Say What? Venezuela Sold What To Goldman Sachs?

December 2, 2014

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Most people ended up looking like the guy above when they read this morning the headline in the Herald : “Venezuela sells to Goldman Sachs part of its oil debt”, an article that is actually not that well written, as it says that Goldman Sachs “earned” 59%, which is incorrect, Goldman Sachs would only “earn” that if it waited 20 years for the Dominican Republic to pay the loans. Time is money and money earns money over time.

What the report claims is that Venezuela sold Goldman Sachs the debt that the Dominican Republic has with Venezuela, because PDVSA has been selling oil for years to this country, whereby, the Dominican Republic pays 50% upfront (which varies) and the remainder for 20 years at 2% interest rate (which also varies, but let’s keep it simple). After all these years, that country has a debt of about US$ 4 billion with Venezuela, which it will have to pay interest of 2% per year and eventually pay all of the US$ 4 billion. What the article claims is that Venezuela sold this debt for US$ 1.7 billion, or a 59% discount.

My understanding is that this is not a done deal, but it is close to being completed and that in the end the buyer is none other than the Dominican Republic itself. Let’s assume it is true and explain it.

Suppose you lend $1,000 to your buddy, you trust him, like him, much like Petrocaribe and Chavismo likes to have the votes of Caribbean countries. Thus, I tell you let’s do this: You pay me 2% (all of twenty dollars) per year and twenty five years from now, you pay me my $1,000. This means that at the end of the 20 years, I will get $500 in interest and my $1,000.

Except that in five years, I am in trouble, lost my job, but you can’t pay me when I ask and you have only paid me $100, still have to give me $400 in interest in the next 20 years as well as my original $1,000. So, I go to another buddy and ask him at what price he would buy this debt from me and you pay him the interest. My buddy says: “Well, I don’t know him, so, for me to be interested, I would have to buy it from you at 40% of its value, so that I get paid 5% per year (the same $20 per year) and in the end he gives me $1,000 for the $400 I paid you, that means I get $600 additional dollars at the end, or about 30 dollars per year additional in interest. I don’t know the math involved, but that is about $30 more per year, so that I got paid in this simple math I use, about $50 per year on my money, which is 12.5% in my dumb and simple math”

We close the deal.

This is what reportedly is happening. Dominican Republic owes Venezuelan US$ 4 billion. Goldman buys it for US$ 1.7 billion and now the Dominican Republic pays Goldman or whomever Goldman sells this debt to eventually. Well, 2% per year is US$ 80 million, so that Goldman will get US$ 80 million a year or 4.25% per year in interest, but at the end of the twenty years, Goldman receives US$ 4 billion or US$ 2.3 billion more, which comes out to US$ 115 million per year the debt was held. That’s another 6.7% per year, or a total of 11.95% (The actual numbers is 11.38% when you do the math properly).

Well, that is about what the Dominican Republic would pay for a twenty year bond. Except that, I am told that it is the Dominican Republic that is behind the whole operation (Your buddy sneaked around and asked the other guy to buy the debt from you). Goldman buys it, it issues a new bond for the Dominican Republic, and voila, the Dominican Republic has reduced its debt by US$ 2.3 billion and Goldman made commissions at every step.

Why would the Dominican Republic want to do this? Well, easy, the Dominican Republic has debt of about US$ 12 billion between bonds and its Petrocaribe debt and other international loans. But its GDP is around US$ 60 billion, that means its debt is 20% of GDP.  By doing this, they chop off US$ 2.3 billion off the total debt, so that it will be easier for that country to make payments in the future. In fact, investors may even decide that they can buy Dominican Republic debt at lower interest rates, since it has improved ts finances. It is win-win for the Dominican Republic.

What does Venezuela gain? It gets US$ 1.7 billion today in cash, and nothing down the line, it buys time without adjusting the economy and maybe losing an election.

