Mexico is preparing to sell up to $10bn of debt to help bail out Pemex, the indebted state oil company that has fallen behind on billions of dollars of payments to suppliers, people familiar with its plans have said.
Pemex’s bonds rallied as President Claudia Sheinbaum’s government said on Tuesday it was planning the sale as part of “a series of measures” to support the company in managing and improving its balance sheet. The yield on Pemex’s bond due 2050 fell from about 10 per cent to 9.6 per cent after the debt sale plan was announced.
Once a cash cow for Mexico, Pemex has increasingly been a drag on the country’s finances. Production has fallen to record lows while debt is the highest of any oil group in the world, presenting Sheinbaum with one of her most pressing political challenges.
The size of the bond sale was not disclosed but Pemex owes at least $20bn to suppliers and it reported almost $30bn in losses last year.
Mexico’s finance ministry did not immediately respond to a request for comment on the deal size. It said in a statement earlier in the day that the transaction was aimed at improving liquidity and reducing liabilities and financial costs.
“This is all with the aim of contributing to energy security and the country’s economic development,” the ministry said.
The country will use a Luxembourg-based special purpose vehicle to sell bonds due in 2030, and use the cash to buy US Treasuries, according to a government filing with the US Securities and Exchange Commission.
The Treasuries would then be handed to Pemex, which would use them as security for loans from JPMorgan, Bank of America and Citi, it added.
The use of an SPV will allow the Mexican government to avoid directly stepping in to support Pemex’s debts. The bonds will be classed as Mexican public debt but “will not be consolidated with the liabilities of Pemex or Mexico”, according to the filing.
Pemex’s bonds are favoured by many emerging market fund managers because they pay a premium over the sovereign debt while enjoying strong backing from an oil nationalist ruling party.
The company is one of Mexico’s largest and the money it owes its suppliers is becoming an economic drag in towns on the Gulf of Mexico. Suppliers are growing impatient at having to wait years for payment, with some of the world’s largest oil services groups, such as Halliburton, owed money.
Sheinbaum has promised that a broader “long term” plan for the company is almost ready and will address its financial and production issues.
Her predecessor, Andrés Manuel López Obrador — a leftist from an oil- producing state — promised to “rescue” Pemex but oil production hit record lows and he spent $20bn on a new refinery that is only just starting to increase production. He also increased direct federal government budget support for the company, although it has continued to make regular quarterly net losses.
One Pemex bondholder said Tuesday’s financing structure was “elegant”, as it took the debt off balance sheet but still gave the company access to cheap funding at sovereign rates, though they cautioned that investors were awaiting broader, more meaningful reform.
“It’s positive in the sense that it implies a recognition that something new is needed, but it’s only half the story,” the person said. “If this is all they’ve got, then we’re going to be back here in five years’ time.”