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Pemex Bonds Won’t Have Mexico Formal Backing Despite Big Premium

Eric Martin
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Pemex Bonds Won’t Have Mexico Formal Backing Despite Big Premium

(Bloomberg) -- Mexico’s Finance Ministry isn’t considering an explicit guarantee on the bonds of state-owned Petroleos Mexicanos despite increasing costs of issuing them because it could hurt the country’s own debt standings, according to a top official.

Undersecretary Gabriel Yorio said Thursday that although the step is sometimes requested by bondholders as a way of reassuring their investment, it could generate distortions in the trading of Pemex and government-issued debt. The yield investors demand to own Pemex’ bonds maturing in 2027 rather than sovereign debt has ballooned to more than 3.1 percentage points from about 1.5 a year ago despite the oil company being fully-controlled by the Mexican state.

If the nation were to guarantee Pemex debt, the company would inherit Mexico’s sovereign rating, Moody’s analyst Peter Speer said last week.

Yet explicitly guaranteeing Pemex debt “isn’t something that we’re considering or have ever really considered,” Yorio said in an interview in his National Palace office in Mexico City. If Mexico did so, “why would someone buy sovereign debt if Pemex is paying a premium over sovereign risk? It would discourage buying sovereign debt. We saw this in a roadshow that we did in Europe.”

Pemex, the world’s most indebted oil company, is on Thursday selling bonds to refinance at least $5 billion of its more than $100 billion debt load. The embattled company is seeking to buy back short-term notes and replace them with bonds of longer maturity. Yorio said that the Finance Ministry would be happy if Pemex refinances $10 billion in notes in this transaction.

Read More: Pemex to Sell $7.5 Billion of Bonds to Refinance Debt

While markets have welcomed government support of almost $10 billion this year, including this week’s $5 billion capital infusion, some Pemex watchers and credit raters say that it’s not enough to move the needle. The company has a heavy tax burden and requires tens of billions of dollars in investment to reverse almost 15 years of production declines. Mexico is working to prevent a potential downgrade in Pemex’s credit rating after Fitch Ratings Inc. cut it to junk and Moody’s Investors Service, which rates Pemex one step above high-yield, lowered its outlook to negative in June.

Yorio was ratified by Congress as undersecretary last month after serving as the head of public credit from the start of President Andres Manuel Lopez Obrador’s term. Finance Minister Carlos Urzua unexpectedly resigned in July and deputy Arturo Herrera took his place, leaving a vacancy in the No. 2 job. Yorio previously worked at the World Bank, Mexico’s infrastructure bank Banobras and the Mexico City government when AMLO, as the leftist leader is known, was mayor.

On Mexico’s broader economy, Yorio said that to grow near the 4% rates sought by AMLO, compared with the 2.5% average of the past two and a half decades, Mexico needs to better incorporate women into the workforce, develop the lending system and improve infrastructure and public services. The government plans to announce an agenda to pursue those objectives soon, he said.

“We’re viewing it through the theme of productivity for how to achieve faster rates of growth,” he said. “If we don’t do this, we’re only going to see the kinds of growth rates that we’ve seen.”

(Updates with growth comments in eighth paragraph.)

--With assistance from Justin Villamil and Carlos Manuel Rodriguez.

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson

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