Pemex hits market for first time since Moody's cut it to junk

By Miluska Berrospi

NEW YORK, Oct 8 (IFR) - Mexican oil company Pemex is back in the dollar bond market on Thursday for the first time since Moody's in April become the second rating agency to demote the credit to junk.

Yet with the state backing the strategically important credit, the deal is expected to enjoy decent demand and price progression so far indicates solid interest in the trade.

Pemex is now on course to pricing a new five-year senior unsecured bond at 6.95%, tight to guidance of 7%-7.125% and well inside initial price thoughts of high 7s.

The deal was also upsized to US$1.5bn from the US$1bn size expected earlier.

At a launch yield of 6.95%, pricing will come inside the existing 6.875% 2026 note, which was trading on Wednesday at a yield of 7.34% or dollar price of 97.80, according to MarketAxess data.

The issuance is expected to draw decent demand, largely because of its close ties to the sovereign, despite ongoing challenges for the debt-laden oil firm.

"Despite our concerns about Pemex's stand-alone credit profile and lack of a credible medium-term financial strategy, we do expect the federal government to continue to provide necessary support," said CreditSights analyst Jake Leiby in a report.

Moody's cut Pemex's rating to Ba2 from Baa3 in April, following Fitch's decision last year to demote the company to junk territory.

S&P still has a BBB rating on Pemex largely thanks to government support, but it cut its stand-alone credit profile to CCC+ from B- in March, citing low cash flow generation and adverse financing conditions.

The company was last in the market in January when it issued a US$2.5bn 5.95% 2031 and a US$2.5bn 6.95% 2060s - both at par - on the back of a US$25bn book.

Both those bonds have seen their dollar prices slump in the secondary to trade yesterday at 85.00 and 78.21 or yields of 8.125% and 8.966%, respectively, according to MarketAxess data.

Proceeds from Thursday's transaction are expected to refinance company debt. SMBC Nikko, Bank of America, Goldman Sachs, and Mizuho are active bookrunners on the deal.

(Reporting by Miluska Berrospi; Editing by Paul Kilby)

((Miluska.Berrospi@thomsonreuters.com;))

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