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The President of Mexico is not amused: "In three years, there has been no investment in exploration or well drilling, and they have given Pemex a very good rating. Now that there are investments, they degrade Pemex. "
By Don Quijones, Spain, United Kingdom and Mexico, Editor-in-Chief of WOLF STREET.
After months of warning shots, one of the top three rating agencies, Fitch Ratings, has downgraded the "undesirable" (BB +) debt to about $ 80 billion of Pemex's debt, much of which is denominated in US dollars and held externally, and has maintained its negative position. "Rating perspective, which means another degradation is likely. The company belongs to Mexico.
The day before, Fitch had lowered Mexico's sovereign debt to "BBB" – only a few notches above the order.
Fitch's downgrading of the default ratings (IDRs) of Pemex's long-term foreign and local currency issuers, from the lowest investment grade to the undesirable (here is our checklist for business rating scales by S & P, Moody's and Fitch in plain language) is forcing some institutional investors to shed these bonds. This will increase Pemex's borrowing costs. And that could hurt Mexico's already beleaguered economy. In addition, this week, Moody's has reduced its outlook for Pemex from negative to stable.
Fitch cited a number of reasons for deciding to degrade Mexico's sovereign debt, including "Pemex's deteriorating credit profile threatening its public finances," the "persistent weakness" in Mexico's macroeconomic outlook, exacerbated by external threats of trade tensions, "" some uncertainty of domestic policy and ongoing budget constraints. "
The rating agency had already reduced Pemex's rating by two notches in January. Moody's did the same thing at about the same time. This was a double blow on the arena designed to incite Mexican populist President Andrés Manuel Lopez Obrador (AMLO) to reduce Pemex's tax burden, to commit more public funds to clean up the economy. the oil giant's balance sheet and withdraw from its nationalist energy strategy. which is popular among voters and hated by investors, especially those overseas.
In February, AMLO committed to inject $ 3.9 billion into Pemex to strengthen its finances and prevent a further deterioration of its solvency. He also pointed to the cost savings that Pemex could derive from the multi-faceted government-led offensive against the rampant oil theft which weighs about $ 3 billion a year on the oil company owned by the company. 39; State. When this was deemed insufficient, the government floated Pemex with an additional $ 5.7 billion in additional funds and tax savings in April. But according to Fitch, even that is still not enough:
"The fiscal cost of this support currently represents 0.2% of the budget GDP in capital injections and lower taxes, but according to Fitch, this is not enough to offer a long-term solution or prevent a continued deterioration of the budget. credit profile of Pemex.
"Pemex's tax bill (oil accounted for 2.3% of federal government revenue in 2018) was higher than its free cash flow (FCF), which prevented it from investing enough to maintain the production and reserves. Fitch is expecting a contraction of 5% of oil production in 2019 and 2020. "
With long-term and short-term debt of $ 106 billion, of which about $ 85 billion is held by bondholders, Pemex is the world's most indebted oil company. If Moody's and S & P also downgraded Pemex into junk, moving from investment to junk to the investment category, it would become the largest "fallen angel" in history, with twice as much debt than its current owner, Petrobras.
This would trigger billions of dollars in forced sales by investors who are contractually obliged to hold high-quality assets, including many pension funds and sovereign wealth funds. And that would tighten even more the screws, as well for Pemex as for Mexico.
Given that Moody's is already pricing Pemex's debt just a notch above junk food and that S & P has recently brought down its outlook to stability for Pemex and Mexico, warning that Mexico has a chance on three to be lowered over the next year, the chances of what happens is high.
For this not to happen, Pemex should significantly improve its financial performance, its tax burden should be significantly reduced (again), and AMLO should forego a series of key policy promises, including its government's costly plan to improving a number of Pemex's oil refineries, as well as building a brand new refinery in his home country, Tabasco, are expected to cost more than $ 8 billion. This plan aims to reduce Mexico's dependence on US refineries for much of the finished gasoline it consumes.
For the moment, this seems unlikely given the importance of Pemex's recovery for the AMLO government. Today, AMLO criticized the rating agencies during its daily public address, accusing them of unprofessionalism, looking back when the last government looted Pemex, and using outdated methodologies that did not include no variables such as corruption.
"In three years, no investment in exploration, no investment in well drilling at Pemex, and they have given a very good rating to Pemex," said AMLO. "Now that there is an investment, they degrade Pemex. I assure you that corruption is no longer tolerated. So we have these differences. It looks like he has work to do. By Don Quijones.
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