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Venezuela Sells $3 Billion of 15-Year Bonds in Local Market

Venezuela sold $3 billion of bonds due in 2026, swelling total issuance this year to a record $7.2 billion as President Hugo Chavez looks to finance government social programs ahead of his re-election bid.

The bonds were priced at 95 cents on the dollar to yield 11.75 percent, according to a statement published on the Public Credit Office’s website. Venezuelans who bought them in bolivars at the official rate of 4.3 per dollar can sell the notes abroad at a discount to obtain foreign currency, a practice that skirts currency controls imposed in 2003.

The country, which has the highest borrowing costs of major emerging-market economies after Belarus, is selling a record amount of debt this year even as the average price for oil exports sits at $99.58 a barrel, up from $75 a year earlier. Chavez nearly doubled the country’s debt limit this year to secure resources for agriculture, housing and job creation programs that he hopes will lead to re-election next year and extend his 12-year rule through 2019.

“The government is trying to issue as much debt as possible to pump up the economy and fund their electoral missions,” said Russell Dallen, the head bond trader at Caracas Capital Markets in Miami.

The sale brings the total issuance by Venezuela and state oil company Petroleos de Venezuela SA to about $15.2 billion this year, a figure that surpasses the combined amount sold by the rest of Latin American governments in the international market, Barclays Capital said on Oct. 11 in a report.

Benchmark Yields

Yields on the government’s benchmark 9.25 percent bonds maturing in 2027 rose three basis points, or 0.03 percentage point, to 14.43 percent at 3:18 p.m. Caracas time, according to prices compiled by Bloomberg. The price fell 0.13 cent on the dollar to 68 cents.

The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries rose seven basis points, or 0.07 percentage point, to 1,330, according to JPMorgan Chase & Co. indexes.

The 2026 bonds are being priced overseas at about 75 cents on the dollar, for a yield of about 16 percent, Dallen said.

The government sold a majority of the bonds to the public banking system, followed by companies importing food, medicine and machinery, Alejandro Grisanti, a New York-based analyst for Barclays Capital, said in an interview. That structure will slow the bonds’ diffusion into international markets, as the public banks will sell their bonds through the central bank’s currency market known as Sitme, Grisanti said.

Bond Limits

According to the Finance Ministry, companies importing “priority” goods were allocated a maximum of $1.47 million while individuals and other companies received a maximum of $1,500 each. The public banking system’s orders were all met, the ministry said, without specifying how much banks bought.

“This allocation mechanism has the benefit of better supporting Venezuelan bond prices during the first few months because the private sector, which usually sells them immediately into international markets, didn’t receive the majority of the bonds,” Grisanti said.

JPMorgan Chase estimates that state-run banks received about $2.5 billion of the sale. That will boost supplies to the central bank currency market, giving it enough dollar-denominated bonds for another six months, according to a note by Benjamin Ramsey, a Latin America analyst in New York.

PDVSA, the state-oil company, may sell bonds in a private placement with the central bank later this year to repay maturing promissory notes, and total issuance by Venezuela and PDVSA may reach $12 billion in 2012, Ramsey said.

Oil Outlook

Fitch Ratings, which classifies Venezuelan debt B+, or four levels below investment grade, said today that the country is vulnerable to a global economic slowdown that could erode world energy demand and drive oil prices down.

“Despite high oil prices and a return to economic growth in 2011, Fitch Ratings views heavy government and oil sector borrowing as risk factors that could affect the country’s credit profile if global economic conditions worsen in 2012,” Fitch said in a statement. “A significant macroeconomic shock could erode sovereign credit quality quickly.”

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