By Miluska Berrospi
NEW YORK, Sept 13 (IFR) - Pemex landed a US$7.5bn blowout three-part US dollar bond last Thursday, garnering a US$38bn order book in what was the Mexican oil firm's first dollar deal in close to a year.
The offering was described as a triumphant return for the company, which just a few months ago was the centre of concerns relating to its finances.
"It was a blowout trade; a truly transformational trade for Pemex in which there was demonstrated commitment on behalf of the sovereign to Pemex," said a banker close to the deal.
The offering was part of a jumbo liability management transaction as the troubled state-owned entity looks to deal with upcoming maturities and expensive debt payments.
The deal followed a rally in Pemex bonds spurred on by the Mexican government's decision to inject US$5bn into the highly leveraged company, which carries more than US$100bn of debt on its books.
Leads approached investors with 2027, 2030 and 2050 bonds, which priced at yields of 6.5%, 6.85% and 7.7% - tight to initial price thoughts of 6.75%, 7.25% and 8%.
The bonds were also set to trade nicely on the break with the bonds bid up in the grey market.
Even so, the big book and tight pricing were not only a validation of the credit but also a reflection of buoyant market conditions and investors' hunt for yield in a low-rate environment.
Yields on Pemex's new bonds were trading higher than some of Mexico's sovereign bonds.
"We're working with a bit of a distorted bond market where the presence of negative interest rates and excess amount of loanable funds that are in the global system are causing mispricing," said a bond analyst.
"On a standalone basis, it wouldn't have come in at these kinds of yields."
And while the government's capital injection was seen as a step in the right direction, investors think Pemex has some way to go before it can stave off further downgrades.
"We continue to believe that Pemex is at risk of a downgrade, particularly given our view that the US$5bn capital injection by the Mexican government is insufficient to replenish reserves," said Rafael Elias, an executive director at emerging markets research firm Tellimer, in a report.
There have been worries that the company could become a full-fledged fallen angel if the other main rating agencies follow Fitch, which downgraded Pemex in June to sub-investment grade (to BB+ from BBB).
Moody's and S&P both have negative outlooks on Pemex with ratings of Baa3 and BBB+, respectively.
Adding to the concerns is the company's ambitious production targets - it plans to produce 1.9m barrels per day by the end of next year.
"On a fundamental level, we believe the company is insolvent as a standalone entity and we expect a steep spread widening if and when the Moody's downgrade crystallises," Elias said.
Alongside the bond, Pemex is carrying out a cash tender for bonds maturing 2020 to 2023, as well as an exchange offer for bonds maturing between 2022 and 2048.
"The planned debt repayment and exchange offers will increase revolver borrowing availability and refinance some 2020 and 2021 debt maturities, improving Pemex's liquidity position and debt maturity profile," Pete Speer, a Moody's senior vice-president, said in a report last week.
Those involved in the deal are convinced that the transaction marks positive turnaround for the company.
A person closely following the transaction said: "It was a successful strategic move by Pemex to address the market's concerns about its short-term and liquidity issues.”.
"This [deal] addresses those concerns head on very aggressively."
Citigroup, Goldman Sachs, HSBC and JP Morgan were active bookrunners and lead dealer managers on the deal. Bank of America Merrill Lynch, Credit Agricole, CIBC and Mizuho Securities were passive bookrunners and dealer managers.
(This story will appear in the September 14 issue of IFR Magazine.)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.