Petroleos Mexicanos (Pemex), the 100% state-owned Mexican oil company, was downgraded by Fitch and Moody’s Investment Services to a BB-/Ba2 rating last week while S&P have retained its BBB rating after the one notch downgrade in March. This follows on from the Mexican government downgrades over the same time frame.
Pemex is widely held across our global portfolios with holding at ~9% in two longer dated issues. Our Pemex 7.69% issue maturing Jan 2050 fell substantially in price during the global sell off in March, hitting a low in price at 65.30 on 1st April. After a bounce of around 10 points and following the recent downgrades these bonds are again testing the recent lows in price. Extremely volatile pricing. To put this volatility into perspective, Apple, the AA rated American corporate’s long maturity bonds over the same period traded down from a price of over 135.00 to a low of 108.00 and now trades around 130.00, also very volatile, however, unlike Pemex bonds, Apple has continued to recover from the huge marking down in pricing during the worst of the market’s recent sell-off.
We have retained our positioning in Pemex throughout the period. Before this sell-off the bonds, using our holding in the 2050 issue as reference, were according to our “Relative Value Model” about 4 credit notches cheap with a spread over US Treasuries of around 500bps. Currently these bonds trade at a price which is over 6 credit notches cheap with a spread of 1062bps over US Treasuries and thus a yield around 11.9% in US dollars with an expected return, according to the model, of 70% should they move to a “fair value” spread within one year.
So, on current pricing the bonds offer excellent value and a total default is already priced in. That offers the question: will they default? Pemex is a major contributor to the Mexican government’s balance sheet and is therefore of integral importance to the nation’s financial health. The government are already looking at financial support although, as is typical, this is a slow process.
We do not believe a default is likely as the consequences are far reaching for the government’s ownership.
As seen during 2014/15 during the last oil sell-off, Pemex was extremely volatile in terms of pricing but after the dust cleared became one of the better performers over a prolonged period. Although selling has been prevalent with the loss of Investment grade status for Pemex with forced liquidation due to the loss of rating status, what we often find happens over the coming period is buying emerging from the “high yield” investors and with Pemex pricing this will encourage support. We intend to retain our positioning as the pricing and yield are attractive given our read on the current financials of Mexico and Pemex.