Mexico's state oil producer Pemex is on the brink of making history as the global bond market's largest "fallen angel" ever, but in the eyes of the fixed-income world the debt-laden company has already lost its wings.
Earlier this month, Fitch Ratings downgraded Pemex's roughly $80 billion of bonds to speculative grade - or "junk" status. A second downgrade seen coming soon from Moody's Investors Service would formally confirm Pemex as a junk credit or fallen angel as bond issuers stripped of their investment grade ratings are known.
Pemex bonds are already trading like junk, however, having been pummeled since the Fitch downgrade. "It is trading more like a low BB or high B sovereign," Pemex bondholder Tim Jagger, head of emerging market debt at asset manager Columbia Threadneedle, said in reference to the ratings scale.
"Pemex's financial structure is not sustainable in its current form," he added. Pemex did not immediately respond to a request for comment. Yield spreads on Pemex bonds - indicative of the premium investors demand for holding them rather than safer US Treasuries - have mushroomed in the last month amid investor doubts about Mexican President Andres Manuel Lopez Obrador's plans to save what was once the symbol of Mexico's self reliance.
Among the most heavily traded Pemex bonds on June 20 was its 6.5% issue worth $1.98 billion coming due in January 2029, according to MarketAxess data. Earlier this week, the bond's benchmark spread hit 525 basis points according to Refinitiv's Eikon, a record since its issuance six months ago. It has climbed more than 100 basis points since early May. Some bond managers see opportunity in the weakness.
Omotunde Lawal, head of the emerging markets corporate debt group at asset manager Barings, said her team had been adding Pemex bonds to both its high yield only and investment grade portfolios. "We used the volatility last week to top up existing positions," she said.
J.P Morgan estimated earlier this year that two downgrades to junk status would trigger as much as $16 billion of forced selling by investors whose mandates stipulate they must hold bonds of investment grade quality.
Lopez Obrador took office in December vowing to revive Pemex. But ratings agencies have repeatedly criticized the president's plans, which include building an $8 billion refinery in his home state Tabasco. Detractors argue the refinery would divert funds away from the more profitable production and exploration business. A Moody's downgrade could cripple the president's bold energy agenda, along with his plans to use new oil revenue to help finance social welfare programs.
The downgrade would make Pemex the largest fallen angel ever by a factor of two, overtaking Brazil's scandal-plagued Petrobras. It could also imperil Mexico's sovereign creditworthiness and make it much more expensive for both Pemex and Mexico to borrow. Mexico itself is investment grade in the eyes of the three major ratings agencies investors rely on for guidance.
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