Moody’s downgrades Pemex to junk status

Ratings agency Moody’s on Friday downgraded Mexico’s credit rating due to a deteriorating economic outlook and cut the debt of state oil firm Pemex to junk status, dealing a serious blow to President Andres Manuel Lopez Obrador.

Moody’s Investor Service said it had cut Mexico’s creditworthiness to “Baa1” from “A3”, and lowered the rating of the heavily indebted, loss-making Pemex to “Ba2” from “Baa3”.

Though Mexico retains an investment-grade rating, Pemex’s drop to junk is expected to ramp up financing costs for the firm formally known as Petroleos Mexicanos.

“It’s likely that next week we will see strong outflows from Pemex bonds,” said Luis Gonzali, a portfolio manager at asset manager Franklin Templeton.

“While I believe Moody’s was benevolent with the sovereign’s rating, it wasn’t with Pemex’s rating, which, inevitably, now enters the universe of speculative bonds.”

Moody’s became the second main ratings agency after Fitch to downgrade Pemex to junk. That is likely to spark a fire sale of billions of dollars of bonds among investors whose mandates say they must hold assets of investment quality.

In a statement, Moody’s said the government’s responses under Lopez Obrador had been “insufficient to effectively address both the country’s economic challenges and Pemex’s continued financial and operating problems.”

The agency took issue with a host of decisions made by Lopez Obrador, ranging from his 2018 cancellation of a new Mexico City airport to his response to the coronavirus pandemic, and saw the public debt burden rising sharply through 2022.

Pemex, which has more than $105 billion in financial debt, becomes the world’s largest “fallen angel,” the term for a borrower that descends from investment grade to junk.

It drops into an increasingly crowded junk market after carmaker Ford suffered the same fate last month.

After Brazilian state oil firm Petrobras had $41 billion of its bonds classified as junk in 2015, its financing costs jumped from $1.6 billion to $8.8 billion in one year.

Mexico’s finance ministry responded quickly to the downgrade and said the government can still access international and domestic financing at favorable conditions.

Pemex blamed the fast-spreading coronavirus outbreak, the deterioration of the global economic outlook, the fall in oil prices and the decrease in asset prices for the timing of the downgrade.

“The combined credit effects of these events are unprecedented,” it said in a statement. “The oil and gas sector has been one of the most affected sectors, given its sensitivity to demand and consumer confidence.”

The immediate economic outlook for Mexico is grim.

Mexico entered a mild recession in 2019 and private sector analysts forecast gross domestic product (GDP) could shrink by up to 10% this year due to the coronavirus crisis.

Lopez Obrador, a leftist oil nationalist, has staked his reputation on reviving Pemex, which has been a powerful symbol of Mexican self-reliance since its creation in 1938.

A combination of declining output, crushing tax obligations and a hefty payroll burden have gradually weakened the company, which is a major source of federal budget revenues.

Credit ratings agencies have for months criticized the president’s plans, which include building an $8 billion oil refinery and taking away incentives for private companies to participate in the energy sector.

Jorge Sanchez, director of Mexican financial think tank Fundef, blamed the downgrade on financial mismanagement and Lopez Obrador’s retreat from the previous government’s opening of the oil and gas industry’s to private investors.

“Over the next days, this will likely cause an outflow of capital and a depreciation of the peso,” Sanchez said. “It’s also a serious blow to the public finances of Mexico, and ends up showing that governments are not good administrators.”

“Mexico is in an economic crisis.”

The ratings agency also maintained a negative outlook.

S&P Global Ratings, which uses a different scale and pegs Pemex ratings to the sovereign, in March cut the ratings of both Mexico and Pemex to BBB, keeping both in investment grade.

Both Lopez Obrador and his energy minister, Rocio Nahle, have tended to push back against bad news from ratings agencies.

In an interview with Reuters earlier this month, Nahle described the agencies’ behavior as “irresponsible”, arguing they should instead be showing more solidarity right now.

“And not come out at a time the economy is under pressure in all countries, come out with this onslaught,” she said.


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