Goldman Sachs' approximately $865m
purchase of bonds from Venezuela’s central bank last year attracted criticism from around the world. Now, the transaction also is saddling Goldman’s investment clients with millions of dollars in paper losses.
Mutual funds operated by Goldman Sachs Asset Management faced potential losses of at least $63m on the bonds in the 12 months ended June 30, based on data from Morningstar.
All told, market-value losses on the investment, which is held mostly in privately managed accounts for Goldman clients, likely exceed $250m, based on a
Wall Street Journal analysis of figures reported by the mutual funds and traders’ estimates.
These losses came before
Venezuela announced a devaluation of its already embattled currency on Friday evening, which likely will add to investor anxiety about the country’s future.
The declines underscore the risks Goldman and its clients shouldered in taking on what the firm viewed at the time as an opportunistic investment in a country facing extraordinary challenges. Goldman marked the value of the bonds at 18 cents on the dollar in June compared with 31 cents when it bought them little more than a year earlier, according to Morningstar.
“For the first few days the Goldman guys looked like heroes and since then they’ve had a whole year of grief,” said Mitu Gulati, an economics professor at Duke University who interviewed 30 investment firms for an academic study of the bonds. “Big investors are just not willing to buy.”
In May 2017, Goldman bought bonds with a face value of $2.8bn originally issued by state oil company Petróleos de Venezuela, or PdVSA, in 2014. The purchase
drew public criticism when it was
reported by The Wall Street Journal because the proceeds went directly to the government of Venezuelan dictator Nicolás Maduro, unlike most bond trades between financial institutions. At the time, Maduro’s detractors were pleading with international banks to avoid transactions that might help a government accused of human-rights abuses.
A spokesman for Goldman declined to comment. Last year, responding to criticism in Venezuela, the firm said it bought the securities from a broker and didn’t interact with the Venezuelan government. “We recognise that the situation is complex and evolving and that Venezuela is in crisis,” the bank said at the time. “We agree that life there has to get better, and we made the investment in part because we believe it will.”
No mutual funds managed by firms other than Goldman had purchased any of the bonds as of June 30, according to Morningstar, which tracks more than 1,300 US-domiciled bond funds. Goldman placed about $20m combined face value bonds in two mutual funds it subadvises for SEI Investments and for Thrivent Financial.
“Goldman Sachs is a subadviser for a small portion of the Thrivent Partner Worldwide Allocation Fund,” a Thrivent spokeswoman said. “Goldman Sachs manages all assets solely at its discretion as it does with other clients.”
Goldman successfully
unloaded some of the bonds, mostly to hedge funds, booking slight gains on some of them and taking losses on others, traders said. Market-value declines have been partly mitigated by
an April interest payment.
The uproar prompted the firm to review its so-called ESG practices, the environmental, social and governance factors that many investors are increasingly using to aid decision making, a GSAM executive said in a March interview with
Bloomberg.
The risk of doing business in countries that have repressive regimes has become the No. 1 ESG concern among money managers, ahead of issues like climate change and corporate governance, according to a survey of 300 investment firms by US SIF, an organisation focused on expanding sustainable investing practices.
Asset managers are increasingly incorporating ESG measurements into bond analysis both because their clients require them and to reduce risk exposure. MFS Investment Management Inc. fund manager Matthew Ryan said he has mostly avoided holding Venezuelan bonds in the $5.9bn emerging markets bond mutual fund he runs because of Venezuela’s poor finances but ESG factors also played a part.
“On top of all their problems, the country has turned increasingly authoritarian and is engulfed not just by an economic crisis but by a social crisis,” he said.
Goldman Sachs Asset Management likely still holds at least $2bn face amount of the bonds, or about three-quarters of its original investment, bond traders estimate. Trading of all Venezuelan bonds has been thin since the country defaulted in November, and liquidity — a measurement of trading activity — in the Goldman bonds is just a fraction of other Venezuelan debt. JPMorgan excluded them from its widely followed emerging-markets bond index, which includes other PdVSA debt.
Venezuela has defaulted on billions of dollars of bonds since November, and debt restructuring talks are unlikely under the current government, bondholders say. When such talks start, one question is likely to be whether the bonds Goldman bought get the same treatment as other debts, or get repudiated because of the circumstances of their sale, Duke University’s Gulati said.
