Ricardo Ortiz
Director for Latin America
Greensill Capital

Bailing Out the Industry

Wed, 01/20/2016 - 11:41

The Mexican oil and gas industry is facing an unprecedented challenge. Not only is it affected by the drop in oil prices, but also by its impact on PEMEX. Just like any other company in the international oil and gas industry, its budget was planned relying on a much higher price of oil, and the drop has led to severe payment difficulties. Mexico’s industry is particularly affected given the fact that it has been so dependent on PEMEX, and because the NOC is delaying payments. “This poses serious hardship on many companies, and in particular on smaller and less well-capitalized ones,” Ricardo Ortiz, Director for Latin America of Greensill Capital, points out. “Among its suppliers, PEMEX has a great deal of small companies that offer daily services. In the case of jack-up rig providers, leases can cost US$180,000 a day, creating serious struggles for such companies if they are not paid on time,” he exemplifies, adding that the amount of financial distress caused by late payments would depend on the size of the company, how local it is, and how many businesses it has around the world. Ortiz believes that the most promising solution for these small and medium-sized local firms is supply chain financing, as it provides the working capital that these businesses need at a much lower cost than the alternative options available to them.

Greensill Capital created the PEMEX Supply Chain Finance Program with the Mexican NOC in order to help companies that are struggling to survive due to delayed payments. “PEMEX suppliers can receive financing at 8-10% from a bank, but we can offer much lower rates to small suppliers, based on the oil company’s credit rating.” The Director also expresses surprise regarding the fact that Greensill Capital has received interest from large, international suppliers that he believes can easily handle 180-day payment terms. “Those large suppliers like the fact that our financing is structured as non-debt and improves their cash flow,” he reasons.

In order to access Supply Chain Finance Program, suppliers must meet various requirements. Ortiz explains that PEMEX must first authorize such an action for each player, after which the latter must sign an amendment to its PEMEX contract, making it eligible for the program. He continues to say that, “Subsequent to this, the supplier can ask Greensill Capital to discount its invoices, and will then receive its money after a 48-hour period. Our documentation for suppliers is easy and allows users to sell their PEMEX receivables to us on a non-recourse basis for a small discount,” Ortiz clarifies. That means that once the supplier has received the payment from Greensill, it has no more financial exposure to PEMEX, or any bank borrowing. “We do not require guarantees from the supplier, as we manage everything through contracts. Afterwards, the supplier has no further responsibility regarding payments by PEMEX, which reduces uncertainty and allows it to finance its working capital at a rate lower than that offered by banks.”

Mexico also has an alternative payment program called NAFIN Productive Chain Program. The Director points out that unlike what the industry may think, these two are not in competition, but rather, offer completely different services. “Greensill Capital is a private supply chain finance program that can provide funding from both domestic and international sources and manage contracts made and payable in dollars in both Mexico and abroad, but not in pesos. Although in certain cases we can accept contracts denominated in dollars that are payable in Mexican pesos, our customers need a certain clause in their PEMEX contracts to receive dollars,” he advises. He explains that, on the other hand, NAFIN is a government productive chain program that only takes care of contracts that involve Mexican pesos. “NAFIN and the government are currently handling the peso financing, and we do not want to interfere in their area. Greensill Capital would be interested in entering this market, but this is ultimately PEMEX’s decision,” he admits.