Pemex/KKR sale and leaseback

For Mexican state oil company Pemex, 2016 was about getting its financial house in order.

Faced with low global oil prices, slumping production and 16 consecutive quarters of losses, the highly leveraged company embarked on an ambitious austerity plan. 

Forced to slash its budgets, Pemex worked to improve its debt profile, refocus its financing strategy and implement a financial overhaul at a time when Mexico’s energy reform has opened the sector to private investment from international players.   

Traditionally one of the biggest corporate bond issuers in emerging markets, Pemex sought new ways to raise capital as it focused on strengthening its balance sheet and resolving liquidity issues triggered by lower oil prices.

In June, it turned to a new funding source, striking a $1.1 billion sale and leaseback agreement with private equity firm KKR that allowed Pemex to monetize some of its assets. The novelty of the transaction for Pemex and the fact that it spurred further similar operations, made it stand out as Private Equity Deal of the Year.

Mexico’s energy reforms made it possible for Pemex to execute such a transaction, says Juan Pablo Newman, chief financial officer.

“This was innovative for Pemex and Mexico’s energy sector,” he says. “It allowed us to expand our financing sources and increase our investor base. We wanted to send a message to the market that Pemex had at its disposal a number of tools to provide the company with the necessary liquidity.”

Under the deal, KKR bought Pemex assets including 11 pipelines, one subsea cable, two non-drilling platforms and one gas compressor. Pemex continues to operate and maintain the assets, paying to lease them from KKR for 15 years. It retains an option to repurchase the assets. 
To finance the transaction, KKR sold a $531 million bond. Left-lead Morgan Stanley, along with joint bookrunners Crédit Agricole, Mizuho and SMBC, priced the 15-year notes at par with a 6.625% coupon. KKR also took out a $500 million four-tranche loan that included five-year, 10-year and 12-year loans and a five-year revolving credit facility of $50 million. 
The deal proved to be a blueprint for other private equity firms looking to invest in Mexico’s energy sector. Private equity firm First Reserve later carried out a sale and leaseback deal with Pemex worth some $600 million. 
The KKR transaction “allowed us to finance ourselves with equity instead of debt,” Newman says. “And it was a complement to our overall debt reduction strategy.” LF
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Size: $1.1bn

Date: June 2016

Supporting banks: Crédit Agricole, Mizuho, Morgan Stanley, SMBC, KDB, BBVA, Crédit Agricole, SMBC, Mizuho, KDB 

Supporting law firms: Creel, Ritch Mueller, Simpson Thacher, Sullivan & Cromwell

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