Pemex bonds dip on Fitch downgrade to junk

By BLOOMBERG

MEXICO CITY • Bonds in Petroleos Mexicanos (Pemex) slumped last Friday after Fitch Ratings Inc downgraded the world’s most indebted oil major for a second time in five months, plunging it into junk status.

Pemex’s rating was cut one notch to BB+, one day after Fitch cut Mexico and Moody’s Investors Service Inc changed the outlook on the country to negative — a move it repeated for Pemex last Thursday.

The oil producer’s dollar debt maturing in 2027 extended a decline for a second day, falling 1.59 US cents (seven sen) to 97.43 at 11:57am in New York on Saturday, pushing the yield up 24 basis points to 6.86%. The bonds trimmed an earlier loss that took prices as low as 96.82.

Recent government measures to save Pemex, including a record US$8 billion bank loan last month, several tax relief packages and a pledge to not issue new debt this year failed to convince Fitch that Pemex could reverse 14 years of production declines and reduce US$106.5 billion of debt.

“This isn’t a surprise, except for the timing,” said Edwin Gutierrez, a money manager at Aberdeen Asset Management in London.

Gutierrez said all eyes are now on the other two ratings firms to see if another downgrade is on the horizon. “Two downgrades would no doubt bring out more sellers.”

Markets have been sceptical of Mexico President Andres Manuel Lopez Obrador’s plan to rescue Pemex after he suspended oil auctions that investors had hoped could reverse sinking output by bringing in private capital.

Another worry is whether Pemex’s planned new refinery in Tabasco, the US$8 billion pet project of the president, will divert resources away from exploration and production.

“Pemex’s negative outlook reflects the potential for further deterioration of the company’s standalone credit profile to below ‘ccc’,” Fitch said in a statement.

“Although Pemex has implemented some cost cutting measures and received moderate tax cuts from Mexico, the company continues to severely under-invest in its upstream business, which could lead to further production and reserves decline.”

Pemex’s six existing refineries are operating at 35% of their capacity due to chronic under-investment, while oil output is less than half of what it once was, at 1.68 million barrels a day in April.

“Pemex will have to go out to the market again and again, so if they are below investment grade then you reduce the number of people who can buy your bonds and that would make it much more complicated to try to raise the necessary money,” said Luis Maizel, a senior MD at LM Capital Group in San Diego, which holds Pemex bonds.

“Right now, it’s a split rating so that doesn’t automatically put you into junk. I just hope this is a call to action.”

Last Thursday, Moody’s held Pemex’s rating at Baa3, just above junk status. The ratings firm said in a statement that if the company didn’t have an assumed government guarantee, the standalone rating would be seven levels into high-yield territory, at Caa1, amid expectations of ongoing negative free cashflow and declining reserves.

In January, Fitch downgraded Pemex’s long-term issuer default rating two notches to BBB- from BBB+.

The Finance Ministry said last Thursday that the move by Fitch is doubly punishing Mexico’s finances by downgrading the sovereign based on the assumption that it will aid Pemex. At the same time, it’s penalising Pemex for considering the aid insufficient, the ministry said in a statement.

It’s not the first time a Latin American oil giant is cut to junk. Back in 2015, Brazil’s Petroleo Brasileiro SA became the largest non-investment grade corporate issuer amid an oil-price rout and a graft scandal that sent some of its suppliers into bankruptcy protection. — Bloomberg