Petróleos Mexicanos – Pemex, as it is universally known – is the only Latin American issuer in the past year to come to market with a combination of loans and bonds, and with the bonds coming in three different currencies.
Although it is owned by the United States of Mexico, Pemex does not share the sovereign’s low financing needs. Like all oil companies, Pemex has enormous capital expenditures that it needs to fund. And unlike most oil companies it has to fund them entirely through debt issuance, since it can’t issue equity.
So Pemex likes to keep its funding sources disparate. In December, for instance, it signed a two-tranche, $1 billion syndicated loan: the three-year portion, arranged by JPMorgan and BNP Paribas, paid 65 basis points over Libor, while the five-year tranche, led by Citigroup and Dresdner, paid 80bp over Libor for the first three years, rising to 90bp over for the final two.
Pemex also has a bit of a problem in that it’s been issuing for so long that its maturity schedule, especially in dollars, is looking pretty crowded. It has to find odd bits of the curve where it can squeeze in new bond issues: it came with a 12-year bond in December, reopened a five-year in January, and then reopened a 19-year in March.
For some reason, dollar investors like nice round maturities, however, and so Pemex kept its options – and its funding sources – open.
Even so, Pemex still relies very much on the dollar market. Plain-vanilla dollar bonds are its mainstay, and its cheapest source of funds. The $1 billion 12-year issue in December, from Goldman Sachs and Lehman Brothers, came at a yield of just 7.59%, and created a liquid new benchmark at the same time.
The reopenings also came at attractive yields: the $750 million five-year, lead managed by Lehman Brothers and Morgan Stanley, priced at just 6.14%, while the $500 million 19-year, from Morgan Stanley and Goldman, came in at 8.09%.
The real innovation, however, came in European currencies. Pemex came with a sterling issue in January. It was following CAF’s lead [see Latin America’s Best agency borrower of the year, this issue], but it was still venturing into a market that had seen no Latin issuance for five years until CAF’s.
Pemex issued in sterling for many reasons, not least to diversify its investor base and to tap as deep a pool of money as possible. But one of the biggest reasons is that sterling issuance doesn’t go down well solely in the UK: it also gains Pemex kudos among its dollar investors.
“If any one investor knows that Pemex has access to a diversified base,” explains Chris Canavan, head of Latin debt capital markets at Goldman Sachs, “that investor will be more relaxed about how much he will be expected to absorb over the next few years.”
The £250 million ($400 million) 10-year bond, lead managed by Barclays and HSBC, came at a yield of 7.6%. When swapped into dollars, that’s a little bit more expensive than straight dollar funding, but not so much more expensive that it can’t be justified by the diversification.
There are other reasons to go to the UK markets. For one thing, UK investors are long-term institutional pension funds and the like, as opposed to the more short-term oriented retail buyers found in euros. That also has the pleasant side-effect that UK investors can go longer out the yield curve than euro investors normally do. Also, UK investors don’t have the same allergy to reopenings that dollar investors do: Pemex could happily reopen this deal three or four times without annoying anybody.
All the same, Pemex did decide to issue one euro-denominated bond as well, in March: a e750 million seven-year deal lead-managed by JPMorgan and BNP Paribas. The bond was the first euro-denominated offering from a Latin issuer in 10 months, and the first time Pemex had issued in the European currency since 2000, before it (and Mexico itself) was rated investment grade.
The bond yielded 6.87% (290 basis points over euro swaps) less than the price guidance of 295bp. It came 45bp wide to the Mexican euro-denominated benchmark at that maturity, despite the fact that in the dollar market Pemex was paying a 70bp premium to the sovereign.
Best of all, from Pemex’s point of view, the bond was sold to more than 200 investors, many of which had never bought Pemex paper before and who had been convinced by a roadshow a couple of weeks earlier. Between them, they ordered more than e1.7 billion in bonds, meaning that the deal was well over two times oversubscribed. If Pemex ever needs to raise more cash in Europe, it should now be able to without too much difficulty.
