Jan 28, 2023
AMLO’s Pemex Debt Plan Cheers Investors Even as Details Remain Thin
(Bloomberg) -- Bonds from Petroleos Mexicanos were whipsawed this week as investors questioned how the company will pay off billions of dollars of debt amortizations due in the next few months.
President Andres Manuel Lopez Obrador said Friday that the government could potentially assume some of Pemex’s obligations or cut the company’s taxes. Even though a proper debt transfer would likely require a constitutional change, his words brought relief to investors, who’d been spooked earlier in the week by reports of the oil giant’s plans to sell at least $2 billion in bonds.
Pemex is facing a steep amortization schedule this year just as crude production hit a record low at 1.623 million barrels a day in 2022, according to National Hydrocarbons Commission data. But support from Lopez Obrador, or AMLO, as the president is known, has made the company’s bonds a favorite among emerging-market investors, who argue that they pay a hefty premium over their sovereign counterparts for essentially the same risk.
“The market has long (and correctly) viewed Pemex debt as implicitly guaranteed by the United Mexican States,” veteran sovereign debt lawyer Lee Buchheit wrote in an email. “It sounds as though AMLO wants to make that official by exchanging Pemex debt for UMS paper.”
To do that, AMLO may need to change the constitution, said David Enriquez, a partner at Goodrich Riquelme y Asociados law firm. That may prove difficult as his Morena party doesn’t have the two-thirds majority in congress it would need to pass such reform.
Pemex has the highest debt load among global oil majors at $105 billion. In the event of a transfer, the government may assume only as much of the company’s debt as needed to “remove the shadow of a possible default,” Buchheit added.
Still, if all of it was transferred to the government, it would be about 8% of gross domestic product, Shelly Shetty, a managing director at Fitch Ratings, said at an event in Mexico City.
Even though the oil driller’s debt isn’t explicitly guaranteed by the government, it “doesn’t mean that they can’t find other paths, like securing congressional authorization to raise the debt limit, issuing more debt and paying off Pemex’s debt that way,”said Patrick Esteruelas, the head of research at EMSO Asset Management.
“At the end of the day, where there’s a will to continue supporting Pemex, there’s a way.”
A capital injection from the government could come in tandem with the new offering or liability management deal that’s expected before a company blackout period starts on Feb. 12, Bloomberg reported.
Money managers have grown accustomed to AMLO’s unscripted morning conferences moving markets. He’s used them to announce his central bank chief nominee and his intentions to use special drawing rights from the International Monetary Fund to buy back Pemex debt. He even blurted out an interest-rate decision before it was officially announced by policy makers last year.
Bonds from the company due in 2050 rose as much as 3.4 cents to 77.5 cents on the dollar Friday following AMLO’s comments, according to Trace data, even as traders await further clarification from the finance ministry.
The cost to insure Pemex’s debt against default over the next five years dropped 14 basis points this week to the lowest since June.
About $5 billion would be needed between a new issue and a capital injection to provide some comfort to the market, said Declan Hanlon, chief emerging-market credit strategist at Santander Investment Securities in New York.
“I think of these kind of headlines as positive hints for action and to prepare the market,” he said. “This combines to inform the investor base that there is some news pending.”
--With assistance from Carolina Gonzalez.
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