NEW YORK, Jan 20 (IFR) - Dollar-starved Venezuela will use its US refining unit Citgo to sell US$2.5bn of new debt, as the OPEC country tries to fend off default worries amid a steep slide in crude oil prices.
With some US$10bn in debt payments due this year, the country hopes to be able to lock in cheap funding as it struggles to plug a widening financing gap.
A US$1.5bn high-yield bond and a US$1bn senior secured five-year term loan will be sold through Citgo, the US subsidiary of state-run oil company PDVSA, a source with direct knowledge of the deal told IFR on Tuesday.
A bank meeting for the loan tranche is scheduled for Thursday in New York, while a roadshow for the bond portion is expected to be announced as soon as next week, the same source said.
If successful, the deal could provide some support for the short end of Venezuela and PDVSA's bond curves, traders and investors said.
But the transaction could also scupper any plans to sell off the Citgo unit altogether, which the sovereign has been considering for some time.
"If they get it done, there will be US$2.5bn in liquidity going straight into PDVSA," said Marco Santamaria, a portfolio manager at AllianceBernstein.
"At the margin that is a good thing, particularly for short-term securities. But I think this also tells you that the equity sale is not on the table," he said.
"Either they can't sell Citgo or they don't like the valuation they are getting - so they have chosen to go this road instead."
Reuters reported in December that Citgo's assets were valued at more than US$10bn in the latest round of bidding, even though the government appears to have given mixed signals on its willingness to sell the unit.
By loading the company with an additional US$2.5bn in debt, Venezuela would effectively shave the same amount off the company's valuation and its potential sale price.
Because investors face much higher recovery prospects on Citgo's bonds compared those issued by PDVSA or the sovereign, the company's bonds have been trading at a fraction of the yield demanded by investors on Venezuelan securities.
A 6.25% US$650m note issued by Citgo in July of last year and maturing in 2022, for example, was quoted on Tuesday at a yield of around 5.5% - a far cry from the 40% yield demanded by investors in PDVSA's own 12.75% 2022s.
From a bond market perspective, short-dated notes issued by PDVSA are expected to outperform other Venezuelan assets, as the new funds raised could help the company meet most of its US$3.5bn debt maturities, plus interest, due this year.
"If you believe there is an interest from the government to maintain PDVSA as a working entity, then this should be particularly beneficial for PDVSA bonds," said Santamaria.
"But all money is fungible, so you never know if they redirect this money to other purposes."
PDVSA's 5% 2015s outperformed the rest of Venezuela's curve on Tuesday, according to a New York-based broker, who said the bonds traded up because of optimism that the Citgo debt sale could cover some near-term debt maturities.
The note was last quoted at 84-50-85.50, or up a point on the day, while other Venezuelan bonds were ending the day as much as 1.5 points lower.
Reporting by Davide Scigliuzzo; Additional reporting by Mariana Santibanez; Editing by Marc Carnegie