Fitch Cuts Pemex to Junk, on Track for Largest “Fallen Angel” in History. Cuts Mexico to Near Junk

President of Mexico not amused: “In three years there was no investment in exploration, no investment in drilling wells, and they rated Pemex very highly. Now that there is investment, they downgrade Pemex.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

After months of firing warning shots, one of the big three ratings agencies, Fitch Ratings, has downgraded to “junk” (BB+) about $80 billion of Pemex debt — much of it denominated in US dollars and held externally — and maintained its ‘negative’ rating outlook, meaning another downgrade is likely. The company is owned by Mexico.

The day before, Fitch downgraded Mexico’s sovereign debt to ‘BBB’  — only a couple of notches above junk.

Fitch’s downgrade of Pemex’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) from the lowest level of “investment grade” to “junk” (here’s our cheat sheet for corporate credit rating scales by S&P, Moody’s, and Fitch in plain English) forces some institutional investors to shed these bonds. It will raise Pemex’s costs of borrowing. And it could hurt Mexico’s already beleaguered economy. And also this week, Moody’s lowered its outlook for Pemex to negative from stable.

Fitch cited a host of reasons for its decision to downgrade Mexico’s sovereign debt, including “the increased risk to the sovereign’s public finances from Pemex’s deteriorating credit profile”, “ongoing weakness” in Mexico’s macroeconomic outlook, which is exacerbated by “external threats from trade tensions,” “some domestic policy uncertainty and ongoing fiscal constraints.”

The rating agency had already slashed Pemex’s rating by two notches in January. Moody’s did the same at about the same time. It was a double shot across the bow meant to spur Mexico’s populist President Andrés Manuel Lopez Obrador (AMLO) to reduce Pemex’s fiscal burden, pledge significantly more public funds to clean up the oil giant’s balance sheet, and stage a retreat from his nationalist energy strategy, which is popular among voters and loathed by investors, particularly overseas ones.

In February, AMLO pledged to inject $3.9 billion into Pemex to bolster its finances and forestall a further credit downgrade. He also emphasized the cost savings Pemex stands to gain from his government’s multi-pronged offensive against the rampant oil theft that is draining the state-owned oil company of an estimated $3 billion a year. When that was deemed insufficient, the government bailed out Pemex with a further $5.7 billion of extra funds and tax savings in April. But according to Fitch, even that’s still not enough:

“The fiscal cost of that support to date represents 0.2% of GDP to the budget in capital injections and lower effective taxes, but in Fitch’s view, are not sufficient to provide a long-term solution or prevent continued deterioration in Pemex’s credit profile.

“Pemex’s tax bill (oil accounted for 2.3% of GDP in federal government revenue in 2018) exceeds its FCF (free cash flow), preventing it from investing sufficiently to maintain production and reserves. Fitch expects oil output to contract by 5% in 2019 and 2020.”

With long-term and short-term debt of $106 billion, of which roughly $85 billion is owned to bondholders, Pemex is the world’s most indebted oil company. If Moody’s or S&P also downgrades Pemex to junk – giving it two downgrades from investment-grade to junk — it would become the largest “fallen angel” in history, with a debt load twice as large as the current title holder, Petrobras.

This would trigger billions of dollars of forced selling by investors that are contractually bound to hold assets of investment grade quality, including many pension funds and sovereign wealth funds. And that would tighten the screws even further for both Pemex and Mexico.

Given that Moody’s already rates Pemex’s debt just one notch above junk and S&P recently lowered its outlook for both Pemex and Mexico to negative from stable, warning that Mexico faces a one-in-three chance of being downgraded in the coming year, the odds of this occurring are high.

For it not to happen, Pemex would have to significantly improve its financial performance, Pemex’s tax burden would have to be significantly lightened (again), and AMLO would have to renege on a host of key policy pledges, including his government’s costly plan to upgrade a number of Pemex’s oil refineries as well as build a brand new one in his home state of Tabasco that is forecast to cost upwards of $8 billion. The plan is intended to reduce Mexico’s dependency on U.S. refineries for much of the finished gasoline it consumes.

