MEXICO CITY (Reuters) - Ratings agencies on Wednesday said Mexico’s $5 billion cash injection into national oil company Pemex was positive though not enough to avert a possible downgrade of its bonds to speculative grade, or junk, in the next months.
FILE PHOTO: A sign of state-owned company Petroleos Mexicanos (PEMEX) is seen at a gas station in Monterrey, Mexico June 17, 2019. REUTERS/Daniel Becerri
The measure was the latest move by President Andres Manuel Lopez Obrador to chart a brighter future for the cash-strapped oil and gas producer with ballooning debt and years of declining output.
Fitch became the first ratings agency in June to downgrade Pemex debt to junk. A second downgrade by Moody’s would likely force some investors to sell billions of dollars of Pemex bonds.
The $5 billion in aid appeared to be in addition to a $4.4 billion contribution, including cash and tax relief, unveiled in the government’s 2020 budget proposal at the weekend.
Pemex, saddled with more than $104 billion of financial debt, said it plans to use the capital for the prepayment of bonds that mature in 2020 and 2023. It also will issue new bonds in maturities of seven, 10 and 30 years to refinance short-term debt. It did not give a value for the new bond placements.
“Proceeds from this transaction will be used to ensure a reduction in the outstanding balance of Pemex’s debt,” the company said in a statement.
Pemex bonds were the most traded by volume among emerging market corporates following the morning announcement, according to MarketAxess. The news sent both the 6.5% Jan. 2029 and the 6.5% Mar. 2027 over 2 points.
Fitch said it would rate the new debt as one notch into “junk” status, in line with its rating for existing Pemex debt.
Although it acknowledged that a successful transaction would improve Pemex’s liquidity, Fitch said it still views government support as “moderate” given Pemex’s heavy tax burden.
“The company continues to severely underinvest in its upstream business, which could lead to further production and reserves decline,” Fitch said.
Moody’s took a cautious view, pegging the new debt’s rating to Pemex’s existing level, just above junk, and saying the company had underpinning challenges.
“Pemex’s intrinsic liquidity is still weak and the company remains reliant on government support until it can consistently generate free cash flow,” the agency said in a report.
“The amount of planned capital spending will still fall well short of replacing reserves in 2019 and 2020.”
Pemex Chief Financial Officer Alberto Velazquez told Reuters in June the company planned to refinance $2.5 billion this year.
In a statement, the finance ministry said the capital contribution will have no impact on net public sector debt or on public sector borrowing requirements, the broadest measure of public sector debt.
Finance Minister Arturo Herrera said on Tuesday that the government will “defend the credit rating” of Pemex, assuring the firm has money to invest and to manage its debt profile so it is “more adequate.”
Reporting by Daina Beth Solomon in Mexico City, Additional reporting by Rodrigo Campos in New York and Stefanie Eschenbacher in Mexico City; Editing by David Gregorio and Marguerita Choy