Debt swap gives new life to Pemex bonds: Mexico Fixed Income

(Bloomberg) – All it took to keep the bonds of the world’s most indebted major oil company afloat was a debt swap that netted it $ 4.8 billion to repay short-term liabilities.

Roughly $ 5.4 billion of Petróleos Mexicanos bonds due 2027 have risen nearly 1% to 103.8 cents on the dollar since the transaction was announced Tuesday. The notes were among the best performing in Latin America last week.

Investors are betting that the swap, carried out in conjunction with the Ministry of Finance, indicates the government’s commitment to the company, known as Pemex. The state entity has more than US $ 110,000 million in debt. The average spread of Pemex bond yields in 2027 over those of the equivalent Mexican sovereign fell 23 basis points to 412 basis points.

© Bloomberg
Pemex spreads against the sovereign continue to fall this year

Pemex’s spreads with the sovereign continue to close this year.

“Cash flow is significant as it keeps banks’ lines of credit available,” Citigroup Global Markets analysts led by Dirk Willer wrote in a note. “We remain constructive about Pemex until the end of the year.”

Help is useful for Pemex. Its crude exports plummeted to a record in October. Production has declined every year for the past 15 years, despite President Andrés Manuel López Obrador’s commitment to bail out the company. On the positive side: the Mexican Senate earlier this month introduced a bill to reduce Pemex’s profit sharing tax from 43% to 35%.

Pemex exchanged government certificates for more liquid securities, which allowed the company to monetize them. While it is unclear whether the firm sold the notes directly or monetized them through other means, the swap gave Pemex an additional $ 4.8 billion.

Some analysts remain skeptical.

“While the market would love to see something big that finally fixes Pemex – a major recapitalization, tax cuts and asset sales – it is clear that this will not happen under this Administration,” said Roger Horn, SMBC’s senior emerging markets strategist. Nikko Securities America in New York. “Like other recent support measures, this transaction is probably enough for Pemex to survive for a while.”

Still, Singapore-based Lucror Analytics began hedging the company on Friday with a buy recommendation on Pemex notes that have the widest spread against the sovereign, including bonds maturing in 2027, 2029, 2030. and 2050.

The earnings from Pemex bonds joined most of the Mexican corporate bonds last week. The country’s sovereign debt denominated in pesos and in dollars also rose.

Yields on Mexican bonds and swaps declined as the peso advanced, amid gains in the peso and a potential advance in US stimulus talks that strengthened emerging market assets. A 3-2 split decision by Banxico to keep rates unchanged also prompted short-term swap rate traders to discount more cuts in 2021.

“Pemex bonds had a good week in such a positive context, although proposals for debt swaps or tax cuts in Congress will be far from sufficient in terms of solving the company’s problems,” says George Lei, strategist from Bloomberg.

Data scheduled for this week will likely show that Mexico’s unemployment rate fell to 4.4% in November, from 4.7% the previous month. Biweekly inflation figures are expected to rise to 3.28%, from 3.23% in the previous period. The country will also report figures for economic activity, trade balance and retail sales.

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Debt Swap Gives Pemex Bonds New Life: Mexico Fixed Income

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