June 7, 2019 / 7:53 PM / 4 months ago

Pemex bonds crushed on Fitch downgrade, fears of more to come

June 7 (Reuters) - Investors stampeded from bonds issued by Mexico’s state oil firm Pemex on Friday after Fitch Ratings cut the company’s credit rating to “junk,” driving yields up on some bonds by the most since oil prices were cratering more than three years ago.

Several Pemex bonds claimed the top spots on the most-active traded list among emerging market issues, according to MarketAxess.

Pemex’s $2 billion bond due in January 2029 topped the list with nearly $300 million of turnover as it dropped more than 3 points in price. Its yield, which moves in the opposite direction, surged by a record 0.45 percentage point to 7.28%.

Also active was the $1.5 billion January 2024 bond, which dropped 2.15 points in price. Its yield rose by 0.54 percentage point, the largest one-day increase since January 2016 when oil prices plunged below $30 a barrel to their lowest levels since 2003, spreading financial stress across the oil sector.

Spreads on Pemex’s bonds, a measure of the premium investors demand for holding the company’s debt rather than a safer asset such as a U.S. Treasury security, shot to the highest in five months.

The Fitch downgrade was a blow to President Andres Manuel Lopez Obrador’s ambitions to revive Pemex, the world’s most indebted oil company, for the benefit of the Mexican public and followed widely criticized plans to build an $8 billion refinery.

Investors fretted that Fitch’s downgrade of Pemex and its $106 billion of debt would not be the last. Fitch cut it to “BB+” from “BBB-“ late on Thursday and maintained a negative outlook, suggesting another downgrade may be in the offing.

Rival ratings agency Moody’s Investors Service currently rates Pemex on the lowest rung of investment grade - “Baa3”.

“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, a director of AllianceBernstein’s emerging market debt strategies. “Pemex also needs to focus on deleveraging by reducing capex and asset sales. This will require a fiscal reform in Mexico and complete change from the current policy in the energy sector.”

Others were on the fence.

“Right now we would say there are even odds for a second downgrade in 2020,” said James Barrineau, head of emerging markets debt relative at Schroders.

Should Moody’s following suit and lower it into speculative grade - or “junk” bond territory - Pemex would become the world’s largest so-called “fallen angel” corporate bond issuer ever.

Fallen angels are debt issuers that have lost their investment grade status. (Reporting by Stefanie Eschenbacher in Mexico City and Kate Duguid in New York Writing by Dan Burns; Editing by Tom Brown)

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