Pemex bonds mixed to lower after package news; Turk Telekom on tap

By Rebecca Melvin

New York, Feb. 15 – The bonds for Petroleos Mexicanos SAB de CV were mixed to lower on Friday after the government announced a $5.2 billion rescue package for the vulnerable oil major, and Pemex chief financial officer Alberto Velazquez Garcia said the company won’t take on any new debt in 2019.

The company has $107 billion in debt outstanding, with payments on $5.3 billion of debt due by the end of May.

Investors expressed their disappointment in the package, and Fitch Ratings said the Mexican government’s actions are unlikely to undo its last credit rating action or be enough to prevent continued deterioration of the company’s credit quality.

The package includes a capital injection of $1.25 billion, a plan to transfer $1.75 billion in funds related to Pemex pension obligations, reducing Pemex’s tax burden by $750 million and deploying $1.6 billion in estimated savings from a crackdown on fuel theft.

In a release on Friday, Fitch Ratings said the combined measures may help the company report a neutral free cash flow and not increase debt, but that upstream investments will remain pressured and the measures may not help the company stem production and reserve decline. They fall short, Fitch said, of the $12 billion to $17 billion it estimates is necessary in terms of investment to halt production and reserve level declines.

In addition, Fitch said the package is unlikely to cause Fitch to change its current rating, which is a two-notch differential from the sovereign ratings. The rating agency downgraded Pemex’s long-term foreign and local currency issuer default ratings to BBB- from BBB+/negative outlook on Jan. 29.

Mexican president Andres Manuel Lopez Obrador said on Friday that the state is willing to bolster its support of the oil company if necessary.

“We’ve taken the decision to support Pemex with everything,” Lopez Obrador said.

Pemex’s 6½% notes due 2027 were trading flat to lower and seen at 94.56 in the early going on Friday, compared to a close on the Luxembourg exchange on Thursday at 94.57.

The overall market was quiet on Friday as U.S. markets look ahead to a long holiday weekend in observance of Presidents Day on Monday, when financial markets will be closed.

In Latin America overall there was only one new issue priced this past week. Brazil’s Banco BTG Pactual’s new 7¾% tier 2 subordinated notes due 2029 remained firm in the aftermarket after the Sao Paulo-based financial company priced $600 million of the notes at par on Tuesday.

The deal ended up being the sole new issue from the Latin America region this past week, worsening the comparison of this year’s deal tally to 2018’s bumper crop of deals.

Latin America started out quieter compared to last year and now blackout periods mean most issuers will remain sidelined for the next few weeks.

Looking ahead, Turk Telekomunikasyon AS said it plans to sell a dollar note under Rule 144A and Regulation S on the heels of the favorable reception that the sovereign got for its new $2 billion, three-year Islamic bond, or sukuk. That deal priced with a 5.8% profit rate and yield spread of 318.4 basis points over mid-swaps.

Turkey’s Garanti Bankasi AS is also expected to come to market soon as it has been authorized to issue up to $6 billion of bonds.

In addition, there are a couple of deals in the offing for the Middle East and Africa region next week. MashreqBank PSC, the largest privately owned bank in the United Arab Emirates, has mandated banks and scheduled a series of meetings with fixed-income investors for a proposed U.S. dollar-denominated five-year benchmark offering of senior bonds. And real estate company Bahrain Mumtalakat Holding Co. BSC is planning to price a new dollar-denominated benchmark offering of five-year Islamic bonds, or sukuk, according to a London-based trader.

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