Hunger Bonds’ Comeback Shows Depth of Venezuela Debt Rally
Venezuelan bonds that became a global symbol of Wall Street’s indifference to the country’s deep economic crisis are now among the biggest winners in a sweeping debt rally.
“Hunger bonds,” issued by state oil company Petroleos de Venezuela SA, have jumped 70% since the US captured President Nicolas Maduro in January. The securities, which traded at steep discounts in deals that provided the Maduro regime with quick liquidity nearly a decade ago, draw their name from the moral outrage over investors propping up a government while its citizens went hungry.
The $3 billion worth of securities have risen to 35 cents on the dollar, from a low of about 20 cents at the start of the year, according to indicative pricing compiled by Bloomberg. The gains come as the stigma around how they were sold starts to fade, though they are still the cheapest across the PDVSA curve.
The moves underscore how aggressively investors have piled into Venezuela’s roughly $60 billion of defaulted government and PDVSA bonds since Maduro’s ouster. A political thaw between Washington and Caracas is raising expectations for a massive debt restructuring, sparking one of the biggest rallies in emerging markets.
“If you can buy them, why not?” said Riccardo Grassi, head of Risk Management and Quantitative Research at Swiss-based fund Mangart Capital Advisors, which holds Venezuelan bonds. “The path to restructuring is there, but in terms of timing, we don’t know. The moment we have more visibility, the spread will narrow.”
The rally reflects how investors are betting that all bonds — even those with a tainted reputation — will be treated equally in a debt rework.
“The architects of Venezuela’s debt restructuring, whenever it comes, would be ill-advised to start down the road of giving differential treatment based on the provenance of the claim or the perceived moral characteristics of the instrument,” said Lee Buchheit, a restructuring attorney who previously advised the Venezuela opposition on financial matters.
Venezuela’s central bank bought the bonds in 2014 when PDVSA issued them. They gained the “hunger bonds” moniker three years later as the country spiraled into hyperinflation and an economic downturn so severe that it caused one of the worst humanitarian crises in the world.
Desperate for cash, Venezuelan authorities sold the bonds to Goldman Sachs Asset Management at about 31 cents on the dollar in a secondary-market transaction.
The transaction generated widespread outrage with protesters claiming the Wall Street firm was propping up a government that was cracking down on its citizens and being accused of human rights violations. Harvard University economist Ricardo Hausmann, who is Venezuelan, coined the term “hunger bonds,” criticizing investors who were financing a government that was prioritizing debt payments over food imports.
The firm has since fully exited the position, according to data compiled by Bloomberg.
A Goldman spokesperson declined to comment.
Read more: Goldman Says It’s Learned From Venezuela ‘Hunger Bonds’ Backlash
Prices for those securities — like other Venezuelan bonds — plummeted after the country fell into default in 2017. Less than two years later, US-imposed economic sanctions began prohibiting trading by American funds in the secondary market. At one point, they were exchanging hands at less than 3 cents on the dollar.
Even today, the hunger bonds trade at a discount of about 12% compared to other PDVSA notes, said Francesco Marani, head of trading at Spain-based Auriga Global Investors SV SA. Still, it’s an improvement from the 50%-60% markdown during the trading ban, he added, which ended in 2023.
The discount is partially explained by the fact that they are excluded from JPMorgan Chase and Co.’s widely-followed emerging-market debt indexes. Concerns over ESG and maturity restrictions also limit the pool of buyers.
'Hunger Bonds' Trade at Discount as Venezuela Debt Rallies
Note: Indicative pricing
Source: Bloomberg
Jim Craige, the chief investment officer at Stone Harbor Investment Partners, has avoided the notes due to uncertainty over how they will be valued in a restructuring.
“We never got comfortable with the actual claim amount,” Craige said. “I just don’t know how that claim value will ultimately settle out.”
Still, others are bullish. Simon Waever, a strategist at Morgan Stanley, recommends buying the 2022 notes, along with other PDVSA debt.
“In the end, when you go through the legal documentation for the 2022s, it is exactly the same as the 2024s and 2026s,” Waever said. “The view from our side is that legally, there is no difference between them, but there are some technical reasons why people don’t hold it.”
Even if the Venezuelan government is pressured to treat the bonds differently during a restructuring due to their checkered past, Jose Ignacio Hernandez, senior specialist at consultancy Aurora Macro Strategies, said that’s unlikely to stand up in a court.
“If you are a very risky investor, you may take advantage of the discount of the hunger bond, because the challenge is how to transform a moral argument into a legal binding claim before the New York court,” he said
