Pemex initiates series of tender offers and new issues

Table 1: Pemex's series of securities

	Acceptance priority level	Principal amount outstanding	Tender consideration*
6.000% notes due 2020	1	US$816,983,000	US$1,016.07
3.500% notes due 2020	2	US$682,697,000	US$1,010.89
5.500% notes due 2021	3	US$3,000,000,000	US$1,037.50
6.375% notes due 2021	4	US$1,250,000,000	US$1,050.00
8.625% bonds due 2022	5	US$160,245,000	US$1,115.00
Floating rate notes due 2022	6	US$1,000,000,000	US$1,036.25
5.375% notes due 2022	7	US$1,500,000,000	US$1,048.75
4.875% notes due 2022	8	US$2,100,000,000	US$1,037.50
3.500% notes due 2023	9	US$2,100,000,000	US$996.25
4.625% notes due 2023	10	US$2,069,302,000	US$1,026.25

Source: company statement. *Per US$1,000 principal amount. 

Regarding Pemex’s return to the bond market with new issues after almost a year (the last issue took place in November 2018), there is a flow of initial information: Pemex is expected to issue a three-tranche series of bonds with an amount yet to be determined. We believe the amount could be between US$1.5-2bn per tranche (if not higher, depending on market conditions and investors’ appetite), rated Baa3/BBB+/BB+, with maturities and initial price guidance as follows:

1. 7-year due January 2027; 6.75% area
2. 10-year due January 2030; 7.25% area
3. 30-year due January 2050; 8.00% area

The new bonds will be guaranteed by Pemex Exploración y Producción, Pemex Transformación Industrial and Pemex Logística, and each of their respective successors and assignees.

We continue to believe that Pemex is at risk of a downgrade, particularly given our view that the US$5.0bn capital injection by the Mexican government is insufficient to replenish reserves – let alone increase production or even reach the c1.9 million barrels per day production target that the 2020 Federal Budget envisages by the end of next year.

We reiterate our Hold recommendation mainly for technical reasons as we believe that investors continue to see Pemex as a quasi-sovereign because of the government’s support. On a fundamental level, we believe the company is insolvent as a standalone entity and we expect a steep spread widening if and when the Moody’s downgrade crystallises (our horizon being between 9-12 months) and the forced selling of Pemex bonds that was priced in a few months ago dissipates.