For the moment, it seems unlikely that AMLO would backtrack on his plans, given just how important Pemex’s turnaround is to the AMLO government. Today, AMLO hit back at the rating agencies during his daily public address, accusing them of a lack of professionalism, of looking the other way as the last government plundered Pemex, and of using outdated methodologies that do not include variables such as corruption.

“In three years there was no investment in exploration, there was no investment in drilling wells in Pemex, and they rated Pemex very highly,” AMLO said “Now that there is investment, they downgrade Pemex. I assure you that corruption is no longer tolerated. So, we have these discrepancies.” Looks like he has his work cut out for him. By Don Quijones.

The former CEO of Pemex is on the hot seat. His lawyer suggests if the price is too high, he may be willing to take his friend, former president of Mexico, down with him. Read…  
“Largest Foreign Bribery Case in History” Claims New Scalp: Former Pemex CEO

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  25 comments for “Fitch Cuts Pemex to Junk, on Track for Largest “Fallen Angel” in History. Cuts Mexico to Near Junk

  1. Senecas Cliff says:

    Pemex’s goose is cooked for two reasons. The first is that Mexico’s oil industry is all about the Cantarell super giant oil field. This field has been in steep decline for many years. The second is Jeffry Browns export land theory which postulates that any oil exporting country with a growing population will over time use up more and more of its own production internally. Between depletion of its main field and its growing use of oil domestically Mexico is no longer a net oil exporter. No politician can cut his own countries use of energy to get more oil to export and stay in office yet without exports there is no hard currency to repay investors for putting money in to exploration. So Fitch’s downgrade is very realistic and this same scenario will be coming to many other oil exporting countries in the near future.

    • Lemco says:

      Exactly! Many small to mid exporting countries will soon have consumption higher then production like mexico’s case… Long term Oil prices will fly, demand isn’t dropping for at least the next decade or so.

      Pemex finally got junked, they are still dual rating but there faith lies in the hands of Moody’s now… Once Moody downgrades, they will pay double digit interest until bankruptcy ( quite a few years away )… Mexico’s debt is 500 bil, pemex 108 bil! Hahaha, mucho dinero

    • Aravind says:

      Blast from the old TOD past!
      Yes, nobody really wants to accept physical realities. If wishes were oilfields, Ghawars, Burgans and Cantarells would multiply :-)

      • CrazyCooter says:

        Yeah, I was super bummed when TOD shut down new content.



  2. Wisdom Seeker says:

    1) If corruption is off the table, why is AMLO proposing to build a brand new $8B taxpayer-funded refinery in his home state? There’s a reason why state and business functions should be separated…

    2) Everyone knows that bond analysts are always late with downgrades. In practical terms their actual function is to kick the worst borrowers when they’re already down, force weak hands to sell at a loss, and give politically-connected vultures a chance to feast on the carcass…

    3) Given that borrowing in a currency one does not own is frequently such a bad idea, perhaps PEMEX (and PETROBRAS) should restructure debts with repayment to be made in barrels of oil rather than US$? Oil too is a liquid currency…

    4) Don’t you just wonder if any of this was on the table in the trade/tariff negotiations?

    • Wolf Richter says:

      To your point #1: There is a huge practical reason for the location of the refinery in Tabasco: Tabasco is near where the oil is!

      The Bay of Campeche is in part formed by state of Tabasco. Here is a little map. Mexico’s giant oil field Cantarell is offshore in the Bay of Campeche. And putting a big refinery close to where the oil comes ashore makes sense.

  3. Speak Softly and Don't Use the Big Stick says:

    Mexico’s a perfectly good state, it just works more like Italy than Germany… And it’s been like that since forever. Everyone’s dealt with it.

    Invading Mexico “to fix it” didn’t work for the Spanish, the French, nor the US in the 1800s.

    In fact, I challenge you to name a single country that the US (or anyone else for that matter) has “fixed” by pre-emptively invading it… one has to wait until the mess is so bad that the locals want to be fixed.

