Pemex’s $102 Billion Pension Fix Welcomed by Hurting Bondholders

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Bond investors in Mexico’s state-owned oil producer may finally be getting some good news.

Petroleos Mexicanos is seeking to strike an agreement with its workers’ union by next month to scale back retiree and other benefits, a deal that will allow the company to begin transferring 42 percent of its $102 billion of pension liabilities to the government.

The move would be a boon for Pemex, as the company is known, at a time when plummeting oil prices and sinking output have choked off revenue and pushed its debt to a record $84 billion. Its woes have been evident in the bond market, where investors in the company have lost 1.9 percent this year. That compares with a 2.5 percent gain for emerging-market corporate bonds.

“It makes all the sense in the world to put these liabilities where they should be -- under the government,” said Luis Maizel, who manages $5.5 billion of fixed-income assets, including Pemex bonds, at LM Capital Group.

Pemex’s pension and retirement obligations, which have doubled in the past five years, are by far the largest of any oil and gas company in the world. They’re roughly four times those of Exxon Mobil Corp., which has the second-biggest at $25 billion.

To transfer the liabilities, Pemex must reach an accord with the union before Sept. 11 on issues including raising the retirement age to 65 from 55 and cutting benefits like gasoline coupons.

‘Competitive Scenario’

The push to relieve Pemex of some of its pension obligations is part of the historic oil reforms signed into law by President Enrique Pena Nieto in 2014. The changes ended Pemex’s seven-decade monopoly, allowing private companies like Exxon to drill for oil.

Pemex “is seeking to make the company viable in the future and guarantee its growth in the new competitive scenario derived from the energy reform,” the oil producer said in an Aug. 11 statement. “It’s looking to preserve the balance between the employees’ legitimate rights and the company’s financial situation.”

Pemex, whose production is on pace to fall for an 11th straight year, is taking on a record $15 billion in net borrowings this year, the most since at least 1999, to finance exploration. The price of Mexico’s crude has plunged 58 percent in the past year to $38 a barrel. The peso slipped 0.1 percent to 16.8274 per dollar Friday.

Yields on Pemex’s $2.1 billion of benchmark bonds due in 2023 have jumped 0.71 percentage point in that span to 4.56 percent, data compiled by Bloomberg show.

“For a long time, the primary liability that bondholders were worried about were these pension liabilities that were not only large but continuing to grow,” said Joe Kogan, the head of emerging-market strategy at Bank of Nova Scotia. “Pemex is obviously short on cash needed for exploration, and the company needs to try to save money in various ways to fund it.”

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