Monday, 16 July 2018

New realities

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Mexico's state-owned oil company Pemex has been busy tapping markets near and far as it looks to counteract declining production levels, while also dealing with the global credit crunch. The borrower has adapted well to new realities, despite having to relinquish past pricing standards in the process, and has turned to new markets to fill its financing vacuum - with great results. Paul Kilby reports.

As capital became increasingly scarce over the 2008-2009 period, and more borrowers competed for a piece of the same pie, Pemex responded by dipping into a variety of funding sources. The company sought diversification to ease pressure in its core dollar market, which Mauricio Alazraki, the company's director of finance and treasury, confirmed as a priority.

Over the last year, Pemex's financing story has shifted. Where it once sought to squeeze every last basis point from the market, it now looks more willing to sacrifice pricing for diversity in a crowded but less abundant marketplace.

By May 2009 it comfortably reached its US$7bn-US$8bn financing goals for the year, leaving it room for opportunistic forays and possible liabilities management operations. At the time, it had raised US$7bn by tapping both local and international bonds for about US$4bn, banks for about US$1.5bn and export credit agencies for an additional US$1.5bn.

Like most companies, Pemex has had to suffer the pain of rising funding costs. This marks a sharp contrast to prior years, when the oil company took full advantage of the liquidity glut to squeeze margins tighter. In 2006 it famously flexed down on most of a US$5.5bn loan almost a month after it was supposed to have been funded. The move was almost unprecedented among LatAm borrowers, resulting in margins of L+32.5bp and 47.5bp on five and seven-year bullets.

Fast forward to 2008-2009 and those types of margins have become distant memories. While the borrower has been forced to adapt to the new pricing paradigms, it has also asked the healthiest banks to provide balance-sheet support before awarding any mandates or ancillary business.

"We are asking for capital commitments with all banks we are doing deals with,” said Alazraki. “I think that is going to be the norm. I cannot say it will be forever, but it will depend on the market and banks."

In late January 2009, Pemex raised US$2bn in the international bond markets via an 8% 2019 via Calyon, Citicorp and HSBC. All of those banks were asked for capital commitments, and it was similar story for leads on May's £350m 13-year via Barclays and Deutsche. It came at comparatively tight new issue premium of anywhere between 15-45bp, but the spread over the sovereign was an historically generous 200bp over.

However, in a market that needed success stories, leads sensibly played it safe: initial whispers were at 8.5% area on the benchmark 10-year, or about 50bp over the underlying curve. It tightened for official guidance to 8.25%-8.375% and then priced at 8.25%.

The deal also benefited from changes to the way Pemex approached the international markets. By issuing directly under its own name, the borrower could attract local pension funds, which previously had not been allowed to buy through the Pemex's traditional issuance vehicle, the US registered Master Trust.

The generous arbitrage from US dollar back into fixed pesos generated a decent bid locally, helping overall momentum and allowing it to price at 99.313 with an 8% coupon to yield 570.7bp over US Treasuries amid demand in excess of US$6bn.

Just a year before, Pemex was able to print a new 30-year at a much tighter yield of 6.6% or just 195bp over, illustrating the extent to which the financing landscape had shifted for the blue chip. But from an historic perspective, pricing was perhaps not as wide as it seemed: Pemex is no stranger to coupons of 8%-9%, and while the borrower is sensitive to the cost of capital, the rate of return on its projects is much higher than the 8.25% yield on the dollar bond, as Alazraki argued at the time.

The last year has proved Pemex’s willingness to compromise on pricing to achieve its goals. By becoming the first LatAm issuer in five years to tap the sterling market it came over its dollar curve, much to the surprise of the market, but in doing so relieved pressure on its dollar curve, while diversifying its funding sources.

The diversification strategy also applied to the local market, which provides limited capacity but has helped the company achieve comparatively lower funding costs. It helped reopen the market in April 2009 with a US$716.6m three and seven-year deal, only to retap those bonds for another US$775m – and at tighter levels.

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