UPDATE 3-Petrobras issues $1.25 bln 2019 bond at lower cost

* Petrobras sells $1.25 bln of 2019 bond, 2nd tap this year

* Bonds yield 6.875 pct, lower end of guidance range

* Demand for bonds tops $6 billion, IFR reports (Recasts with pricing of the bonds)

By Guillermo Parra-Bernal

SAO PAULO, July 1 (Reuters) - Brazilian oil giant Petrobras (PETR4.SA)(PBR.N) sold on Wednesday $1.25 billion of reopened global 2019 bonds at considerably lower yields than it had to pay only five months ago when it first issued them.

The state-owned firm paid investors a yield of 6.875 percent, the lower end of the guidance range provided by leaders of the deal, a market source said. The bonds, which carry a coupon of 7.875 percent, were priced at 106.96, the source added.

Petrobras had sold $1.5 billion of the same bonds on Feb. 4 at a yield of 8.125 percent.

Demand for the bonds topped $6 billion, reported IFR, a Thomson Reuters service, allowing Petrobras to more than double the benchmark issuance size of $500 million.

The drop in borrowing costs and strong demand indicate improving credit conditions in international debt capital markets.

Petrobras plans to use proceeds from the reopening to repay part of a $6.5 billion, two-year bridge loan secured from six banks this year, Chief Financial Officer Almir Barbassa told Reuters on Wednesday.

Dario Pedrajo, who manages $100 million in assets at Miami-based Kapax Investment Advisors, said Petrobras "is probably one of the few oil companies in the world that has the means to increase its reserves substantially over the next 10 years."

Petrobras hired JPMorgan Chase & Co, HSBC Holdings, Banco Santander and Citigroup to handle the transaction, according to a person with direct knowledge of the deal.

Petrobras has had to rely on state lending to fund a significant part of its investment plan for 2009, which has been challenged by the plunge in oil prices from last year's record highs and by the impact of the credit crunch.

This year, in addition to the $6.5 billion bridge loan led by Banco Santander and Societe Generale among others, Petrobras secured a $12.5 billion credit line from state development bank BNDES, $2 billion in loans from the EximBank of the United States and $10 billion from the China Development Bank.

Preferred shares of Petrobras closed down 2.0 percent at 31.80 reais on the Sao Paulo stock exchange, hurt by a fall in oil prices.

EARLY SIGN

The bond reopening is an early sign that debt capital markets are opening to Brazilian borrowers. Eletrobras (ELET6.SA), Brazil's federally controlled power utility, is expected to sell dollar bonds in coming weeks.

The Brazilian government raised $1.75 billion from two bond sales this year, and BNDES, Brazil's state development bank, sold $1.5 billion in bonds last month.

In the wake of credit market fallout that intensified in September, sovereign and quasi-sovereign issues have become "the risk of choice" among still skittish investors, David Spegel, head of research at ING Bank in New York, said last month.

Standard & Poor's said on June 10 it expects Petrobras to raise "sizable amounts of debt" to cover debt maturities and fund investment. Last month, S&P downgraded Petrobras' ratings by one level to BBB-, the lowest investment-grade ranking, on concern its debt is growing too fast. (Additional reporting by Walter Brandimarte in New York, Roberto Samora in Sao Paulo and Denise Luna in Rio de Janeiro; Editing by James Dalgleish)