Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    16 May 2019
    Published by

    In Focus: Pemex’s syndicated loan; reiterate Hold 

    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).

    Read the full report here

    Recap of the week’s key credit development

    Pakistan (PKSTAN): On Sunday, the IMF announced that it had reached Staff-Level Agreement on a 39-month, US$6bn Extended Fund Facility (EFF). While the Staff-Level Agreement should be seen as a positive, and ends an 8-month back and forth between the Fund and the authorities, the programme size that has been announced by the IMF is slightly smaller than both what the market was expecting as well as the country’s likely 3-year external financing gap, which we previously calculated to be cUS$12.5bn. Although the term privatisation is notably absent from the press release, we think it is likely that the Fund will continue to push for both variations of privatisations and reforms of various state-owned enterprises. 

    Georgia (GEORG): On Monday, the IMF reached a staff-level agreement on Georgia’s fourth review under its Extended Fund Facility. The Board is expected to consider the review next month. The three-year programme, approved in April 2017, has a total commitment of cUS$285mn, 100% of Georgia’s quota, and the US$41.6mn to be disbursed after Board approval will take total disbursements to US$208mn. The IMF now reports that reforms remain on track and that most commitments for the fourth review have been met. This is positive news that is also in line with our recommendations on Georgian corporates. 

    Kenya (KENINT): Kenya (B2/B+/B+) announced on Wednesday its third dual tranche eurobond sale, offering US$ bonds due 2027 and 2032. Final pricing saw a US$900mn 7-year WAL at 7% and US$1.2bn 12-year WAL at 8%. Now, as the five-year US$750mn 5.875% tranche issued in 2014 comes due next month, the government is looking to refinance, although it comes amid concerns over the direction of public debt. We upgraded our recommendations on Kenya 2028s to Buy from Hold following the IMF Spring Meetings (see our trip report here), which now trades at a yield of 7.5% on a mid-basis as of 15 May. After the looming maturity of the 2019s next month, Kenya will have five outstanding US$ bonds, for a total amount of US$6.1bn.