Pemex Scrapping Peso Bond Sale Signals Deepening Slowdown: Mexico Credit

Petroleos Mexicanos’s decision to scrap its first peso bond sale in seven months signals the slump in local debt issues is deepening.

Pemex, as Mexico’s state-controlled oil producer is known, canceled plans to raise as much as 10 billion pesos ($776 million) in a debt offering yesterday, citing “high volatility” in markets. Only Mexichem SAB has sold peso debt this month, extending a slump after offerings sank to a 10-month low of 7.4 billion pesos in August. In Russia, no company has tapped the local market this month after offerings fell to a four-year low of 20 billion rubles ($662 million) in August.

Mounting concern Greece’s debt crisis is spreading to other European countries is prompting investors to shun higher- yielding emerging-market assets. Yields on Pemex’s peso bonds due in 2020 jumped 42 basis points, or 0.42 percentage point, in the past week, to 7.59 percent, according to data compiled by Valuacion Operativa y Referencias de Mercado SA..

“We’re living in a disorganized market with the Greece situation and the expectations for Italy, Spain,” Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA in Mexico City, said in a telephone interview. “There will be companies that already have scheduled placements that obviously need them to keep working, or to invest, or to do things they need to do. There will be others like Pemex that say, ‘I’ll wait, I don’t have to rush.’”

Greek Default

Yields on Mexican government peso bonds due in 2021, the benchmark for companies selling debt in the local market, soared 41 basis points in the past week to 6.44 percent, according to data compiled by Bloomberg. Yields on similar-maturity Brazilian debt rose 13 basis points in the period.

German Chancellor Angela Merkel’s vow to avoid letting Greece go into “uncontrolled insolvency” because of the risk of contagion for other euro-area countries has failed to reassure investors. There’s a 98 percent chance Greece will default in the next five years, trading in credit-default swaps shows.

Slowing growth in the U.S., which buys 80 percent of Mexico’s exports, is also curbing demand for debt in Latin America’s second-biggest economy. U.S. gross domestic product will expand at a 1.6 percent rate in 2011, according to the median forecasts of 78 economists surveyed by Bloomberg News.

“Due to adverse market conditions that have had repercussions in the local curve, Pemex decided to suspend, until later notice, the sale of the bonds,” the company’s press officer said in an e-mailed response to questions. “Pemex will seek windows of opportunity that it considers convenient in the market to carry out its financing operations, in accordance with its needs and annual program.”

Pemex, based in Mexico City, had planned to sell fixed- rate, floating-rate and inflation-linked bonds.

Paying a Premium

“They sort of feel that because of the noise they’ll have to pay a premium to the investor to price in this market,” Bevan Rosenbloom, a credit strategist at Citigroup Inc. in New York, said in a telephone interview. “If they don’t have to do it, why would they do it?”

The cost of insuring against default on European sovereign and bank debt has soared amid concern a default by Greece will trigger losses for banks holding the government’s bonds.

Pemex’s canceled offering doesn’t mean the company was unable to find buyers for its debt or that other Mexican companies will refrain from tapping the market, said Guillermo Rodriguez, who helps manage about $5.5 billion at Corp. Actinver SAB. Comision Federal de Electricidad, Ford Motor Co.’s local unit, and Banco Compartamos SA plan to sell debt as soon as this month, according to stock exchange filings.

‘Secure Credit’

Pemex is “a very secure credit,” Rodriguez said in a telephone interview from Mexico City. “It was more the decision of the company than the market. The rate movements in the last two or three days have been very important in terms of increasing the cost for the company, and if you don’t have such big financing needs, then I say you can wait until they normalize.”

Compartamos is seeking regulatory authorization to sell its bonds as soon as Sept. 22, said Patricio Diez de Bonilla, the company’s chief financial officer.

“We’ll keep seeing volatile markets in the coming months,” Diez de Bonilla said in a telephone interview from Mexico City. “Depending on when they give us the authorization, we’ll be analyzing whether the conditions of the market are favorable for the sale. We still see the possibility of doing it, despite the volatility.”

CFE is also planning to go ahead with its sale, spokesman Estefano Conde said in a telephone interview from Mexico City, without giving a specific date for the offering.

A local press official for Ford Motor didn’t immediately return messages seeking comment.

Investment Plans

Pemex, Latin America’s largest oil producer, will invest about $27 billion a year during the next decade to reverse a six-year decline in oil output, according to company presentations this year.

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries fell three basis points to 222 at 8:11 a.m. in New York, according to JPMorgan’s EMBI Global index.

The peso rose 0.1 percent to 12.8681 per U.S. dollar.

Yields on futures contracts due in October, known as TIIE, rose one basis point to 4.70 percent yesterday, signaling Banco de Mexico may lower the key rate that month to shore up growth amid the global slowdown.

Default Swaps

The cost to protect Mexican debt against non-payment for five years fell three basis points yesterday to 169, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Yields on Pemex’s peso bonds due in 2021 touched 7 percent on Aug. 22, the lowest since the securities were issued in January 2010, before the sell-off, according to data compiled by Bloomberg.

“The funding bogey that they were looking to hit is obviously quite sensitive to present market conditions,” Michael Roche, an emerging-market strategist at MF Global in New York, said in a telephone interview. “Getting a deal off domestically is a bit more costly.”

To contact the reporters on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net; Benjamin Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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