Mexico’s Pemex is targeting a bond sale of more than $1 billion

Mexico’s state-owned oil company Pemex on Tuesday conducted a bond sale worth at least $1 billion.

The issue comes after emerging-market governments borrowed more than $40 billion in international bond markets this year after rising interest rates sparked a global sell-off last year.

Andrés Manuel López Obrador, Mexico’s nationalist president, has in the past vowed to “rescue” Pemex after years of privatization, which he sees as damaging. His government has sought to boost the company with billions of dollars in support and tax breaks to help it cope with a debt burden of more than $100 billion.

Some investors had hoped the government would provide more support before the company was forced to re-enter the market. But Pemex was working Tuesday to price the sale of 10-year bonds, according to three people familiar with the matter. The company last issued new debt in 2022.

Emerging market fund managers who have invested in Pemex bonds in the past say they are attractive because they pay a high premium or spread over Mexican government bonds while enjoying strong government support.

Yields on the company’s new bonds are expected to be more than 10 percent, people following the deal said. Mexico’s 10-year government bond traded at a yield of 8.7 percent on Tuesday, which would mean a premium for investors in the new Pemex bonds of about 1.5 percentage points.

“It’s a pragmatic arrangement where the government is trying to keep pressure on the company to remain self-sufficient,” a Pemex bondholder said of the decision to issue capital rather than inject capital through the government.

“It is not a permanent solution and we do not expect a permanent solution. It will be this piecemeal approach for the foreseeable future.”

According to an emerging market credit analyst at an asset management firm, the target size of the deal was $1 billion to $1.5 billion. But the analyst, who spoke ahead of the deal’s pricing, said he expects the size could be increased if there is sufficient demand.

The yield on the new bonds, which have yet to be determined, reflected expectations that the government would continue to support Pemex, the analyst said. But for a “quasi sovereign,” the range is wide, the analyst added.

But the analyst didn’t think the yield on this particular issue was extremely attractive compared to other Pemex bonds, with several trading at around 80 cents on the dollar.

In the first quarter of this year, Pemex will have to pay off more than $5.5 billion in debt, its CEO Octavio Romero said this month.

Despite generous financial support from the government, Pemex’s production has been falling for years, hitting a low of 1.5 million barrels per day in 2022, down from more than 2.1 million barrels per day in 2016. As a result, the company could not benefit from higher oil prices.

Though production is declining, the company is also building an oil refinery that is well over budget and expected to cost more than $11 billion. López Obrador has come under fire from environmentalists over the project in his home state of Tabasco. Mexico’s Pemex is targeting a bond sale of more than $1 billion

Adam Bradshaw

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