Suppliers of the state-owned Pemex are suffering heavy losses after the oil company carried out an unsolicited debt swap instead of paying its overdue obligations with cash.
The companies are racking up debt after Pemex refinanced some $2 billion of commercial debt in early June.
Pemex issued bonds to deal with billions of dollars in accumulated debts with its suppliers and service providers abroad, as it has failed to generate enough cash to pay its liabilities amid a heavy tax burden and declining production. . But the move has left those it owed, for example companies that service oil rigs or provide maintenance to offshore platforms, racing to monetize this unwanted debt as quickly as possible, even at a discount.
About a month after the deal, Citigroup Global Markets helped these companies shed about $288 million of securities at 87 cents on the dollar, according to data compiled by Bloomberg and information from people familiar with the matter who asked not to be named because the information is not public. The bonds were valued at par at the time of the swap and the net loss for these companies amounts to about 4% if interest accrued over the period is taken into account, one of the people said.
Pemex “needs additional sources of liquidity to meet supplier obligations,” said Édgar Cruz, a BBVA strategist in Mexico City. “In that sense, the company could return to the market to continue with this liability management. Paying short-term accounts payable for long-term debt.
Vendors that did not sell their secondary market shares still hold about $200 million of the bonds through 2029, according to people familiar with the deal. These companies will be able to sell when their lock-in periods end, either at the end of July or towards the end of September, the people said.
Pemex’s ill-fated debt sale sparked discontent among dozens of suppliers and spooked bond investors, who were caught off guard by the deal. Fund managers did not expect the firm to sell new bonds at a time of weak appetite for credit from emerging markets, especially as questions were raised about Pemex’s difficulties in meeting its obligations despite high oil prices.
Last month, Citigroup sold $1.5 billion of bonds at 97.6 cents on the dollar, a discount that had already irked suppliers trying to get their money back.
At the end of March, Mexico’s state drilling company had the highest debt of any major oil company in the world, at $108.1 billion. But as President Andrés Manuel López Obrador has reiterated his support for the firm, the bonds have become an investor favorite, paying higher coupons than their sovereign counterparts that typically have a similar risk profile. .
But the risk premium Pemex pays on government bonds has risen since early June, as declines in the price of the company’s notes outpaced those of sovereign notes. The yield spread between the notes due in 2032 increased as much as 200 basis points to a record 6.2 percentage points. A sell-off in emerging market bonds amid concerns about a global economic slowdown has also helped push down bond prices.
“Pemex has weak liquidity and relies heavily on government support,” Nymia Almeida, an analyst at Moody’s Investors Service, wrote in a statement last week as the agency downgraded the company’s credit rating. “In addition, Moody’s estimates that Pemex will have substantial negative free cash flow over the next 12 to 18 months, driven by insufficient operating cash generation to pay interest, tax and capital expenditures.”
