Moody’s downgrades Pemex; no new debt without sovereign guarantees

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Rating agency Moody’s has downgraded Mexico’s debt=laden state oil company Pemex to ‘junk’ which will trigger forced bond sales and increase future financing costs.

Pemex was downgraded two notches to Ba2 from Baa3, with a negative outlook. As a result, the company’s bond prices in New York tumbled by as much as 30%, according to an April 17, 2020 article in the Financial Times.

“The actions took in consideration our expectations for an extended period of negative free cash flow and the need for external funding, despite the company’s efforts to adjust costs and investments to low oil prices,” Nymia Almeida at Moody’s is quoted in the article as saying.

According to the article, Pemex has debts of some $105bn. It said the company managed to reduce its debt payments through refinancing operations but still has to repay $6.7 billion in 2020.

The Financial Times quotes John Padilla of the consultancy IPD Global as saying, “This absolutely cements the fact that Pemex in no shape or form will be able to go to the market for new debt or to refinance debt without sovereign guarantees.”

“No one really believes [the government] would allow Pemex to default, but now [because of coronavirus] there is a much bigger squeeze on capital,” he added.

The article said neither Pemex nor the Mexican government had any immediate comment.

The Financial Times reported that earlier on Friday, Fitch Ratings downgraded Pemex, pushing the Mexican state oil company deeper into junk.

Another report suggests that Pemex has too much fuel and no place to store it, due to the falling demand brought on by the restrictions for COVID-19. Bloomberg reported that during the first half of April 2020, demand for gasoline and diesel fell 60% and 35% respectively.

“In some metropolitan areas sales have been reduced by as much as 70% because of social distancing to combat the coronavirus pandemic… In rural areas, the drop is less pronounced, at about 30%, since diesel is still necessary for agricultural machinery and product transport,” the Bloomberg report stated.

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