Petróleos Mexicanos, the national oil company, is growing accustomed to operating from a position of strength when it comes to the debt markets. Its crude oil is generating 20% more revenue than last year and the company has an investment-grade rating of Baa3 from Moody’s Investors Service.
In June, bond buyers reinforced Pemex’s appeal, bidding aggressively in a reopening of its $500 million 2010 issue. Priced at 102.648, the reopening doubled the size of the original bond. “This was the tightest new issue to the underlying sovereign risk,” says Joaquín Avila, co-head of investment banking at Lehman Brothers, the sole bookrunner on the bond. “It shows Pemex is leaving the emerging markets behind and it can really capitalize on the yield,” he says.
Pemex, the world’s fifth-largest oil company, compares in size to the major international oil companies such as Exxon Mobil and Texaco. But Pemex is still rated below even smaller producers like Philips Petroleum because it is state-owned and is based in Mexico, says Alexandra Parker, senior vice president in Moody’s corporate finance.
Delia Paredes, associate managing director of finance at Pemex says, “We would like to reduce our differential spread and position ourselves as a global oil and gas company and not as a pure quasi-sovereign risk.”
Shortly after Pemex reopened its 2010 bond, Moody’s announced that it may boost the credit ratings of 38 emerging markets companies, including Pemex, above their sovereign debt ceiling.
Ruggero de’Rossi, a fund manager for Oppenheimer Funds who bought the new Pemex issue in the secondary market, says the company deserves to be rated on par with comparable US oil companies. “[Pemex’s] fundamentals reflect a higher creditworthiness,” he says. “We are talking about a company with strong cash flows and the ability to pay [their obligations]. There shouldn’t be much difference between a Mexican BBB and a US BBB.”
De’Rossi says he doesn’t normally buy Pemex in the primary market as it offers less liquidity than the sovereign’s bonds, but when he bought it, it was trading at five basis points more than the sovereign 2010. In mid-June it had dropped to 20 basis points below and de’Rossi hopes that it will trade as much as 50 basis points lower than the sovereign benchmark.
The June reopening of a bond that Pemex originally issued in October 2000 carried a coupon of 9.125% and a yield to maturity of 8.702%, or 328 basis points over Treasurys. US high-grade investors bought 84% of the offering.
The strong demand contrasted sharply with Pemex’s $1 billion, seven-year 144a global bond with a 8.5% coupon launched in February, a month after Mexico’s $1.5 billion global deal and a week after Telmex’s $1 billion global bond. Led by Salomon Smith Barney and Goldman Sachs, Pemex’s February global came to market at a time when investors gorged on the surfeit of Latin paper in the first quarter of this year and could take their pick of top Mexican paper.
Although the 8.5% coupon on Pemex’s bond was higher than the 8.375% coupon on Mexico’s 2010 bond, it was priced to yield 8.8848%, offering investors barely more than Mexico’s 8.8511%. Pemex’s Paredes says, “Market conditions at that time were favorable to issue in the medium part of the curve. We considered the price as fair to the market,” she says.
Paredes says if investors thought Pemex was overly aggressive in pricing the reopening, it would not have secured as much support from high-grade US investors as it did. Nor would it be trading so well in the aftermarket, says Avila. “It was launched at 102.648 and is trading at 106.5,” he says.
In the end, the success came down to execution. “We got tight pricing because there was a very good market environment with the Treasury rally that day that allowed a very smooth execution at those levels,” says Paredes. More importantly, says Avila, “There was no need to give selling concessions which are typical to emerging market accounts.” LF