June 12, 2019 / 6:22 PM / 8 days ago

Mexico’s Pemex rounds up banks ahead of deadline for US$8bn loan

NEW YORK, June 12 (LPC) - Mexican oil producer Petróleos Mexicanos (Pemex) is circling commitments from at least 15 banks to fill an US$8bn loan, but the state-owned company is tackling a recent downgrade that has lenders questioning how much exposure they want in the two-part credit facility.

Fitch Ratings cut Pemex’s credit rating one notch to BB+ on June 6 one day after lowering sovereign parent Mexico to BBB from BBB+. A similar move from either Moody’s Investors Service or S&P Global Ratings would trigger a clause in the loan facility that increases pricing on the US$8bn deal to 300bp over Libor from 235bp, banking sources said.

Pemex, which has battled declining oil production levels for a decade, now faces added external threats such as its government’s trade tensions with the US, domestic policy uncertainty and fiscal constraints.

Despite Pemex’s promise to issue no new debt and implement cost-cutting measures, along with the added benefit of tax cuts from the government, the company has bemused investors by favoring investment into oil refining over the profitable upstream oil and gas business, such as exploration and production (E&P).

“Investors know Mexican oil reserves are low and want to see longer-term investments like E&P, whereas a new oil refinery is being done to reduce potential oil theft and achieve shorter-term results,” a Latin American credit analyst said.

FOOD FOR THOUGHT

Lenders in the past have overlooked Pemex’s burgeoning US$106.5bn debt load, and funded the company’s operations as the potential for greater ancillary business and government support compensated for its high leverage.

But Pemex’s planned capital investment, which is expected to fall well-short of replacing oil reserves for 2019 and 2020, coupled with an unpredictable policy framework from Mexico’s left-wing administration led by Andrés Manuel López Obrador has undermined lender confidence in the company.

“All the banks are having internal discussions and questioning whether or not to come into this deal,” a loans banker at a US lender said. “This is exposure beyond just the credit so it isn’t straightforward.”

Banking sources are also skeptical whether Pemex can find a large enough syndicate of lenders to spread the credit risk among the US$8bn deal, which is the largest-ever financing of its type for the company.

“It’s a lot of bank finance and there are only so many banks you can go to,” a second source at an international lender said. “I think the deal will get done, but it is certainly no slam dunk like Pemex deals have been in the past.”

Global coordinators JP Morgan, HSBC and Mizuho officially launched the two-part transaction on May 15 and underwrote the financing with US$2.3bn tickets each, sources said. The deal, which comprises a US$2.5bn five-year term loan and US$5.5bn five-year revolving credit facility, was opened to lenders in Mexico City on June 4.

BBVA, BNP Paribas, MUFG and SMBC entered the transaction as bookrunners with US$550m tickets apiece while Bank of America Merrill Lynch joined as a mandated lead arranger (MLA) with a US$375m commitment, sources said.

Pemex has opened up the loan to potential lenders at three further levels – lead arranger, arranger and manager status. Lead arrangers are required to lend at least US$250m each, arrangers must commit US$175m apiece and those joining as managers must offer US$100m.

Lenders pick up 100bp in fees as bookrunners, MLAs snare 85bp, lead arrangers gain 70bp while arrangers and managers obtain 62.5bp and 55bp in fees, respectively.

Despite the headwinds, Pemex remains a bellwether among Latin American credit markets and is bolstered by its large scale of proven oil reserves. The company has had an average daily production of roughly 2.3m barrels of oil equivalent per day for the last 12 months that ended in March, according to a June 7 report from Moody’s.

Pemex also benefits from government support, its dominant position in Mexico’s energy industry and as a major exporter of crude oil to the US. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Leela Parker Deo)

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