February 14, 2019 / 6:42 PM / 3 months ago

Mexico's Pemex scouts market for up to US$7bn in bank debt

NEW YORK, Feb 14 (LPC) - Mexican oil producer Petróleos Mexicanos (Pemex) is in talks with lenders to potentially raise up to US$7bn in bank financing this year in a bid to circumvent bond investors that demand a higher premium due to Mexico’s political uncertainty and a recent ratings downgrade.

The state-owned company’s immediate priority is renewing a US$1.5bn revolving credit facility that matures later this year, said three banking sources that have lent to Pemex in the past. Pemex is understood to be in talks with its banks to refinance this facility before proceeding with any immediate bond sale, the sources said.

Pemex signed the US$1.5bn three-year revolving credit line in November 2016 at 185bp over Libor, LPC reported. Bank of America Merrill Lynch, Citigroup, HSBC, Mizuho and SMBC led the transaction. Fifteen other lenders joined in syndication.

“In recent years, Pemex has raised most of its finances through bonds, they can get more duration and have had the benefit of good conditions in the last two years,” said one loans banker. “But there is uncertainty, we are not sure what policies the President will apply, and uncertainty will add a premium.”

Mexican President Andrés Manuel López Obrador said earlier this year that the central government will inject at least US$1.25bn into the company to boost crude oil production and refining and is expected to announce a plan on Friday to improve Pemex’s finances and reduce debt.

The energy company holds roughly US$103bn in debt, according to Pemex’s figures, and raised almost US$10bn in bank, bond and export credit agency-backed transactions in 2018, according to banking sources with lending links to the company.

Investors, however, are disturbed by the President’s decision to prioritize the less-profitable oil refining business over boosting foreign investment into Mexico’s oil and gas exploration and production sector, sources said. López Obrador, known by his initials AMLO, has argued that Mexico needs to increase oil production in order to reduce the country’s reliance on refined fuel imports.

Pemex further raised brows among market makers in January when an investor presentation in New York fell flat. Investors were not convinced by Pemex’s plans to reduce its debt and fund capital expenditure plans, said a source in attendance.

Pemex’s US$2bn 2029 bond, with a 6.5% coupon, was quoted at 96.824 on Thursday morning, dropping at least two points in the last week, according to a banker monitoring the company’s securities. The bonds had stabilized in recent weeks after slipping in January to 92.81 after Fitch Ratings cut Pemex to BBB-, one notch above sub-investment grade territory.

The Fitch downgrade cited Pemex’s “substantial tax burden, high leverage” and large capital investment requirements as justification for the ratings action, while projecting Pemex will have negative free cash flow between US$3bn and US$4bn for the end of 2018 and 2019. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Jon Methven)

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