Despite the support from the Mexican government, oil giant PEMEX received a downgrade on its ratings and an affirmation on its Baseline Credit Assessment (BCA) by Moody’s, reports media.
Moody's downgraded PEMEX's guarantee from Ba3 to B1 and affirmed PEMEX's BCA at caa3. These ratings follow Moody's previous downgrade of its ratings on the Government of Mexico's from Baa1 to Baa2 on July 8, 2022. The agency also changed the outlook on the government's ratings to stable from negative.
Moody’s explained that the government’s financial strength and support were vital in the assessment of PEMEX’s credit profile due to the importance the country gave to its high liquidity risk. PEMEX’s high debt maturities and continued negative free cash flow were also considered, as the oil giant might need for large amounts of external funding in the future.
The downgrade of PEMEX's ratings was prompted by the downgrade of Mexico's rating, given the critical importance of the government's financial strength and support due to PEMEX’s high liquidity risk. The decision also considered PEMEX's high debt maturities in 2022-2024 and Moody's expectations for continued negative free cash flow. Moody’s also considered the large amounts of external funding given the company’s persistent losses, the necessity to maintain capex at least at current levels to sustain production and the high interest expenses. PEMEX also represents a risk when it comes to access to the capital markets due to its high intrinsic credit risk.
PEMEX is considered to have weak liquidity and it has a major dependency on the Mexican government’s support. Moody estimated that PEMEX will have substantial negative free cash flow in the next 12-18 months because of its insufficiency when operating cash generation to pay taxes, interest expenses and capital spending. However, the stable outlook on the company was set due to Moody’s expectation of the company’s business strategy and financial profile, which will remain unchanged in the next 12-18 months.