Mexico’s state-owned oil company Pemex was conducting a bond sale worth at least $1bn on Tuesday, according to people familiar with the deal, with investors demanding a double-digit yield to lend to the heavily indebted group.
The issuance comes as emerging market governments have raised more than $40bn in international bond markets this year after a global sell-off last year triggered by rising interest rates.
Andrés Manuel López Obrador, Mexico’s nationalist president, has in the past vowed to “rescue” Pemex after what he sees as years of damaging privatisation. His administration has tried to boost the company with billions of dollars of support and tax breaks to help it manage a debt load of more than $100bn.
Some investors had hoped that the government would provide more support before the company was compelled to tap the market again. But Pemex was on Tuesday working to price the sale of bonds maturing in 10 years, according to three people with knowledge of the matter. The company last issued new debt in 2022.
Emerging market fund managers who have invested in Pemex bonds in the past say that they are attractive because they pay a high premium, or spread, over Mexican sovereign bonds while enjoying strong government backing.
The yield on the company’s new bonds was likely to stand at more than 10 per cent, people following the deal said. Mexico’s 10-year government bonds were on Tuesday trading with a yield of 8.7 per cent, which would imply a premium for investors in the new Pemex bonds of roughly 1.5 percentage points.
“It’s a pragmatic arrangement where the government tries to keep the pressure on the company to be self-sufficient,” one Pemex bondholder said of the decision to issue rather than inject capital via the government.
“It’s not a permanent solution and indeed we don’t really expect a permanent solution. It’ll be this piecemeal approach for the foreseeable future.”
The deal’s target size was $1bn-$1.5bn, according to one emerging market credit analyst at an asset management firm. But the analyst, speaking before the deal had priced, said they expected the size might be increased if there was sufficient demand.
The yield on the new bonds, yet to be finalised, reflected expectations that the government would continue to support Pemex, the analyst said. But for a “quasi-sovereign” the spread was large, the analyst added.
But the analyst did not perceive the yield on this particular issuance to be hugely attractive relative to other Pemex bonds, given that several are trading at about 80 cents on the dollar.
In the first quarter of this year Pemex has to make more than $5.5bn worth of debt payments, its chief executive, Octavio Romero, said this month.
Despite generous financial help from the government, Pemex’s production has been falling for years and hit lows of 1.5mn barrels a day in 2022, down from more than 2.1mn b/d in 2016. That has left it unable to capitalise on higher oil prices.
Even as production is declining, the company is also building an oil refinery that is running vastly over budget and is likely to cost more than $11bn. López Obrador has come under fire from environmentalists for the project, which is in his home state of Tabasco.
