Mexico will do ‘whatever it takes’ to prevent Pemex downgrade

MEXICO CITY (Reuters) – Mexico will inject $3.6 billion into ailing state-owned oil company Pemex, including by reducing taxes and refinancing debt, officials said on Friday, promising to do “whatever is takes” to strengthen its finances and prevent a further credit downgrade.

Falling oil output, corruption and high labor costs have contributed to the decline of the company that was once a symbol of national pride. It now holds roughly $106 billion in financial debt, the highest of any national oil company in Latin America. Fitch and Moody’s rate its credit one notch above junk.

Investors said they had expected stronger measures to avoid further downgrades, but were reassured by the commitment to more action in the future if required.

“The announcement is positive and could be enough to remedy the company additional financial needs for 2019,” said Edgar Cruz, global markets credit research at BBVA in Mexico, while warning that it would not stave off another crunch next year.

Over the next three years, Pemex must make more than $27 billion in debt payments.

Pemex will receive $1.8 billion in pension liability monetization as part of the new fiscal assistance plan for the company and finances will be helped by a corruption clampdown, officials said in a presentation that was short on details. They vowed the Mexican government will not take on new debt.

The Mexican peso weakened by more half a percent against the dollar in morning trading after the announcement. Mexico’s 10-year bond strengthened on Friday, with the yield down 14 basis points at 8.42 percent from 8.56 percent on Thursday.

The price of the most heavily traded Pemex bond on Friday, its 6.75 percent 30-year maturing in 2047, ticked higher, with its yield falling slightly to 7.55 percent.

However, the Pemex 4.875 percent 10-year bond maturing in 2024 ticked down, with its yield edging up 4 basis points to 5.735 percent.

‘DO WHAT IT TAKES’

Over time, Pemex taxes will go down and the capital injection will allow debt refinancing over the year, Finance Minister Carlos Urzua told a press conference.

If Pemex requires more help, the government will provide it, he added.

“This will allow Pemex … to not need to take on new debt, just refinancing,” Urzua said. “The federal government … will do what it takes to keep finances healthy in the case of Pemex, starting this year.”

Rating agency Fitch downgraded debt issued by Pemex by two steps last month, making it the second agency after Moody’s to put the company just barely within its investment grade category.

The move stoked fears further downgrades by Fitch or other credit ratings agencies could significantly raise the oil company’s financing costs and result in dire fiscal consequences for the government.

Mexican President Andres Manuel Lopez Obrador, who took office in December, did not fully detail how the government will finance Pemex’s lower tax bill and additional capital injection. He said efforts since late December to battle rampant fuel theft in Mexico will result in savings of about $1.6 billion, while a plan to increase production will generate more resources.

“It’s injecting resources, it’s lowering the tax obligation,” he said at the press conference. “But above all, it’s cleaning Pemex of corruption, and that will let us take the company forward.”

Investors had expected a stronger response, said Luis Gonzalez, a portfolio manager at Franklin Templeton Investments in Mexico City, noting that the capital boost plus lowered taxes would still barely save Pemex from needing refinancing this year. However, he praised the commitment to double down on relief measures if necessary.

“The unconditional support they expressed for the oil company is positive,” he said.

The company is in talks with lenders to potentially raise up to $7 billion this year, Refinitiv IFR reported on Friday. The company has previously said it would refinance around $6.6 billion in 2019.

The immediate priority, according to the IFR report, is renewing a $1.5-billion revolving credit facility that matures later this year, said three banking sources that have lent to Pemex in the past.

Pemex previously said that a total capital injection of about $1.8 billion from the government was planned for this year, according to a February 2019 presentation to investors.

The first injection was received on Jan. 25, the presentation said, with four additional payments scheduled between later this month and May. The company “does not expect” to place new debt through March, the presentation said.