Defiant Energy Policy of Mexico’s President-Elect Rattles Moody’s and Fitch
But it’s going to be tough; he’ll need more than luck to pull it off.
Moody’s has rated the $2 billion of senior unsecured notes due 2029 that Mexico’s state-owned oil company Pemex is in the process of issuing one notch above junk. Pemex is offering to pay a coupon interest rate of 6.5%. In its report on Friday, Moody’s blamed the company’s “weak liquidity, a heavy tax burden and the resulting weak free cash flow, high financial leverage and low interest coverage; and challenges related to crude production and reserve replacement.”
Moody’s is also worried about the large amounts of debt coming due in 2020 and beyond. And Pemex will continue to be “dependent on debt capital markets to fund negative free cash flow,” it said.
Fitch Ratings downgraded the outlook for Pemex’s debt from stable to negative amid concerns about the incoming government’s proposed energy policies. It rates Pemex three notches above “junk” (BBB+), but only because the company is state-owned. Its standalone credit profile — if Pemex were not backstopped by the Mexican state — is junk, seven notches into junk (CCC).
Fitch has also warned earlier that if Pemex’s credit rating drops, so, too, will Mexico’s sovereign debt rating. Even a small deterioration in credit risk could exact a heavy toll on both the company and the country.
The outlook revision to negative from stable “reflects the increased uncertainty about Pemex’s future business strategy coupled with the company’s deteriorating standalone credit profile,” Fitch said in its report.
Fitch’s downward revision was cited by analysts as one possible factor in the fall of the peso last week to its lowest level in over a month. CI Banco analyst James Salazar said that Fitch’s Pemex assessment is a reminder that the company’s “finances should continue to be handled with great caution so as not to cause additional imbalances that will increase its debt.”
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