Venezuela Plans to Sell at Least $3 Billion of Dollar Bonds

Venezuela will sell at least $3 billion of dollar-denominated bonds in the local market this year to take advantage of declining borrowing costs, a government official said.

The government may begin selling the bonds as soon as next month, said the official, who is involved in the transaction and asked not to be identified because he isn’t authorized to speak publicly on the matter. He declined to comment on the maturity and interest rates the bonds would offer. Venezuela last sold dollar debt in August, when it issued $3 billion of 12.75 percent notes due in 2022.

The dollar debt offering forms part of a plan to raise as much as 45 billion bolivars ($10.5 billion) to help finance President Hugo Chavez’s programs to build homes, boost agricultural production and create jobs. The terms of the additional debt plan, which was denominated in bolivars when published in the Official Gazette last week, doesn’t restrict the sale of part of it in dollars, the official said.

Venezuelan bonds have rallied since the announcement last month that Chavez was operated on to remove a cancerous tumor in Cuba, which fueled speculation his health problems may bolster the opposition ahead of 2012 presidential elections and lead to a reversal of his socialist economic policies.

‘Significant Rally’

“These new supply concerns will remain a constraint, but the dominating issue is whether Chavez will be healthy enough to run next year,” Paul Biszko, an emerging-market strategist at Royal Bank of Canada in Toronto, said in a phone interview. “The prospect of Chavez not being there after next year and with no successor with his charisma and ability to carry on could trigger a significant rally in the bonds.”

An official at the Finance Ministry didn’t immediately return a phone message seeking comment on the bond sale.

The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries has fallen 113 basis points, or 1.13 percentage points, to 1,074 basis points since June 16, according to JPMorgan Chase & Co’s EMBI+ index.

The yield on the government’s benchmark 9.25 percent bonds maturing in 2027 rose 5 basis points to 13.03 percent today at 3:30 p.m. in New York, according to data compiled by Bloomberg. The price fell 0.28 cents on the dollar to 74.75 cents.

Selling Debt

The government has been selling debt denominated in U.S. currency over the past eight years to tap into demand for dollar-based securities from Venezuelans locked out of the currency market by Chavez’s foreign exchange controls. Local investors can obtain dollars by selling the bonds for cash in international markets.

The government will design the bond so that the implicit rate which locals pay after buying the bonds locally and selling them abroad isn’t weaker than 5.3 bolivars per dollar, the official said.

That puts the exchange rate in line with the central bank’s currency market that the government created last year after shuttering an unregulated market run by brokerages. The government also pegs the bolivar at 4.3 for imports deemed essential.

Venezuela won’t weaken the 5.3 central bank rate in the “short term,” the government official said today.

“Unless oil takes a big tumble, I don’t see them devaluing ahead of the election period,” RBC’s Biszko said. “This is the mechanism they have to supply dollars, so they have to keep the system going and to make that happen they have to continue servicing the debt.”

The central bank continues to buy back bonds in the secondary market to bolster prices and to resell the securities through its Sitme currency market, the official said. The bank is still negotiating the repayment of a loan given to state oil company Petroleos de Venezuela SA which may involve the reopening of corporate bonds due in 2022, he said.

PDVSA said on June 30 that it reopened bonds due in 2013 for $1.78 billion in a private placement with the bank.

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