AMLO's Pemex Debt Plan Gives Investors Hope, Even Without Many Details

Bond prices for Petroleos Mexicanos (Pemex) have been volatile this week as investors question how the company will pay off billions of dollars of debt that is due in the next few months. Pemex has a large amount of debt coming due soon, and investors are worried about whether the company will be able to make the payments. Pemex has been struggling financially in recent years, and this has caused concern among investors.

President Andres Manuel Lopez Obrador said Friday that the government could potentially assume some of Pemex’s obligations or cut the company’s taxes. Even though a proper debt transfer would likely require a constitutional change, his words brought relief to investors, who’d been spooked earlier in the week by reports of the oil giant’s plans to sell at least $2 billion in bonds.

Lopez Obrador's remarks come as a relief to investors who were worried by reports earlier in the week that Pemex planned to sell $2 billion in bonds. While a full debt transfer would require a constitutional amendment, the possibility that the government could take on some of Pemex's obligations or reduce its taxes is welcome news.

Pemex is facing a steep amortization schedule this year, just as crude production hit a record low at 1.623 million barrels a day in 2022, according to National Hydrocarbons Commission data. However, support from Lopez Obrador, or AMLO, as the president is known, has made the company's bonds a favorite among emerging-market investors. These investors argue that the bonds pay a hefty premium over their sovereign counterparts for essentially the same risk.

Lee Buchheit, a veteran sovereign debt lawyer, wrote in an email that the market has long (and correctly) viewed Pemex debt as implicitly guaranteed by the United Mexican States. He said it sounds as though AMLO wants to make that official by exchanging Pemex debt for UMS paper.

According to David Enriquez, a partner at Goodrich Riquelme y Asociados law firm, AMLO may need to change the constitution in order to achieve his goals. However, this may prove difficult as his Morena party does not have the two-thirds majority in congress that would be required to pass such reform.

Pemex has the highest debt load among global oil majors at $105 billion. In the event of a transfer, the government may assume only as much of the company's debt as needed to "remove the shadow of a possible default," Buchheit added.

Shetty said that if all of the money currently held in private pension funds were transferred to the government, it would amount to about 8% of gross domestic product. She made these remarks at an event in Mexico City.

According to Patrick Esteruelas, head of research at EMSO Asset Management, even though the oil driller’s debt isn’t explicitly guaranteed by the government, this doesn’t mean that they can’t find other paths to securing the necessary funding, such as congressional authorization to raise the debt limit, issuing more debt, or paying off Pemex’s debt.

"There is always a way to continue supporting Pemex if there is the will to do so."

A capital injection from the government could come in tandem with a new offering or liability management deal that is expected before a company blackout period starts on February 12, according to Bloomberg.

Money managers have become accustomed to AMLO's unscripted morning conferences moving markets. He has used them to announce his central bank chief nominee and his intentions to use special drawing rights from the International Monetary Fund to buy back Pemex debt. He even blurted out an interest-rate decision before it was officially announced by policy makers last year.

Bonds from the company due in 2050 rose by 3.4 cents to 77.5 cents on the dollar on Friday, following comments from AMLO. However, traders are still awaiting further clarification from the finance ministry.

This week, the cost to insure Pemex's debt against default over the next five years dropped 14 basis points to the lowest level since June.

Declan Hanlon, chief emerging-market credit strategist at Santander Investment Securities in New York, said that about $5 billion would be needed between a new issue and a capital injection to provide some comfort to the market.

"I see these kinds of headlines as positive signals for action and as a way to prepare the market," he said. "This combination of factors can help to inform investors that there is some news pending."