Not only was Pemex able to place in the market US$7.5bn in three tranches, but order books (according to some market participants and local media in Mexico) seem to have exceeded US$30bn. This indicates an extremely strong appetite for a credit that was unable to tap the capital markets at affordable rates in the first half of the year, given all the uncertainties including potential negative ratings action, dwindling production and the amount the Mexican government would be willing (and most importantly, able) to inject into the company.
The issues came on the back (and concurrently) of the Mexican government’s announcement that it would inject US$5bn into Pemex to be used to pay down debt. In addition, and contributing to the successful placement, the bonds were issued to extend maturities, and redeem and retire bonds maturing between 2020-2023. Further, during the presentation of the federal budget to Congress on 8 September, the Ministry of Finance made a statement that the government will continue to support Pemex.
The company issued the following:
- US$1.25bn in 7-year bonds priced to yield 6.50%, when initial price guidance was 6.75%;
- US$3.25bn, 10-year bonds priced to yield 6.85%, when initial price guidance was 7.25%, making this bond the preferred security for investors given the substantial differential between price guidance and printed yield;
- US$3.0bn in 30-year bonds priced to yield 7.7%, when initial price guidance was 8.0%.
We were surprised by the extremely high appetite for these new issues. However, we remain bearish on Pemex and continue to believe that the budget for the company seems insufficient to replenish reserves, let alone increase production or even reach the c1.9mn barrels per day production target that the 2020 Federal Budget envisages by the end of next year.
Although we believe that these bonds will trade very well in the coming weeks (even in the next few months), we do not see production increasing to the levels stated in the federal budget when the company releases its Q3 19 results. Moreover, rating agencies (particularly Moody’s) might send more warnings, leading to a correction not only in these bonds, but on the whole Pemex credit curve.
In sum, we reiterate our Hold recommendation on Pemex, contrary to the market, because: we still believe that the company is insolvent on a standalone basis; the Mexican government might see its ability to continue to support Pemex limited by lower fiscal revenues; and we still see the risk of a downgrade to “junk” in the next 9-12 months.