This proves how idiotic the whole Petrocaribe thing was, except to buy votes at international venues. Venezuela, which has been issuing debt at yields to maturity of 10-15%, was lending money to countries at 2%, when most of these countries pay less than Venezuela in the international markets.

Think about it this way: we sold that could be sold at $100 at $50 (50% upfront) plus the remainder we only got  40% for or $20, i.e. we gave them a $30 discount per US$ 100 barrel.

Not great business.

In fact, of the top three Petrocaribe debtors, Dominican Republic pays the highest interest of the three. Jamaica and Bahamas actually pay much less. Jamaica pays 6.5% for its 10 year bonds and Bahamas pays 4.6% for its 2024 bonds. Bahamas is “investment grade”, a country with “adequate capacity to pay debt”, versus Venezuela’s “vulnerable position”. Thus, we are giving very easy terms to country’s in much better shape than we are. (In fact, Bahamas’ GDP per capita is close to US$ 22,000 per inhabitant, while Venezuela’s is US$ 14,000 at the official rate of exchange)

There could be additional operations like this with these or other countries, but remember, nothing has been confirmed yet, I just thought I would explain since people have asked so many questions. In fact, others like Jamaica and Bahamas, could yield higher percentages of their debt for Venezuela, as they represent much better risks.

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34 Responses to “Say What? Venezuela Sold What To Goldman Sachs?”

  1. Harry Says:

    NSA Venezuela cellular network coverage map:

    there is some relief but my personal view is nobody’s watching. not enough eyeballs and other priorities

  2. Harry Says:

    OT: The Greenwald group at The Intercept takes us a little closer with yesterday’s release.

    By far the most revealing of the NSA’s capabilities in Venezuela. Over 95% of Venezuelan cellular networks are accessible to the NSA.

    There is a government cellular network operating in Venezuela which probably falls into the five percent.

    https://firstlook.org/theintercept/2014/12/04/nsa-auroragold-hack-cellphones/

    NSA documents pages 23-24:
    https://firstlook.org/theintercept/document/2014/12/04/auroragold-working-group/

    Map legend:
    Red – None Found
    Dark Green – Over 95% (of cellular networks tapped)

  3. Island Canuck Says:

    This just appeared on Twitter:

    República Dominicana aún no aprueba venta de acreencias en PetroCaribe a Goldman Sachs

    http://runrun.es/runrunes-de-bocaranda/runrunes/173844/republica-dominicana-aun-aprueba-venta-de-acreencias-en-petrocaribe-goldman-sachs.html

    • Dr. Faustus Says:

      Rejected? Hilarious!

      As per above, I would suggest that all PetroCaribe oil bills to the DR are put into an old, dust-covered shoebox, and put on a shelf in a far way government warehouse marked “Do not pay until 2055 or somesuch.” Furthermore to the discussions taking place in the DR’s Parliament, .. “But, say again? They’re real debts? Oh c’mon…..”

      • Ira Says:

        Hah! You nailed it!

        Chavismo doesn’t allow busting balls for money owed to VZ from Spanish-speaking countries!

        And the countries which owe them know it!

  4. CRyan Says:

    I don’t think the Bahamas ever bought any oil under the Petro Caribe banner? That’s the partyline here in Nassau. If you have any info on this from your end it would be interesting.

  5. Cpc Says:

    Deep discount is not due to the creditworthiness of RD, their bonds trade at very low discount. The reason is that the original terms of the debt under PetroCaribe had to be amended to turn that debt into a marketable financial asset. Namely, Venezuelan law and jurisdiction had to be switched in favor of NY Law, plus pari passu and cross default provisions had to be included. RD would only agree to the new terms (not at all more burdensome financially) if it was granted a discount similar to PDVSA, after all, they always had the option to purchase PDVSA bonds at deep discount and pay their debt to PetroCaribe (which is in PDVSA’s books) at face value.

    By the way Miguel, for clarity, you cannot “sell” a debt, you assume a debt. What you can sell is a credit or receivable.

