Mexico: Banks free Pemex from bondage

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By:
Rob Dwyer
Published on:

HSBC, JPMorgan and Mizuho lend Mexico’s oil company $8 billion after investors show no interest in non-deal roadshow – and that’s the least of the firm’s problems.

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The Mexican government tried to put a happy gloss on its announcement of an $8 billion loan from private-sector banks to its state oil producer Pemex on May 13. 

The market even bought it – briefly – with a rally in the company’s bonds (the 10- and 30-year benchmarks both rallied about 15 basis points shortly after president Andrés Manuel López Obrador, frequently abbreviated to Amlo, broke the news). 

But the rally faded quickly – and for obvious reasons: the loan confirms the lack of appetite for the credit among international institutional investors. 

Pemex had gone to New York in January on a non-deal roadshow to take the temperature of oil and gas investors. The feedback was that investors were not inclined to look past Amlo’s rolling back of important energy reforms that had brought private investment into the sector. 

Since the cost of new bonds was going to be prohibitive, the company pursued plan B, which was for HSBC, JPMorgan and Mizuho to stump up the money. They will (try to) syndicate it out to local and international investors.  


Pemex, which has a well-deserved reputation for being a poor refinery operator, in our view, would be greatly challenged to meet such an aggressive mandate
-Citibank

The pricing available to Pemex in the bond market was presumably outside the Libor plus 235bp that the banks offered for the five-year, $5.5 billion loan (and that bankers away from the deal believe has been probably at least partially securitized). 

The remaining loan is a $2.5 billion revolver.

The loan buys some time, but it also shows the financial stress that the world’s most indebted oil company is still under. 

The company also has debts of $105 billion, while there are widespread expectations of further downgrades for Pemex after Fitch’s two-notch downgrade in January – another reason why management would have taken bonds had investors been willing to stump up new cash.

Also, $2.3 billion of the proceeds have probably already been spent: the government has hinted that part of the loan would go to paying off Pemex bonds that mature in May.

So while the loan buys time, it also confirms to investors that international institutions are wary of the credit, the company’s dynamics are negative and sovereign support is weakening. 

The refinery

To add to its woes, the government announced that Pemex is to manage the construction of a new refinery after refusing to pay the prices quoted by the private sector. 

Perversely this bid for Mexican energy self-sufficiency could have been a win for Pemex: the government has set aside $2.5 billion of funds to pay the costs centrally, so it could have been spun as a potential equity investment.

Alas, no. For not only did the government not make it clear whether or not Pemex will be expected to pay for any of the refinery (or only manage the project), but the cost of the project is largely seen as unrealistic. 

Amlo has said the private-sector estimates of between $10 billion and $12 billion and a building schedule over three-to-six years were exorbitant. He expects a maximum of three years and $8 billion.

If Amlo believes those estimates, he is in a very small minority. The cost projections are for $20,000 per barrel/day of capacity, compared with $30,000 to $45,000 per b/d for best-case scenarios at other EM refiners.

Citibank wryly observed in a client note: “Pemex, which has a well-deserved reputation for being a poor refinery operator, in our view, would be greatly challenged to meet such an aggressive mandate. We are inclined to take the “over” on both cost and time.”

The bigger picture – the real reason why Pemex’s credit profile is deteriorating – is that Amlo’s new energy policy reverses one of the bright spots of the previous administration: the opening up of the energy sector to private companies. 

Instead, Pemex is again to be the sole vehicle for exploration and production of the country’s oil production.  The fact is that the company has declining cashflow to use for exploration (wouldn’t the $8 billion for the refinery have been better spent rebuilding reserves?), while production has fallen. Cashflow falls as a result and so on into a vicious circle.

In the meantime, the government looks for financial sticking plasters: take its March announcement that $7 billion from the Oil Revenue Stabilization Fund, known as FEIP, will be used to pay down Pemex debt.

If the government really wants to rely on Pemex to the exclusion of private capital, then it needs to free up the company’s tax burden. It has been talking a good game on lessening Pemex’s tax rates, but the company supplies 10% of government revenues, even amid the country’s fiscal challenges. 

Potential investors in Pemex debt want to see tax relief happen, not hear pledges for unrealistic programmes.