day two

  • Citywire Miami 2017: all the pics from our fund selector forum

    Citywire Miami 2017: all the pics from our fund selector forum

  • Wine tasting at the Ritz Carlton Santiago

    Wine tasting at the Ritz Carlton Santiago