    • moctavio Says:

      Corrected. RD bonds have much higher coupons than Venezuela’s in most cases, for example, the RD 2024 has a coupon of 11.5% trades at 100%. While I am sure your factors are also important, the deep discount is because the interest is only 2%, but in the end the discount rate is more like a DR rate than a Venezuela rate (My calculation is 11.38%). A Venezuela discount rate would be almost double that at this point in time.

      You seem to be close to the transaction 🙂

      • Manny Says:

        Miguel, where do you see RD 2024 has coupon of 11.5%? I’m looking at issuance for 18-April-2024 and has a 5.875% coupon and trades at 104.5. Am I looking at the right one? Also, how do you guys get the 11% rate for transaction? If I do a quick calculation in excel for 1.7b pv 4b fv , 20year period at $80m annual payments I get 7.5% [in excel RATE(20,80,-1700,4000) ]. What am I missing?

        • Miguel Octavio Says:

          I am looking at a different issue. The one with 11.5% coupon, i think the one you are mentioning has sinking fund. I did the full discounted cash flow cakculation and the rate implicit with the herald numbers was11.38% if my memory is correct

  6. Ira Says:

    So what does this mean for PetroCaribe? In the short- and long-term?

    I mean, we read that the Oil-For-Jeans programs are now tentative with some countries, but any predictions for immediate actions that we can expect for this financing?

    Like, with oil tumbling to 40 (Yes! It will happen! Thank you, Jesus! And Moses! And Buddah!)….does VZ continue to finance at these ridiculously low rates and long terms?

    And here’s my big “I told you so” based on some fairly recent posts:

    Venezuela WILL default, sooner rather than later, and I predicted this on circumstances which aren’t predictable. Events that come out of left field. Circumstances which prove the experts aren’t so expert.

    And today’s bbl/price is proof of that. Total OPEC production is now at around 30 million barrels a day–and the U.S. Is at 9 million by ITSELF, not even counting Canada!

    It’s going to be a merry Christmas for me in Florida, I feel the at-pump savings already, and it’s only going to get lower.


  7. My (flawed) analysis shows Chávez paid $1.6 billion to have the OAS’s Petrocaribe members refuse to listen to Maria Corina Machado’s short speech. What did the Bolivarian Republic pay the other members? Or are they voting in exchange for trade deals? Or they afraid?


  8. But I thought these were vulture capitalists, according to Christina!!

  9. Dr. Faustus Says:

    “It is win-win for the Dominican Republic.”

    Er, I dunno about that. The Petrocaribe oil bills were probably put into a dust-covered shoe box on the expectation of a future non-payment. Now it’s a real debt with real consequences.

  10. Yuzhou Lin Says:

    Amigo,I heard a hearsay in a Chinese website, it says that VZ will give Isla La Blanquilla to china in exchange of China write off the old loan and give VZ new loans.

  11. Steven/Setty Says:

    Please ask your sources what has happened, or will happen, with the joint fund set up between Venezuela and each country under Petrocaribe deals. You can go back to Official Gazettes to see the terms. Every deal I have read included a pledge to put half of the financing money (25% of the total) into a jointly managed development fund, like Fonden, in each recipient country. That always struck me as a straight-up bribe, as off-budget $$ with no oversight obviously favors the incumbents in these weak states. I wonder what is becoming of these pots of cash.


  12. On another note, the “snow” is pretty annoying.

  13. captainccs Says:

    If you have debts and no cash you have to fire sell assets, just what happened in 2008. Petro Caribe was a Faustian deal and the devil (the real devil) is getting his. This deal is the same as selling the oil at a huge discount. Mismanagement pure and simple. That’s what you get when you elect assholes.

  14. Glenn Says:

    Amazing indeed. Anything to stay in power and to hell with Venezuela.

    And still I don’t believe Petrocaribe is dead…..

  15. Noel Says:

    De llorar!


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