Via Financial Times

A second rating agency has downgraded Mexico’s debt-laden state oil company Pemex to junk, which will trigger forced bond sales and raise future financing costs. 

Moody’s slashed Pemex two notches to Ba2 from Baa3, with a negative outlook, sending its bond prices in New York tumbling as much as 30 per cent.

“The actions took in consideration our expectations for an extended period of negative free cash flow and the need for external funding, despite the company’s efforts to adjust costs and investments to low oil prices,” Nymia Almeida at Moody’s said in a statement.

Pemex has debts of some $105bn, but President Andrés Manuel López Obrador considers it a national champion. It has reduced its debt payments through refinancing operations but still has to repay some $6.7bn this year.

“This absolutely cements the fact that Pemex in no shape or form will be able to go to the market for new debt or to refinance debt without sovereign guarantees,” said John Padilla of the consultancy IPD Global.

“No one really believes [the government] would allow Pemex to default, but now [because of coronavirus] there is a much bigger squeeze on capital,” he added.

Neither Pemex nor the Mexican government had any immediate comment.

Mexico scored a victory at the weekend when global oil producers swallowed its refusal to cut output by 400,000 barrels a day, allowing it to reduce by just 100,000 b/d and have the US make up the shortfall.

Analysts said the steeper reductions demanded by Opec would have spared the government from having to pour money into Pemex — many of whose fields are lossmaking at current prices.

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Earlier on Friday Fitch Ratings pushed Pemex deeper into junk in its second downgrade in a fortnight. In June last year Fitch became the first agency to rate the company’s debt speculative.

Some institutional investors required to hold investment-grade paper will have to sell Pemex, now that it has lost investment grade status with two rating agencies.

Market estimates suggest holders of as much as $16bn could be forced to sell, although many analysts believe sales will be much lower — perhaps $5bn. But Aaron Gifford, emerging market analyst at T Rowe Price, said the downgrade had been widely priced in, and many of those who might have to sell had already done so.

He estimated that ratings-sensitive exchange trading funds could dump about $3bn in Pemex holdings. 

Since the beginning of March, bonds issued by Pemex have cratered in value. The price of one maturing in 2027 has fallen almost 30 per cent, trading at 77 cents on the dollar on Friday after the downgrade. Another bond maturing in 2047 has suffered as well, dropping more than 30 per cent over the same time period. It now hovers at 66 cents on the dollar.