Even with support, Pemex's debt is more expensive than in Europe

The bonds issued by the Federal Government last week to support Petróleos Mexicanos (Pemex) will pay twice what investors pay for bonds from Portugal, France, or Germany. They will also offer premiums 60% above the five-year sovereign bonds of the United Kingdom or the United States.

Experts emphasized that the complex instrument, issued by the Federal Government, allowed the instrument to be marketed at a significant premium, which is why it was in high demand.

Other oil companies pay lower yields than those obtained to support Pemex. Saudi Aramco, the state-owned oil company of Saudi Arabia, pays a yield of 4.69%, Shell 4.52%, Chevron 4.51%, and Exxon 4.44%, while Latin American companies have similar interest rates. Brazil's Petrobras pays 5.25% and Colombia's Ecopetrol 5%, all in five-year bonds.

Investors emphasized that despite knowing the money was for Pemex, they lent the funds because they knew that if the oil company couldn't pay, the federal government would be responsible to the bondholders within five years. Because of Pemex's debt level, investors either refused to lend to the oil company or received excessively high returns.

The Ministry of Finance and Public Credit (SHCP) launched a $12 billion bond through Eagle Funding LuxCo, according to the London Stock Exchange's international financing magazine.

Pre-capitalized trust securities (P-Caps) were placed.

Carlos López Jones, director of Economic Studies at Kapital Edge Consulting, emphasized that this is the first time Mexico has used this type of unusual instrument to support Pemex.

He explained that Eagle Funding LuxCo purchased five-year U.S. Treasury bonds and paid an additional 170-point interest rate to investors. It then lent them to Pemex's treasury, which in turn borrowed money from investors and used the bonds as collateral.

"I (Pemex) have a friend's car invoice and I use it as collateral to borrow from other people," the economic expert explained.

With this financial transaction, the loan was prevented from being recorded as debt owed by the Federal Government and Pemex, although analysts believe the Mexican oil company will not have the money to cover the debt for five years.

Víctor Manuel Herrera, president of the Economic Studies Committee of the Mexican Institute of Finance Executives (IMEF), acknowledged that a better interest rate was achieved for Pemex; however, he emphasized that when the bond matures in 2030, the Mexican government will be responsible for paying the debt.

"They bought Mexico's risk, Pemex has no repayment capacity, and investors took on the sovereign debt risk. Pemex can't pay its debt now, or in five years," explained the former director of the Standard & Poor's rating agency in Mexico.

Without liquidity

Carlos López Jones agreed that Pemex will not have the money to repay the loans it obtains, and that the initial investors have the guarantee of the United States bond, while those who lent to the oil company's operations will have the backing of the Mexican government.

"The normal thing in this type of issue is a rollover. You issued debt for $12 billion, you obtained (for example) $9 billion, and in five years they add another $3 billion with a maturity date of 2035," the analyst explained.

Víctor Manuel Herrera emphasized that the debt is considered sovereign debt, even though it isn't recognized, and that could be a problem because Mexico is close to having its rating downgraded.

Last week, María del Carmen Bonilla, head of the SHCP's Public Credit Unit, emphasized that the transaction was inexpensive and would not impact public finances. Furthermore, it will help the oil company reduce its liabilities by lowering its debt costs.

Speaking about the ratings, Víctor Manuel Herrera said that this "rescue" would raise Pemex's ratings, which are currently at rock bottom. The oil company's debt rating is junk bond, and there is hope and anticipation that Pemex will have sufficient resources to pay in five years.

Carlos López Jones emphasized that the bond interest payments are from a bankrupt company and that higher interest is being paid than in countries like Germany, which is the largest in Europe, or Spain, Portugal, or Greece.

HR Ratings, which has Pemex at BBB+ with a negative rating, emphasized that the company's future is challenging due to declining crude oil production, its dependence on oil fields with little investment, and the exchange rate, as 90% of its financial debt is denominated in foreign currency.