By Stefanie Eschenbacher and Daina Beth Solomon
MEXICO CITY (Reuters) – The bonds of Mexican state oil company Pemex took a beating on Friday as investors fretted over chances that Moody’s ratings agency could soon follow Fitch in downgrading the debt to “junk,” which would trigger a forced sell-off.
On Thursday, Fitch cut the credit rating of Petroleos Mexicanos, known as Pemex, from investment grade to speculative grade, or “junk,” with a negative outlook, a day after it downgraded Mexico’s sovereign debt.
(See graphic on Pemex’s massive debt. https://graphics.reuters.com/MEXICO-PEMEX/010091NG2K0/index.html)
Moody’s rates the company’s bonds one notch above junk. If the agency also downgrades Pemex’s debt, it could result in as much as $16 billion of forced selling by investors whose mandates stipulate they must hold bonds of investment-grade quality.
Fitch’s downgrade highlighted Pemex’s ailing finances and dealt a blow to President Andres Manuel Lopez Obrador’s ambitions to revive the world’s most indebted oil company, with $106 billion in financial debt.
“A downgrade by Moody’s is a high probability, absent a change in policy by the Mexican government which results in lowering the taxes they get from Pemex,” said Shamaila Khan, director at asset manager AllianceBernstein’s emerging market debt strategies.
Several Pemex bonds claimed the top spots on the most-actively traded list among emerging market issues, according to MarketAxess.
Spreads on Pemex bonds, a measure of the premium investors demand for holding its debt relative to safer assets like U.S. Treasuries, gapped out to their widest in five months on Friday.
Pemex dollar-denominated bonds due in January 2024 dropped more than 2.5 points in price and its yield climbed nearly 65 basis points to 5.68%, according to Refinitiv data.
In the two days since Fitch cut Mexico’s sovereign rating, largely reflecting concerns about Pemex, the yield on the 2024 bonds has climbed 96.5 basis points, the biggest two-day rise on record for the $1.5 billion bond.
Pemex said in a statement the downgrade would pose no risk to its debt refinancing plan and that it continued to gain support from international financial institutions for refinancing.
Lopez Obrador, who took office in December, accused ratings agencies of ignoring Pemex’s woes during past administrations.
“We respect their point of view, but feel they weren’t professional, they weren’t objective,” Lopez Obrador told reporters at his daily morning news conference.
Lopez Obrador has blamed the Pemex problems on the “neoliberal” policies of previous governments. A Reuters analysis of Pemex accounts from the past 10 years showed the firm’s financial debt surged by 75% during the six-year term of Lopez Obrador’s predecessor, Enrique Pena Nieto.
Mexico’s government in May unveiled measures to help Pemex with its debts and gradually reduce its tax burden, but investors are largely skeptical the government will be able to engineer a complete turnaround without more drastic measures.
The company’s total obligations, including pensions, today exceed its assets by more than $70 billion.
“We would say there are even odds for a second downgrade in 2020,” said James Barrineau, head of emerging markets debt relative at asset manager Schroders(LON:SDR).
(GRAPHIC-Pemex’s massive debt link: https://graphics.reuters.com/MEXICO-PEMEX/010091NG2K0/index.html ).