August 14, 2007 / 1:24 PM / in 12 years

UPDATE 4-Venezuela offers $1.5 bln Southern Bond at premium

(Updates to show the government will receive orders until Friday)

By Ana Isabel Martinez

CARACAS, Aug 14 (Reuters) - Venezuela on Tuesday launched a third issue of the Southern Bond, which combines Venezuelan and Argentine paper, setting a premium sale price for the $1.5 billion issue, officials said.

The bond offers a combination of Argentina’s Boden 2015 debt with a 7 percent coupon along with Venezuelan TICC 2017 and TICC 2019 bonds with respective coupons of 6.25 percent and 5.25 percent.

Venezuelan Finance Minister Rodrigo Cabezas told Reuters the bond was being offered at a price of 104. This represents a 4 percent premium over face value, which means the yield will be below the coupon if the bond is sold at this price.

Venezuela, which buys the Argentine debt and repackages it with its own sovereign issues, is taking advantage of high investor interest shown in previous Southern Bond offerings. The securities are sold together, but trade separately.

The strong demand which allows the bond to be sold at a premium comes from Venezuelans who pay for the bonds in bolivars and then resell the Boden component for U.S. dollars in the so-called parallel market.

This allows bondholders to skirt the government’s strict currency controls that Venezuelan President Hugo Chavez introduced in 2003.

The parallel market offers 4,300 bolivars per dollar, more than double the official rate of 2,150 per dollar VEBFIX=. Analysts say the transaction will also help keep the bolivar from weakening further in the parallel market.

The Finance Ministry began taking orders for the bond at 9 a.m. local time (1300 GMT).

Investors were originally given until Thursday morning to make offers, but late on Wednesday the Finance Ministry announced an extension of the timeframe until Friday morning.

“With this latest bond issuance, the authorities are trying to drain liquidity and supply dollars through international bond sales to locals to ease inflation pressures,” Andres Ortiz, an analyst with JP Morgan said in a research note.

Venezuela put a 112.6 sticker price on the last Southern Bond offer, a heavily oversubscribed $1.5 billion issue launched in February that combined Boden 2015 with Venezuelan TICC 2019 paper.

In the Buenos Aires market, the dollar-denominated Boden 2015 bonds ARRO15D=RRBB traded on Tuesday at a bid of 81.25 with a yield of 11.04 percent.

Venezuela uses the Southern Bond debt issues to soak up excess money supply, which has jumped close to 40 percent in the last 12 months VEECI06 as Chavez pumps cash into the economy through a vast network of social programs.

This has helped drive inflation to the highest level in Latin America. Venezuelan consumer prices rose 17.2 percent in the 12-month period ending in July.

The TICC was created last year for the first issue of the Southern Bond. It acts as a hedge against a devaluation of the bolivar because it is linked to the fixed exchange rate.

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