    No need to take on someone else’s problems here. Just manage the border.

  4. Fernando says:

    Hey Wolf,

    You deleted my comment about invading Mexico?

    It’s ok…

    If you lived by the border you wouldn’t…

    • Wolf Richter says:

      I understand that war, death, and destruction is just another form of entertainment these days for some people. But here, I don’t allow war mongering. This includes things like clamoring for the US to invade another country. This is an article about bonds getting downgraded.

  5. Javert Chip says:

    Years of Mexican government corruption, local bad dudes looting PEMEX, official government looting (ie taxes higher than free cash flow), featherbed hiring of incompetent managers, wild out of control finances, declining production, failure to maintain CAPEX…

    …Fitch finally downgrades PEMEX to junk (why didn’t this happen 10-15 years ago?) and AMLO is mad at Fitch for “unprofessionalism…looking the other way…not factoring in corruption”. Is he serious? That what PEMEX managers and the government of a socialist state that owns it are supposed to do. Fitch is just there to warn potential investors of financial risk.

    PEMEX debt is roughly 10% of Mexican GDP; what happens when that supposedly golden goose goes belly up?

    • Rosebud says:

      Isn’t there a connection between corn, ethanol, and oil? The tortilla scare from a half dozen years ago was enough to stop the Mexican population pyramid from widening its base.

    • MC01 says:

      I’ve been to a proper Socialist country a couple of times in my youth: Mexico doesn’t go even remotely close. ;-)

      But, yes, Pemex has very serious issues: lack of investments is one, but much more concerning is the ever-ballooning Pemex staff. Political hires are a terrible problem, but “recommended” even more so: these are people who were hired because a relative already working for Pemex put a good word for them… regardless of the skills they bring, if any.

      I hope Don Q will weigh in but from what I’ve heard it seems there’s not much interest in carrying out a serious review of Pemex personnel outside the top managerial positions. Over the years this resulted in grotesque situations such as that of Pemex’s fertilizer division and the chemical plants in the State of Veracruz (chiefly producing basic chemicals such as ammonia, nitric acid and superphosphate… the “building blocks” of any self-respecting chemical industry) which keep on deteriorating through lack of investments while their staffs balloon.

      This “extra staff” is not merely a massive drag on Pemex balance sheets, but a cause for constant brain drain. Think all the good hardworking people who see their careers derailed by somebody’s useless nephew or just get fed up with the climate of corruption at all levels, from the janitorial staff to the top executives. These people will just pack their bags and go work for Exxon-Mobil in Angola, ENI in Kazakhstan, Shell in Nigeria or whatever.

      Fitch learned their lesson in 2008 and have not been taken in: the Mexican government may pledge billions of US dollars and start building state-of-the-art refineries but until there’s a serious overhaul of Pemex corporate mentality and the old shenanigans mercilessly eradicated this sounds like Enron’s infamous “fake trading floor”.

      • MC01 says:

        Thank you very much for the reply.
        I looked up Romero’s profile and he’s PRI. I seem to recall the PRI had the worst result in its history at last year presidential elections: they took the proverbial beating.
        I wonder if Romero (who’s 74) will understand the wind is turning against his ilk and strike some sort of deal to disappear into a golden retirement before it’s too late or will simply believe he can ride out of this as well.

        President López-Obrador somehow reminds me of Simon Bolivar: he’s a good and decent man faced with a Herculean task that requires… somebody far less good and decent. Perhaps he can pull it off and cure some of Mexico’s most glaring ills. But if he cannot I wouldn’t be surprised if his successors will turn to far less orthodox and democratic means to cure those ills.

      • Javert Chip says:

        As an (old, retired, non-oil) CFO I’ve been in & done business with a number of “proper Socialist” countries, and in my humble opinion, Mexico more than qualifies.

        re PEMEX: Mexico almost has a chicken-and-egg problem: ya gotta have oil to refine, and it’s nice having a refinery near-by for your oil. Drilled oil wells don’t just naturally flow until the reservoir is empty; wells require maintenance & new technology to maximize extraction.

