The Long and Short
Striking oil in Mexico and Brazil
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
In Mexico, it is PEMEX. In Brazil, it is Petrobras. The quasi-sovereign oil companies in both countries have recently become tied more closely to the state. Pemex is looking interesting, while Petrobras is becoming a higher yielding asset than before.
Mexico’s embattled oil company, PEMEX, received a commitment from the sovereign to pay maturities due this year of around US$6.5 billion. This is after the government provided collateral of US$4.5 billion during late 2020 for a credit line with international banks. PEMEX is the most indebted oil and gas company in the world with USD $113 billion of total debt and net leverage of 13.0x. Still, PEMEX 10-year debt at a yield-to-maturity of 6.5% provides a spread to the sovereign curve of 330 bp, one of the widest for a quasi-sovereign in the world. The implicit support from Mexico’s government is becoming more explicit; although the bonds are not guaranteed, the government is behind the company.
Brazil corporates are underperforming this year driven by the country’s political and economic situation. That compares to an outperformance over the last five years against most EM corporate benchmarks. Overall, Brazil IG corporates have an OAS of 200 bp compared to individual EM corporates that range from 100 bp to 200 bp depending on the country. Interestingly, total Brazil IG issuance concentrates in five corporates: Suzano/Fibria, Gerdau, Votorantim, Raizen and Vale. As the sovereign has not regained its IG status, large and well capitalized banks are still in ‘BB’ area. On the other hand, Brazil HY corporates offer an average of OAS of 300 bp, which is not that attractive compared to Mexico’s (OAS 480 bp), Asia HY (OAS 700 bp) and Latam HY (OAS 450 bp). The main reason is the high credit quality of many Brazilian corporates that are still considered HY credits because Brazil it is still HY (Ba2/BB-), and likely to stay there for some time. The key corporate to watch in this space is Petrobras, where the 10-year bond has widened 100 bp in yield to 4.81%, given the sudden change of CEO and the threat to change its diesel and gasoline pricing policy to subsidize the population. Still, Petrobras has deleveraged over the last five years, reaching a more manageable net leverage of 2.1x. EM corporate bonds are not having a positive year in terms of returns, but they still provide a significant pick-up to IG corporates. Credit differentiation it is the key.
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