Flash Fixed Income Report /

Pemex edges nearer to junk

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    6 June 2019
    Published by

    Fitch's downgrade of the Mexico sovereign to BBB from BBB+ means the sovereign ceiling of many corporates, including that of Pemex, also falls. 

    Fitch has Pemex just one notch above junk. If the rating agency is to keep the spread to the sovereign the same, it could well soon downgrade Pemex, costing the company its IG status.

    Bear in mind that, in line with our long-held views, Fitch says it downgraded the sovereign partly because of the Mexican government's strategy of shoring up Pemex's finances with public funds, potentially damaging Mexico's credit metrics and financial outlook. 

    Our argument has been that Mexico had two choices: 

    1. Risk a sovereign downgrade by financing Pemex with public funds and tax breaks; or 
    2. Implement the fundamental changes that the company needs to become productive again, specifically by reviving the (suspended) auctions that were part of the Energy Reform passed during the previous administration.

    Mexico chose option #1, and Fitch and Moody's both took notice; Fitch by downgrading the sovereign (affecting cUS$500bn of public external debt), Moody’s by lowering the outlook on the sovereign rating to Negative.

    We do not believe a change in direction is on the horizon for Mexico or Pemex. At today’s daily press conference, President Andrés Manuel López Obrador (AMLO) dismissed the rating actions and criticised Fitch and Moody’s, saying they continue to use “the same ratings methodologies that have been in place for decades, that have a ‘neoliberal’ bias, and that don’t consider the fight against corruption, making their assessments wrong”.

    If Fitch agrees with us, and junk status could be around the corner for Pemex, justified by:

    1. The maintenance of the notch differential between the corporate and the sovereign; and 
    2. The fact that the Mexican government seems unlikely to revise its strategy for Pemex, even after the sovereign downgrade.