Mexicohas given another $5bn in aid to state oil company Petróleos Mexicanos as the former monopoly launched a bond swap designed to stave off the risk of a catastrophic debt downgrade.
The cash injection comes just days after the leftist nationalist government, which has been slashing government spending to free up cash for Pemex and to fund flagship social programmes, announced 86bn pesos ($4.4bn) in cash and tax breaks for the company in its 2020 budget.
The bond swap, expected to be in the order of $15bn, is designed to ease a looming repayment crunch on Pemex’s $104bn debt, with an estimated $44bn due in the next four years.
The finance ministry, which is grappling with an economy teetering on the brink of recession, said it would fund the additional $5bn in aid from unspecified “financial assets deposited in the federal Treasury”.
The aid would not impact Mexico’s net debt or public sector borrowing requirements, it added. President Andrés Manuel López Obrador has ordered the government and Pemex, which has been struggling to raise production and relies on state aid, not to raise borrowing.
Pemex said the $5bn would be used to refinance bonds due from 2020-23 and that proceeds from the new offerings would support the refinancing of short-term debt. Pricing was expected on Thursday.
Tim Jagger, head of emerging markets debt at Columbia Threadneedle, said the operation “kicks the can down the road a little more” and could delay a Pemex downgrade by 12-18 months.
Fitch Ratings downgraded Pemex to junk in June, and the company’s low production and reserves and what rating agencies see as insufficient government aid have threatened a second downgrade.
Two junk ratings could spark forced selling by institutional investors and hit Mexico’s sovereign rating, which remains investment grade.
Pemex appointed Citigroup, Goldman Sachs, HSBC, JPMorgan, Bank of America Merrill Lynch, Crédit Agricole CIB and Mizuho Securities to run the market operation, which one person familiar with the deal said was designed to “disappear” upcoming debt repayments in a bid to avert the downgrade risk.
Under the deal, Pemex will offer 7-year, 10-year and 30-year paper “to support the refinancing of short-term debt”, Pemex said. The company also intends to conduct a bond swap targeting bonds due in 2022-25 and 241-48 to ease the repayment pressure.
However, one investor who asked not to be named said the fact that Pemex was returning to markets after telling investors in the past weeks that they had no plans to do so “raises some yellow flags”.
“The market is going to extract a premium,” the investor added. “They’re running out of cash and if you look at the budget the government released this week, it is making heroic assumptions around the volume of production.”
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