The Long and Short
Pemex ratings trending up
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. This material does not constitute research.
Spreads to the sovereign for Petroleos Mexicanos already are at multi-year tights, even without solid support from fundamentals. But the level of direct assistance under the Sheinbaum administration is on track to surpass the previous administration. And looking beyond the near-term amortization wall for the company’s debt, it is possible to see spread compression towards pre-Covid levels. The front end and belly of the issuer’s curve is the obvious target for excess return, though bond price convexity is most noticeable in the long end, where bonds offer substantial discounts to par.
Ratings for Pemex have diverged over the years, to put it mildly. S&P has taken the route of “almost certain” government support and has never flinched in aligning its ratings with the sovereign, which is currently ‘BBB’. Fitch and Moody’s have taken more active approaches, discerning probabilities of government support and using various mechanisms to determine the ratings from “linkages” to the sovereign. To that end, Fitch was the first to drop Pemex below investment grade before Covid, shaking up valuations and losing a paid mandate to rate the company, given the dissatisfaction of Mexico’s Finance Ministry. Moody’s was next to jettison an investment grade rating and, in doing so, paring the credit from investment grade indexes that function as arbiters of portfolio construction for the majority of “real money” or “long only” investment managers.
As a result, up until the last week, Moody’s rated Pemex ‘B3’, eight notches below S&P—though as telegraphed, upgraded the credit by two notches on September 8 on the back of the current tender announcements and commensurate UMS new issuance to pay for it. Similarly, Fitch puts its ‘BB’ rating on ‘Watch Positive’ on September 5 given its conclusion that Pemex’ government related entity (GRE) overall linkage score (OLS) will improve “driven by a higher assessment of the decision-making and oversight subfactor” (that’s a mouthful) will improve post said tender. Further, the agency viewed that Mexico’s legislative actions now allow Pemex to share a debt ceiling with the secretary of finance. These amendments in turn are targeted at addressing Pemex’ balance sheet and cost of funding. A successful tender will likely trigger a revision of the oversight and decision-making subfactor, per the GRE criteria, to ‘Very Strong’ from ‘Strong,’ thus creating a 5-point bump in Pemex’s OLS to 35 from 30. This score would lead to a change in the approach to notching of Pemex’s IDR from top down minus two to top down minus one. This thus would lead to a ratings upgrade to ‘BB+’. Even with a likely Moody’s upgrade in tandem, its potential ‘B1’ rating (post two notch upgrade) remains an outlier versus Fitch and S&P. However, the average of S&P and Fitch, in this scenario, will become investment grade at ‘BBB-‘.
With the ongoing clear and present sovereign support, ratings compression is following a logical path, though this technical has snuck up on the market in part. From there, it is likely to become a meaningful component of the technical in the bonds for the remainder of 2025 and into 2026. Pre-Covid, when Pemex was investment grade by all three agencies, the crossover demand for paper was material. And while we are not expecting to be at that level of non-emerging markets demand in the near term, the ratings trajectory is generally correlated with same and thus may add increased influence to spread compression in the coming months.
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