Pemex Debt Holders See Downgrade To ‘Junk’ Status Ahead

Instant Max AI

(Reuters, Stefanie Eschenbacher and Ana Isabel Martinez, 6.Jun.2019) — Investors at six of the world’s largest asset managers, all of whom own the bonds of Mexican national oil company Pemex, expect them to be downgraded to “junk” status within months.

This could spur massive sales of the company’s bonds and hit Mexico’s economy as well.

Ratings agency Moody’s lowered its outlook on the oil company to negative from stable on Thursday, a day after it took similar action on Mexico’s sovereign debt.

Minutes after Moody’s lowered the outlook for Mexico’s sovereign debt to negative, Fitch delivered another blow to Latin America’s second-largest economy with a downgrade.

Both ratings agencies cited Pemex and trade tensions with the United States as risks to Mexico.

Investors at asset managers AllianceBernstein, Amundi, Franklin Templeton, Neuberger Berman, Schroders and T. Rowe Price said the decisions on Wednesday on Mexico’s sovereign debt were likely to result in a downgrade of Pemex bonds.

The action “moves the needle on Pemex losing its investment grade rating closer,” said Gorky Urquieta, a global co-head of emerging market debt at Neuberger Berman.

Moody’s in lowering Pemex’s outlook said it had concerns about the company’s credit strength and needed capital investment. Pemex is the most indebted oil company in the world, with $106 billion of financial debt, of which $85 billion is bonds held by investors.

Downgrades would be disastrous for the government of President Andres Manuel Lopez Obrador because they would complicate his plans for ambitious social spending and instead force budget-cutting actions.

“The downgrade of the sovereign by Fitch will exert downward pressure on Pemex’s rating,” said Abbas Ameli-Renani, an emerging markets portfolio Manager at Amundi. “Given that Fitch rates Pemex at BBB-, we are at a critical juncture.”

If two of the three ratings agencies classify Pemex as “junk,” the move would trigger billions of dollars of forced selling by investors whose mandates stipulate they must hold bonds of investment grade.

PEMEX WOULD BE BIGGEST ‘FALLEN ANGEL’

A downgrade would make Pemex the largest-ever fallen angel – the ignominious distinction for a borrower that descends from investment grade to junk – in history by a factor of two based on dollar value of bonds.

This “can cause contagion to all Mexican assets including the Mexican peso,” said Shamaila Khan, director of emerging market debt strategies at AllianceBernstein.

In an attempt to calm nerves, Pemex issued an unusual statement on Wednesday night, reiterating that it would not increase its net debt and would continue refinancing and other liability management measures.

Pemex also said it would seek to lower its overall debt burden by 2022 and raise production of oil and gas. The company noted it had achieved a financial surplus in both April and May.

Investors said the decisions by Moody’s and Fitch could be a wakeup call for Lopez Obrador, who is pushing ahead with plans to build an $8 billion refinery despite warnings from ratings agencies, investors and some Mexican regulators.

“The silver lining is that it could make AMLO rethink his approach to dealing with Pemex and oil reforms at large,” Urquieta said.

Lopez Obrador has blamed “neoliberal” policies of his predecessor Enrique Pena Nieto for the deterioration of Pemex, once the symbol of Mexican self-reliance.

A Reuters analysis of Pemex accounts from the past decade showed financial debt surged by 75% in the six years of Pena Nieto’s government.

Investors have repeatedly said Lopez Obrador’s government has not done enough to cut Pemex’s tax burden, allow joint ventures with foreign companies and focus on its more profitable exploration and production business.

“We expect a continued periodic effort by the AMLO administration to shore up finances to prevent more deterioration in ratings to Pemex,” said James Barrineau, head of emerging markets debt relative at Schroders.

Ratings agencies Fitch, Moody’s and S&P did not immediately respond to a request for further comment.

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