        However, continued Mexican failure to provide appropriate CAPEX investment simply ensures oil extraction continues to decline. In addition to PEMEX’s current $100B+ debt, it could productively invest up to an additional $100B of CAPEX to catch up to current technology (total = roughly 17% of Mexico’s $US1.2T GDP).

        I don’t know current legal status of foreign ownership/management/investment in Mexican oil (used to be illegal), but no oil major is going to sell technology (relatively low margin proposition) to Mexico when they can leverage it to get “oil participations” (relatively high margin business) in other parts of the world.

    • HowNow says:

      Javert, you see “socialism” where the real political/economic system is “oligarchy”. I grew up in So. Cal., and it was long-believed that there were 10 or so families that completely own and run Mexico. AMLO, shutting down the new airport project, stepped on many oligarchic-toes, is a no-no. A short while later, Fitch decides to downgrade Pemex debt…
      The biggest misnomer of the moment is “Mexican Independence Day – Cinco de Mayo”. Some revolution! Replaced Tweedledum with Tweedledee.
      I would not and do not advocate a socialist system. But the way capitalism is turning out… we need to make some fundamental adjustments. And those adjustments require the now toxified word: regulation. Too bad the right wing (read oligarchs) have poisoned two words (among others): liberal and regulation. They’re actively poisoning the idea of “government” too. It’s quite amazing what money can buy these days: the hearts and minds of the muppets.

      Thanks for the article, Don. Excellent, as always.

      • JSM976 says:

        Spot On!

      • Javert Chip says:


        I absolutely agree with comments about oligarchy, but don’t see the two as mutually exclusive (am I wrong in my taxonomy?). Both inevitably use “family” and “friends of family” to concentrate power & ownership at the national level.

  6. Mean Chicken says:

    Right, the setup for vulture capitalists to swoop in and pick the carcass clean, presidente of Mexico included.

  7. David Hall says:

    The Eagleford oil field of Texas extends into Mexico. The Mexicans do not want fracking. PEMEX has competition with fracking discoveries all over the world.

  8. Jack says:

    One doesn’t really need any rating agency to tell us that Mexico is run by cartels , they might be “ Legal “!! Or call themselves Government,
    but reality is that all ( stress all Latin America is one whole bunch of corrupt maelstrom of foreign interference and local criminals acting as agents of the ( USA or Russia) against their own people.

    The Endemic and continued apathy that the local people have developed is a product of a Centuries long imported experiments in Failed political ideology/s
    going by the names of Socialism or Capitalism .

    No home grown movement have ever captured the heart of the societies of South and Central America due to the consistency of Foreign element in their midst.

    Now to Mexico, the unfortunate country that have been stripped of almost a third of its territory by the wars with the US

    is only ever going to be an extension of America’s misguided Foreign policy that will ultimately destabilize the heartland of the US as it figures out wether it will be content to be a second grade power or will fight to retain what remains of its dwindling power!

    Yes Mexico is going to be the ever present thorn in the side of those who thought they’d won in Alamo!

    On the oil front though Mexico didn’t amount to much in terms of world oil production if measured against its other two bigger brothers the US and Canada.

    Much less if it’s measured against the middle eastern oil exporting powerhouses

    For further info , read up on trading economics site and international energy agency

    Forgive me straying a bit here :) !

  9. Korkin says:

    March 2019. Gasoline exports from the United States to Mexico amounted to 511 thousand barrels per day. This is 60% of all US gasoline exports.
    It is clear that the plans of the Mexican authorities to reconstruct the existing and build a new refinery do not suit too many in the USA.

  10. Mexico is better off getting out of the oil exporting business, unless they want to follow Venezuela, and the US into bankruptcy. The real downgrades should come closer to home.

  11. WeakHands says:

    Reuters reported that the total outstanding debt is around $106 billion and about $16 billion will need to exit from pensions who can only hold IG. I’m more interested in the second order effects this will cause on overall liquidation of positions/portfolios that are on leverage.

    More to come!

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