S&P down one notch on Mexico and Pemex credit notes

The rating agency Standard & Poor’s lowered Mexico’s sovereign foreign currency rating by one notch from ‘BBB + to’ BBB ‘, placing it in a negative perspective, given the impact of the coronavirus and the drop in oil prices, factors that will slow the growth of the economy.

“We anticipate a pronounced impact on the Mexican economy derived from the combination of Covid-19 shocks and the fall in international oil prices,” the rating agency said.

The agency also cut Pemex’s credit note to “BBB”, reflecting the close relationship with the sovereign note and the government’s sure backing of the company in case of financial difficulties. In both cases they are two steps from the speculative degree.

In addition, it revised down its independent credit profile at Pemex to ‘ccc +’ from ‘b-‘.

“The lower oil prices forecast for the next two years will jeopardize the execution of Pemex’s business plan, since a weaker cash flow will limit the ability to fully finance its capital investment needs,” said the signature on the document in which you announced the reduction.

From February 26 to March 26, the mix has fallen 66.24 percent, from $ 43.46 per barrel to 14.67.

“In this context, we see limited space for Pemex to improve its credit metrics, which are very weak in the short term. Furthermore, the low prospects for cash flow generation and a prolonged period of adverse financial conditions could gradually adjust the company’s liquidity, ”he added.

He added that the outlook is negative and implies risks of another downgrade for the next 12 to 24 months if there is an ineffective execution of policies, a weakening of public finances or greater contingent liabilities outside the budget.

The downgrade of Pemex’s rating was already anticipated by analysts, mainly due to the current government’s decision regarding energy policy, which neglects private investment and prioritizes the participation of Pemex and some projects such as the Dos Bocas refinery.

“We expected this action, due to the economic shock of the coronavirus, the fall in the price of oil and everything that is happening around the world,” he said. Marco Oviedo, Head of Economic Research for Latin America at Barclays.

Ernesto O’Farrill, president of Bursamétrica, He considered that this drop was kind, since he considers that the government’s decisions have been erratic, coupled with the current coronavirus problem and the drop in oil prices.

“The coincidence of the three circumstances that hit the economy and confidence, which are the global recession due to Covid-19, the oil war and erratic economic policy decisions, since the cancellation of the airport, the gas pipelines and recently of Constellation Brands, (…) my appreciation would be that the degradation was kind, ”he said.

“The government has not been able to create an environment of confidence for investors in the energy sector. The arguments (of the drop) is the cost generated by the support to Pemex for public finances and the fact that the government has not been able to attract investment to the sector, ”said Arturo Carranza, an analyst in the sector.

“The current context has exposed the weaknesses of the program (which has been designed by the federal government) and the support to Pemex, the cost of continuing with projects that have been said to be unprofitable and not investing in exploration and production, investing in refinery, focusing on production by volume instead of profitability “, agrees Adrián Calcaneo, from IHS Markit.

Carlos González Tabares, director of analysis and stock market strategy at Monex, He commented that the concern is that Moody’s also reduces the rating of the state’s productive company, which would take the oil company to basura junk bonds ’.

“Standard and Poor’s considers that Pemex and the sovereign are practically the same, unlike the other rating agencies (…) the most important thing will be what Moody’s says; however, it is very likely that they will also review the rating of both the sovereign and Pemex, the bad news there is that, if Moody’s reduces Pemex’s rating, it will practically be taking Pemex to junk bonds. ”

While, Alexis Milo, chief economist at HSBC, He said that historically S&P maintains the same rating for the sovereign as for Pemex, so the downgrade of the company was only a matter of hours. “It is no surprise.”

S&P estimated a 2.2 percent drop in GDP this year, and a moderate recovery ahead, reflecting, in part, the government’s inability to improve private sector confidence and investment dynamics.

Analysts expect an economic contraction in Mexico this year. The consensus is -3 percent, although some estimates are for a drop of more than 5 percent.

With information from Diana Nava and Guillermo Castañares

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.