Pemex launches biggest ever EM corporate eurobond

Pemex, Mexico’s state oil company, has launched the biggest ever euro-denominated emerging market corporate bond despite concerns about the sustainability of its debt levels.
The three-tranche €4.25bn deal, expected to be priced in a couple of hours, would outstrip the €3bn offering by Brazilian oil company Petrobras and trumps the €4bn deal from Israeli drugmaker Teva that had set previous records, according to data from Dealogic, writes Jude Webber in Mexico City.

“European investors are seeing beyond the headlines. This is a vote of confidence for Pemex,” said one banker working on the deal.

The three tranches – for 4.5 years, 7 years and 11 years, were “well balanced” and hit different investor bases, he said, praising Pemex for diversifying debt denomination.

“It’s quite smart to access the euro when the market is very deep,” said the banker, who asked not to be named before the deal is priced.

The issue comes less than a fortnight after Fitch Ratings issued a fresh warning on Pemex’s debt levels. Pemex’s debt probably surpassed $100bn at the end of last year.

“Without more adjustments to the tax programme, debt could surpass $125bn in two to three years, which Fitch considers unsustainable,” the agency said in a report on February 3.

Pemex, under new management for the past year, has embarked on an aggressive cost-cutting strategy in a bid to stablise its balance sheet. Pemex is Mexico’s biggest company and the state owned group’s financial woes have threatened to drag down Mexico’s sovereign ratings. Both S&P and Moody’s have Mexican sovereign debt on a negative outlook and are mulling downgrades.

Pemex, which reports 2016 results on February 27, is on course for its lowest production in four decades this year, but the company says there is light at the end of the tunnel, despite 16 consecutive quarterly losses. It has put in place debt management programmes and trimmed its third quarter losses by more than $2.6bn. However, Fitch says Pemex’s efforts may be insufficient unless the government changes the tax terms for the former monopoly.

Pemex has been thrust into competition with domestic and international players under a reform which has opened up a sector closed to private investment for nearly 80 years.

“The continued high taxes will significantly increase the need for a large government rescue in the medium term. Pemex’s taxes make it improbable that the company would have positive free cash flow in the future,” said Lucas Aristizabal, senior director at Fitch, in the report.

The issue is divided into a €1.75bn first tranche due in 2021, a €1.25bn second tranche due in 2024 and a €1.25bn final tranche due in 2028. The proceeds are expected to finance Pemex’s investment programme at a time when the company is focusing on profitable ventures and seeking deals with other companies to develop oil fields and its loss-making refineries.

Bloomberg noted that the deal was Pemex’s first sale in euros since March 2016. It follows a $5.5b three-tranche issue in December, which despite the sell-off in Mexican assets following Donald Trump’s US election victory, managed to attract more than $30bn in orders.

Corporate investment in Mexico has slowed and the peso has been under pressure amid uncertainty over Mr Trump’s trade plans. The US president has threatened to walk away from the North American Free Trade Agreement unless he can extract a deal that is better for US workers.