Mexico’s Next President Will Inherit Oil Giant’s $106 Billion Debt

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(Bloomberg) — Of all the challenges Mexico’s next president will inherit — historic migration, a rising deficit, rampant crime — stands an issue no other head of state has to confront: the world’s most indebted oil company.

Petroleos Mexicanos has $11 billion coming due this year, the largest chunk of bond maturities it will face until at least 2050, according to a company filing and data compiled by Bloomberg. While the government of outgoing President Andres Manuel Lopez Obrador has promised to cover the majority of those payments, it’s only the tip of the iceberg.

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All told, Pemex owes $106 billion, and that debt has consequences far beyond Mexico. It’s held by investors worldwide who have been saddled with losses as the company’s finances have deteriorated. It also has implications for the global oil market and the environment, significantly eroding the output of the Western Hemisphere’s fourth-largest producer and, critics say, prompting the company to neglect maintenance that contribute to spills and greenhouse-gas leaks.

Read more: A $15 Billion Oil Debt Spawns a Black Market in Mexican Fixers

Slashing the debt is key to turning around production, since money that could be spent fixing aging infrastructure is instead being used to cover unpaid bills and interest payments. While oil supply from the Americas at large has become the world’s biggest driver of growth, Mexico’s contribution is shrinking. Its output has plummeted by nearly half over the past two decades. Analysts see dim prospects for a turnaround.

“Pemex is like a big high-speed train that’s very hard to change tracks,” said Adriana Eraso, a Latin America corporate analyst at Fitch Ratings Inc. “The government is doing the bare minimum to keep investors calm, but we don’t see any change in Pemex’s trajectory.”

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There is, however, a glimmer of optimism in the market. Pemex bonds have rallied in recent months as investors grow confident that the company will continue making debt payments with help from the Mexican government. Pemex’s bonds due 2027 have risen 6% to around 94 cents on the dollar since September, when the government said it would allocate funds for the company in its 2024 budget.

Read More:  Pemex Gets Billions for Debt Payment in Mexico Draft Budget

A Pemex spokesman didn’t respond to a request for comment on the company’s long-term plans to address its debt burden. The company said in October it would pay bonds maturing in 2024 with government support.Mexico’s president, known as AMLO, has been lavishing support on Pemex in the form of tax cuts and capital injections, which haven’t reversed the company’s financial decline. His nationalistic policies have curtailed private-sector investment in Mexico’s oil industry, leaving much of the burden of developing the country’s oil fields to Pemex.

Investors are eyeing what the next government might do to save the company from its ballooning debt. So far, they’re unconvinced the next government’s strategy will veer sharply from AMLO’s, Eraso said. 

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Presidential front runner Claudia Sheinbaum, a member of the ruling Morena party who holds a Ph.D. in energy engineering, hasn’t yet outlined a plan for reducing the debt, but has emphasized the Pemex’s importance while highlighting the need for a transition to more renewable power. 

“Sheinbaum might be less dogmatic than AMLO about shutting the door to foreign investment, and she might be willing to address some of the environmental concerns given her background,” said Edwin Gutierrez, head of emerging-market sovereign debt at Abrdn Plc in London said. “But don’t expect major changes.”

Read More: Climate Expert Claudia Sheinbaum Aims to Lead Oil-Rich Mexico

Sheinbaum’s allies have acknowledged Pemex needs to rework its business plan, while some of the company’s board members have suggested a portion of the company’s debt should become public — in short, taken over by Mexico’s Treasury, placing the burden on taxpayers.

That’s easier said than done. The government can’t take over Pemex’s debt outright under Mexican law, and a government guarantee to cover payments would require a constitutional amendment, according to Gabriel Lozano, JPMorgan Chase & Co.’s chief economist in Mexico City. 

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If the incoming government has “a clear majority in congress, they could more easily modify the company’s regime and change it. That would give them an entryway into being able to explicitly guarantee Pemex’s debt,” Lozano said. “But this will be a year of muddling through.” 

Pemex’s debt has largely choked off the company’s market access, and refinancing the bonds would be costly as global rates remain high. Continued government support or sovereign issuance could also drag on Mexico’s credit rating, according to Barclays Plc.

What Bloomberg Intelligence says:

“The burden of supporting the oil company amid a global slowdown that includes the US may constrain Mexico’s fiscal flexibility and increase the country’s reliance on Pemex’s revenue, while raising the risk of negative credit ratings actions for sovereign debt.”

—Jaimin Patel, senior credit analyst

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Sheinbaum’s biggest competitor, opposition candidate Xochitl Galvez, has called for “modernizing” Pemex. She’s suggested that a model like Brazil’s Petrobras, which is publicly traded despite being government-controlled, could work for the Mexican producer. Petrobras, or Petroleo Brasileiro SA, whittled down a similar massive debt burden with a restructuring plan in the last decade that included cost-cutting and selling tens of billions of dollars of assets.

Even a partial privatization of Pemex is likely to face strong pushback. The 1938 nationalization of Mexico’s oil assets is so culturally significant that the country’s schoolchildren commemorate it every year on March 18. 

“We don’t know what the next administration is going to do, but we know what they should do,” said Jeff Grills, head of emerging markets debt at Aegon Asset Management. “They should privatize a part of Pemex like Petrobras did.”

—With assistance from Maya Averbuch and Amy Stillman.

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