Pemex bonds drop after Fitch ‘junk’ rating, Mexico president slams downgrade

June 7, 2019

MEXICO CITY (Reuters) – Mexico’s president on Friday lashed out against rating agency Fitch’s downgrade of state oil firm Pemex’s debt to “junk” status, as its bonds took a beating and investors fretted over the possibility that Moody’s would soon follow suit.

On Thursday, Fitch dropped Pemex’s credit rating from investment grade to speculative grade, or “junk,” with a negative outlook, a day after it downgraded Mexico’s sovereign debt.

The company said in a statement the downgrade would pose no risk to its debt refinancing plan and that it continued to gain support from international financial institutions for refinancing. With $106 billion of financial debt, Pemex is the most indebted oil company in the world.

Spreads on Pemex bonds, a measure of the premium investors demand for holding its debt relative to safer assets like U.S. Treasuries, gapped out to their widest in five months on Friday.

The Pemex dollar-denominated bond due in January 2024 dropped more than 2.5 points in price and its yield climbed nearly 65 basis points to 5.68%, according to Refinitiv data.

In the two days since Fitch cut Mexico’s sovereign rating, largely reflecting concerns about Pemex, the yield on the 2024 has climbed 96.5 basis points, the biggest two-day rise on record for the $1.5 billion bond.

Lopez Obrador, who took office in December, accused ratings agencies of ignoring Pemex’s woes during past administrations.

“We respect their point of view, but feel they weren’t professional, they weren’t objective,” Mexican President Andres Manuel Lopez Obrador told reporters at his daily morning news conference.

A Reuters analysis of Pemex accounts from the past 10 years showed the firm’s financial debt surged by 75% during the six-year term of Lopez Obrador’s predecessor, Enrique Pena Nieto.

The company’s total obligations, including pensions, today exceed its assets by more than $70 billion.

Mexico’s government in May unveiled measures to help Pemex with its debts and gradually reduce its tax burden, but investors are largely skeptical the government will be able to engineer a complete turnaround without more drastic measures.

Moody’s rates the company’s bonds one notch above junk. If the agency also downgrades Pemex’s debt, it could result in as much as $16 billion of forced selling by investors whose mandates stipulate they must hold bonds of investment-grade quality.

(Reporting by Daina Beth Solomon and Sharay Angulo in Mexico City; Additional reporting by Dan Burns in New York; Editing by Anthony Esposito, Steve Orlofsky, Chris Reese and Cynthia Osterman)

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