MIZUHO
PEMEX Downgraded By Moody’s; Bonds Remain Attractive On Govt Support
Summary: Late Friday, PEMEX was downgraded by Moody’s to B3 from B1, its BaselineCredit Assessment (BCA) was downgraded to ca from caa3, and maintained a negativeoutlook. This morning, PEMEX’s USD bonds are indicated ~20-22bps wider for 5yr to10yr bonds, while the longer end is almost ~15-17bps wider.
View: The timing and the double notch downgrade may be considered somewhat of asurprise to investors considering 1) no new news at the moment, 2) ahead of the releaseof earnings results, 3) ahead of Mexico elections, and 4) Mexico has provided support /capital for 2024 debt maturities, and PEMEX’s syndicated loan refinancing wascompleted in early December. The Moody’s downgrade was not necessarily a result ofnew information, but a lack of measures taken to change PEMEX’s situation. Wecontinue to believe the Mexican government may remain supportive of PEMEX in thefuture as evidenced by recent capital contributions and reduction in DUC (taxes).Separately, we do believe that PEMEX and the Mexican government needs to work on abroader strategy to address PEMEX’s operations, working capital and capital expenditureneeds (to reduce negative free cash flow), and the capital structure and debt maturityschedule. We believe PEMEX remains an attractive way to to pick up additionalspread/yield to the Mexican sovereign.
Next Data Points
: Earnings: PEMEX plans to report 4Q23 / YE2023 operating and financial resultsand host an earnings call at the end of February 2024. We believe PEMEX maygive some further insight for working capital, capex and financing needs for 2024,but management’s actions may be limited ahead of Mexico’s PresidentialElection, which scheduled for June 2024.
Mexico Elections: Who may be AMLO’s successor? Former Mexico City MayorSheinbaum is competing for the ruling Morena party in the June election tosucceed President Andres Manuel Lopez Obrador (AMLO) is leading in Mexico’spresidential election polls and is representing the ruling Morena party (AMLO’spolitical party) in June’s election. We believe that if Sheinbaum (Morena party) iselected as Mexico’s next president, she may continue provide support to PEMas seen under AMLO. Again, AMLO and his administration has been supportiveof PEMEX by providing capital contributions and further reductions to DUC soPEMEX may stem some of the negative free cash flow
.Moody’s Downgrade Reflects: Moody’s downgrade points to a number of issues thathave plagued PEMEX over the past few years, and not really citing new information. Webelieve the lack of changes and new news may have fueled the downgrade. Moody’ssaid the bca downgrade “PEMEX's increasing liquidity requirements due to expandingcapital requirements, increasing cost of capital and significant upcoming maturities overthe next 2-3 years. Further, the company faces increasing business risks as it continuesto expand its refining capacity and attempts to grow production.”Moody’s Points To Bond Exchange: Also worth noting in the Moody’s press releaseare discussions around potential liability management exercise and/or debt exchanges.Moody's said it “foresees that any support from the next administration, although forthcoming in 2024-25, will likely come at a higher cost. The downgrade alsoincorporates the risk that the company could pursue a transaction such as debtexchanges, repurchases or other transactions that would reduce debt at a substantialdiscount to par or make other changes that Moody's would consider a distressedexchange, which is a default under Moody's definition.” We do not rule out potentialliability management moves cited by Moody’s but believe some of these measures mayhappen later in 2024, after the Mexican presidential elections in June 2024.Other Rating Agencies: S&P: On December 11, 2023, S&P said: “it believes support from thegovernment will remain key for the rating. Since 2019, PEMEX has receivedabout MXN$1.4tn from the Mexican government, reinforcing S&P’s assessmentof the almost certain likelihood of extraordinary government support if thecompany were to experience financial distress.” Furthermore, S&P said: “InS&P’s view, Pemex is a key asset and plays a central role in the government'senergy policy. The high government involvement in all strategic decisions and itsfull ownership of the company support S&P’s assessment of the link betweenPemex and the government.” Fitch: On December 20, 2023, Fitch affirmed PEMEX’s B+ rating and assigned astable outlook citing ‘the commitment of the Mexican government to injectUS$8.5bn of capital into PEMEX, after the inclusion and approval of Pemex inthe federal budget, to address a portion of its 2024 maturities.
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