Mexico’s Pemex was close to becoming the biggest fallen angel ever in the global bond market in 2019, only to be saved by its US$7.5bn bond and liability management exercise that allowed it to reprofile US$20bn in debt and gave it the breathing space required to focus on its core business.
The state-owned oil company went from teetering on the edge of junk status to garnering one of the largest order books ever from a Latin American quasi-sovereign or corporate issuer on what was its biggest bond ever.
While Pemex’s future rating’s trajectory is still anyone’s guess, this transaction helped restore confidence at a vital time for the credit, which had been faltering due to high debt load, low oil output and insufficient government backing.
“[This transaction] increased the room for them to focus on increasing oil production,” said Citigroup’s head of Latin America capital origination, Chris Gilfond.
Faced by waning investor confidence, Pemex needed a grand gesture to show that it could deal with billions of US dollars in debt maturities.
Aided by a US$5bn capital injection from the Mexican government, Pemex returned to the market – for its second bond foray of the year – in September, a blowout month for US dollar issuance as yields on US Treasuries fell to multi-year lows.
Leads approached investors with 2027, 2030 and 2050 bonds, which priced at respective yields of 6.5%, 6.85% and 7.7% – tight to initial guidance of 6.75%, 7.25% and 8% – on the back of a US$38bn order book.
Demand led bankers to increase the size of the deal to US$7.5bn from an original expectation of US$5bn-$6bn.
And while the broader hunt for yield certainly helped, the deal showed the troubled credit had true access to the market and made possible a liability management exercise targeting about US$20bn in loan and bond debt through tenders, exchanges and repayments.
“It was a successful strategic move by Pemex to address the market’s concerns about its short-term liquidity issues,” said a banker on the deal.
“In terms of sophistication and importance, I don’t remember the last time Pemex or Mexico did something like this,” said Carlos Mendoza, managing director with the Latin America financing group at Goldman Sachs.
The deal also won praise from the ratings agencies, which saw the move as vital to improving the company’s liquidity profile.
Citigroup, Goldman Sachs, HSBC and JP Morgan were active bookrunners and lead dealer-managers on the transaction. Bank of America, Credit Agricole, CIBC and Mizuho Securities were passive bookrunners and dealer-managers.
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