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PDVSA to Issue $1.5 Billion of Bonds to Pay Central Bank

Petroleos de Venezuela SA will sell $1.5 billion of bonds to the central bank to repay a loan and will likely sell additional securities in the second half of the year, a government official said.

PDVSA, as the state oil company is known, within a month plans to issue more of its bonds due 2022 that were first sold in February, the official, who asked not to be identified because he isn’t authorized to speak publicly on the matter, told reporters.

PDVSA has raised $4.75 billion since August by selling more of its bonds due 2014 and 2017 in private placements, mostly to repay loans to the central bank. The company is borrowing as it seeks to fund government social programs and meet its oil investment goals. The central bank sells the securities through its currency market known as Sitme to importers at an exchange rate of 5.3 bolivars per dollar.

“The market has been expecting new issuance, but this way of putting a bond out on top of an existing issue, and in a steady drip, since it will likely come through Sitme, puts a cap on the price appreciation of that issue,” said Russell Dallen, the head bond trader at Caracas Capital Markets at BBO Financial Services Inc. in Miami.

The yield on the 12.75 percent bonds due in 2022 rose 21 basis points, or 0.21 percentage point, to 17.22 percent at 5 p.m. in New York, according to data compiled by Bloomberg. The bond’s price fell 0.84 cents on the dollar to 78.46 cents.

More Strain

President Hugo Chavez has put added strain on the oil company and its finances by demanding greater financing for his social programs and by using dollar-denominated bond sales to relieve local demand for foreign currency. Venezuela, the largest oil producer in South America, depends on crude for 95 percent of export revenue.

The Caracas-based company’s debt has swelled since selling $7.5 billion of bonds in 2007 in what was the largest corporate issue in Latin American history. PDVSA has $2.45 billion of bonds maturing on July 10.

The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries rose 10 basis points, or 0.10 percentage point, to 1,136, according to JPMorgan Chase & Co.’s EMBI+ index. That’s the highest borrowing cost among developing countries.

Venezuela’s government and the central bank have been buying back bonds in the secondary market, the official said. The government and PDVSA will likely issue new bonds later this year, he said.

Yesterday’s Rally

Venezuela and PDVSA bonds rallied yesterday, outperforming regional peers, leading Dallen to believe the government was buying back its bonds to supply the Sitme currency market.

There were about $44 million sold on Sitme today, including $32 million of Venezuela bonds due in 2016 and 2019 that hadn’t traded in high volumes since December.

“The revelation that the government was in the market buying bonds explains the run-up in bond prices this week as oil and the rest of the emerging markets softened,” Dallen said.

The fact that PDVSA is selling $1.5 billion of bonds in a private placement rather than a larger issue to the public is a “relief” to markets, according to Boris Segura, a Latin America strategist at Nomura Securities International.

“They aren’t flooding the market, for now, and this supply has been talked about for months,” Segura said. “The fact that it is now being announced and going to the central bank is a relief for the market.”

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