By Diego Ore and Brian Ellsworth
CARACAS, Nov 13 (Reuters) - Venezuelan state oil company PDVSA announced on Wednesday a $4.5 billion bond sale, accelerating a steep rise in borrowing in the last year with its second-largest issue that will finance operating expenses rather than investments.
The company has taken on more than $10 billion in private loans this year alone through agreements with allied nations including China and Russia, and is struggling to pay billions of dollars in debts to service providers.
The announcement follows a rout in PDVSA bonds this week that helped push yields as high as 17 percent, driven in part by investor concerns over a military occupation over the weekend of shops accused of price gouging.
“PDVSA is continuing with its strategy of issuing debt that is not part of a plan to expand its oil production, which is counterproductive,” said Asdrubal Oliveros of Caracas-based Ecoanalitica. “What they’re trying to do is address a lack of hard currency.”
PDVSA will sell $1.5 billion to the central bank while the remaining $3 billion will be offered to service providers to pay down billions of dollars in accumulated debts - meaning the bulk of the issuance will not raise funds for the company.
This marks the first time PDVSA will sell bonds directly to suppliers. In previous issues, it had sold bonds on the open market and repurchased them to pay off contractors.
Oil Minister Rafael Ramirez told reporters on Wednesday the portion sold to the central bank would be used to pay off debts with Colombian food companies and for the Sicad currency auction system that functions alongside the country’s decade-long currency control mechanism.
Debts to service companies rose 35 percent in 2012 from the previous year to reach $16.75 billion, due to cash-flow limitations caused by sizeable social spending commitments and heavy borrowing through financing deals that it repays in oil.
The note is called PDVSA 2026 despite including maturities in 2024 and 2025, and carries a 6 percent coupon.
Yields on the bonds that end up in the hands of international investors are likely to be dramatically higher.
Ramirez, who is also PDVSA president, told a legislative commission on Wednesday that the company’s financial debt reached $39.2 billion in the first half of 2013.
That was slightly lower than the $40 billion posted at the end of 2012, but the figure does not include debts with service providers or financing for joint ventures, which makes up the bulk of the debt taken on over the past year.
Venezuela’s sovereign bonds dropped sharply after President Nicolas Maduro ordered a military occupation of an electronics chain at the weekend and authorities arrested dozens of people for purported price gouging.
PDVSA’s benchmark 2017 bond on Wednesday slumped 3.72 points to yield 16.93 percent, its highest yield in nearly two years. The company’s 2027 bond slipped 2.95 points to yield 13.30 percent.
The company over the last decade has functioned as the financial engine of late Socialist leader Hugo Chavez’s self-styled revolution, paying a large tax burden in addition to investing heavily in social development programs.
The current issue will take PDVSA’s total bond sales since 2007 to more than $32 billion.
The announcement said funds will be used in part for social development, signaling the company may boost spending on welfare programs in the run-up to Dec. 8 municipal elections - as it did in previous votes under Chavez.
Venezuela over the last five years has borrowed tens of billions of dollars from China through financing agreements that it pays through oil shipments, limiting PDVSA’s cash flow.
In 2012, the company did not receive cash for more than one third of its petroleum exports.