Some sellers emerge amid mixed tone in EM debt market; S&P downgrades Pemex

By Rebecca Melvin

New York, March 4 – There were some sellers of emerging markets debt on Monday, leaving the market with a lightly mixed tone, according to a market source.

Investors continue to watch prospects for a U.S.-China trade deal, and absences in the EM primary calendar continue to be mostly supportive of secondary market spreads.

No new mandates for Latin America or the Central & Eastern Europe, Middle East and Africa region were heard on Monday. The calendar contains a couple of deals for Turkish corporates and a deal on the road for Russia fertilizer company EuroChem Group AG. Prospects for further issuance from Russia remains a question mark.

Meanwhile, negative rating news hit Petroleos Mexicanos SAB de CV, as S&P said it revised the stand-alone credit profile on the heavily-indebted state-owned oil company to B- from BB-, and downgraded the global scale rating outlook to negative from stable.

S&P said the moves were due to a persistent deterioration of the company's business and financial risk profiles that has compromised the recovery of its upstream and downstream activities. The government's financial support also falls short of the company's multi-annual capital investment needs, the agency added.

Pemex’s 6½ notes due 2027 fell more than a point to 97.9 on Monday, from a previous close of 99.1 on the Luxembourg Stock Exchange.

But the longer-dated Pemex 6¾% notes due 2047 were mostly flat at 94.89 on Monday.

The outlook mirrors that of the sovereign – which S&P’s lowered to negative on Friday, while keeping its credit rating unchanged. S&P said the Pemex change reflects a view that the close relationship between the company and the sovereign will remain unchanged over the next couple of years.

The sovereign stable to negative rating agency move also hit Mexico’s bonds on Monday. S&P said on Friday that action was based on its view of potentially higher contingent liabilities and lower GDP growth prospects that could weaken the sovereign’s financial profile.

Mexico’s 4½% 10-year notes due 2029 were down about 0.3 point on the day to 100.325 on Monday. The bonds, of which $2 billion priced in mid-January, have slipped steadily from 100.9 on Feb. 28.

Meanwhile, Moody’s Investors Service’s downgrade last week of the senior unsecured notes of Brazilian mining company Vale SA to Ba1 from Baa3, with its outlook revised to negative, continued to hit that credit.

The action on Feb. 27 concluded a review for possible downgrade that began in January following the company’s Minas Gerais dam collapse. The rating agency said there are “considerable uncertainties associated with the full impact and long-term implications of this labor and environmental disaster for Vale’s overall credit profile.”

The collapse of the dam at the Corrego do Feijao mine killed at least 179 people and left 131 people missing.

Spreads on Vale notes have widened about 60 basis points, and Vale’s 6¼% notes due 2026, of which $2 billion is outstanding, were down again on Monday by 0.25 point to 104.94. In between the initial shock of the Moody’s move last week, the bonds had recovered a little ground.

The political crisis in Venezuela continued to churn on Monday. Opposition leader Juan Guaido returned to the country, which is in the midst of Carnival holiday festivities, on Monday to ratchet up his efforts to pressure President Nicolas Maduro to step down. Guaido, who has the backing of 50 nations as the interim president, was met at the airport outside of Caracas on Monday by diplomats from Spain, the United States, Germany and other countries, in what was a show of support taken as helping Guaido fend off any possible move for his detention. The Maduro government had denied its permission for Guaido to leave the country last month, and could attempt to arrest him for illegally leaving the country.

The slow-moving political drama is expected to result in a regime change by many accounts. Regime change would be looked upon favorably by holders of Venezuela’s sovereign and corporate bonds, a number of which are in default. Currently U.S. persons are prohibited from doing business with Venezuela, and there has been no trading of the bonds since sanctions were imposed at the end of January and beginning of February.

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