Bloomberg News

Pemex Takes Top Issuer Spot After Sale Revival: Mexico Credit

September 28, 2011

Sept. 28 (Bloomberg) -- Petroleos Mexicanos’ revival of a 10-billion peso ($746 million) local bond sale it scrapped two weeks ago is making the state oil company the biggest issuer in the country as it finances a $270 billion investment program.

Latin America’s largest oil producer issued debt at yields tied to the interbank rate and inflation yesterday, pushing its sales this year to 20 billion pesos, according to data compiled by Bloomberg. Pemex, as the Mexico City-based company is known, dropped the fixed-rate part of the offering after Europe’s deepening debt crisis this month drove benchmark yields up 56 basis points, or 0.56 percentage point, the most since November 2010.

The sale is the biggest in the local market since March and swells corporate offerings this month to $2 billion, a contrast to a drought in the overseas market that has reached four weeks. Pemex, which cited “high volatility” when it pulled the issue on Sept. 13, is tapping into a global rebound spurred by speculation that Europe will resolve the region’s debt crisis.

“Two weeks ago the world was going to end,” Alberto Bernal, head of fixed-income research for Miami-based Bulltick Capital Markets, said in a telephone interview. “It looks like Europe is taking more aggressive decisions now. Today people are calmer,” helping shore up demand for Mexican debt, he said.

Global stocks rallied the most since May 2010 and commodities gained yesterday as U.S. Treasury Secretary Timothy F. Geithner predicted European governments will take measures to solve the region’s crisis. The MSCI All-Country World Index surged 3 percent. The Mexican oil export mix advanced 2.7 percent to $97.98 a barrel.

Investor Demand

The yield on the Mexican government’s peso bonds due in 2024 fell 16 basis points yesterday, the most since Aug. 26, to 6.74 percent, according to data compiled by Bloomberg.

Pemex sold 7 billion pesos of floating-rate peso bonds due in 2017 to yield 24 basis points over the 28-day TIIE interbank deposit rate and 3 billion pesos of 10-year inflation-linked debt with a coupon of 3.55 percent.

Yesterday’s bond sale was oversubscribed 2.5 times, Pemex said on its website. Corp. Actinver SAB and the local units of HSBC Holdings Plc, Banco Santander SA and Bank of America Corp. participated as underwriters, Pemex said.

“The local market showed a window of opportunity” for the bond sales, Pemex’s press department said in a separate e-mailed statement to Bloomberg yesterday. The funds raised will go toward refinancing and investment, Pemex said.

The company is benefiting from investor demand for higher- rated debt and securities sold by state-owned companies, said Sergio Mendez, who helps manage 100 billion pesos at pension fund Afore XXI.

Credit Quality

Pemex is rated BBB by Standard & Poor’s, the second-lowest investment grade and the same as Mexico. Comision Federal de Electricidad, the state-owned utility also rated BBB, sold 7 billion pesos of bonds due in 2020 on Sept. 22. The Mexican unit of Banco Santander SA also sold 2.8 billion pesos of floating- rate bonds yesterday.

“Investors like Pemex’s credit quality,” Mendez said in a telephone interview from Mexico City. “It’s among the highest in Mexico and it also satisfies demand for quasi-sovereign debt.”

The company will invest about $27 billion a year during the next decade to reverse a six-year decline in oil output, according to company presentations this year. Production fell in September to the lowest since July 1990 after adverse weather from Tropical Storm Nate prevented exports and cut output in the early part of the month, Pemex said Sept. 27. The company produced an average of 2.49 million barrels a day in September, compared with 2.57 million barrels during the same period a year earlier.

Oil Output

Crude production is headed for a 13th consecutive monthly decline after Nate prompted temporary closings of the company’s oil export terminals and evacuations of 473 workers from five offshore platforms in the Gulf of Mexico.

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries narrowed 1 basis point to 258 at 8:40 a.m. New York time, according to JPMorgan’s indexes.

The peso fell 0.3 percent to 13.4078 per U.S. dollar.

Yields on futures contracts due in October, known as TIIE, fell one basis point yesterday to 4.77 percent.

The cost to protect Mexican debt against non-payment for five years fell 15 basis points yesterday to 180, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

European Crisis

The pick-up in local issuance may be short-lived if concern mounts again about Europe’s ability to contain its debt crisis, said Miguel Angel Aguayo, fixed-income analyst at Grupo Financiero Banorte-Ixe.

“We are living in an uncertain environment,” Aguayo said in a telephone interview from Mexico City. “Why should Pemex wait to tap the market when things can get worse?”

Mexican companies haven’t sold debt in the overseas market since Aug. 31, the longest stretch since July 6, Bloomberg data show. The average yield on corporate dollar debt rose to 7.28 percent this week, the highest since April 2010, according to JPMorgan.

Issuance of investment-grade bonds in the U.S. rose to $6.7 billion this week, compared with $650 million in all of last week, according to data compiled by Bloomberg.

“Pemex realized that the events in the last few days changed the perception for the bonds,” Bulltick’s Bernal said. “There is less of a chance of the world exploding today than there were a couple of weeks ago.”

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net Carlos Manuel Rodriguez in Mexico City at carlosmr@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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