Dollar debt weighs on Pemex

Mexican national oil company Pemex ended last year with at least US$105bn in outstanding debt and a worrying US$40bn of that figure is in dollars.

The company's debts were a burden it was struggling to carry even in the relative serenity of last year and, adding to its woes, it also has at least US$77bn in pension obligations on its books. 

Just in terms of the headline US$105bn figure, Pemex is the world’s most indebted oil company and its effective debt load is higher. increasingly, the company is delaying payments to contractors, which has become an open secret in Mexican energy circles. 

But among these problems, it is the composition of that debt load that is stirring great concern. 

“Pemex has US$40bn in dollar debt,” Damian Sassower, chief EM strategist at Bloomberg Intelligence, said Thursday. “That’s the same dollar-denominated debt as Russia and Brazil combined.”

Last month, the Mexican peso suffered its sharpest fall since the “Tequila crisis” of 1994-1995. So far this year the peso has lost 27% of its value against the greenback, even after a slight rebound in early April. And that makes servicing dollar-denominated debt even harder. 

Foreign currency revenue comes largely from the sale of Mexico’s Maya crude abroad, and the heavy Maya blend has dropped from about US$55/b five weeks ago to less than US$11/b at present. 

DEBT PAYMENT AND E&P

To avoid default, Pemex needs to pay out US$6bn this year alone, a tidy sum that is only a fraction of its medium-term obligations, as it has to pay out more than US$30bn by the end of 2024. 

Source: Reuters 

In order to help the company manage its debt load, last year the Mexican government stepped in to offer Pemex unprecedented levels of support that included trimming its tax obligations by US$1.5bn and another US$8.5bn in aid. The largest tranche of that support, provided last September, came in the form of a direct cash injection of US$5bn.

Pemex used that support to pre-pay some of its bonds, enabling it to temporarily bring down its debt load to US$99bn. That move, carried out in tandem with the help of JP Morgan, Citibank and Goldman Sachs, allowed Pemex to float yet more debt on Wall Street and find buyers. 

It bolstered Pemex's debt, creating a multi-month rally in Pemex bonds, with the company's benchmark bond due in 2030 trading above 109 cents on the dollar for much of February. 

Then came the global spread of COVID-19 and the Saudi-Russia price war and oil prices suddenly dropped. The Pemex 2030 bond has since crashed, trading most recently at less than 72 cents on the dollar.

Moreover, with the Mexican government facing budget constraints and increasingly dire warnings from private banks that the country will endure a dramatic recession this year, it can no longer effectively serve as a lifeline to Pemex by simply giving the company cash. 

Today Bank of America, which initially forecast that Mexico’s economy could shrink by 0.1% in 2020, revised its estimate: the bank now expects Mexico’s economy to contract by a whopping 8% this year. 

A MUCH-ANTICIPATED SECOND DOWNGRADE TO JUNK

In recent months, interest payments and the failure to consistently produce more than about 1.7Mb/d (million barrels per day) of oil have combined to drive Pemex’s debt level back up. 

It now stands higher than at this time last year. Last summer, that debt led Fitch to become the first rating agency to downgrade Pemex credit to junk.  

While many expected Moody’s to downgrade Pemex ('Baa3', with a negative outlook) to junk soon, it was actually S&P that made the first move in this direction. A week ago, it went ahead and downgraded Pemex’s credit rating from 'BBB+' to 'BBB'.  

In its guidance, the agency warned that it could make another downward revision to Pemex’s credit in the coming months, which would mean a second junk rating.