Flash Fixed Income Report /
Mexico

Pemex's syndicated loan; reiterate Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    13 May 2019
    Published by

    The US$8bn syndicated loan for Pemex announced today will be the largest loan in the company's history. It will have a maturity of five years. The three financial institutions leading the transaction (JP Morgan, HSBC and Mizuho) stated that they expect "ample participation" from local and international banks in the syndication process.

    The proceeds will be used to refinance existing credit lines in the short and medium terms, under "better conditions than those that would have been achieved in the capital markets", according to Minister of Foreign Affairs Marcelo Ebrard.

    In addition, Minister of Finance Carlos Urzua stated that, in order to partially alleviate the company's tax burden, wells that produce between 150,000-250,000 barrels per day that were contracted under the 'assignment' structure, and that include a tax known as 'rights for shared profit' or 'DUCs', in addition to the regular tax regime of 'normal contracts' (taxed like any other company), will be migrated to the 'normal contracts' structure. This implies the 'DUCs' will be lifted from the contracts that were assigned to wells that fall within the above production range.

    Urzua did not state how much this migration will represent in terms of fiscal savings for Pemex.

    Pemex and Mexican President Andres Manuel Lopez Obrador (AMLO) and his cabinet hailed the syndicated loan and the tax-regime change as a great achievement, but we believe it is almost completely the result of the absence of affordable capital-market conditions for the company.

    Although the development should strengthen Pemex's balance sheet by reducing its cost of debt and extending the maturities of some credit lines by 3-5 years, we still believe much remains to be done to return the company to self-sustainability, profitability and greater creditworthiness.

    We expect the Pemex family of bonds to trade up on the news, but maintain our Hold recommendation given Pemex's continuing operational problems – decreasing production and misplaced business priorities (such as investing in refining rather than exploration and production).