Moody’s Downgrades PEMEX

Credit rating agency Moody’s has once again downgraded PEMEX’s credit rating from Ba2 to Ba3, with a negative outlook.

The decision was reportedly based on the NOC’s “high liquidity risk”, according to Moody’s press release. This means that PEMEX’s current business model does not provide enough profit in the short to medium term to cover parts of its debt that will soon be running into different forms of payment deadlines. Moody’s refers to these parts of PEMEX’s debt as its “high debt maturities”. 

As the credit rating agency elaborated in its report, “PEMEX has weak liquidity and is highly dependent on government support. On March 31, 2021, PEMEX had US$ 2billion in cash and currently has less than US$175 million in available committed revolving credit facilities to address over US$10.8 billion in debt maturities from April 2021 to the end of 2022, besides substantial negative free cash flow in the period, driven by insufficient operating cash generation to pay taxes and invest in capital.”

Furthermore, Moody’s negative assessment of PEMEX’s business plan is based on the NOC’s continued investments on its downstream and refining operations as reflected in the continuing construction of Dos Bocas, its purchase of Deer Park, its continuing rehabilitation of its existing refineries and its increasing percentage of crude being fed into its refining system. According to Moody’s, these investments will increase the volume of losses for the company, or as the credit agency describes, “negative free cash flow will rise in the next three years due to lower operating cash flow derived from the expansion of its refining business, which has generated operating losses in the last several years, close to US$17 billion in 2018 through 2020, as reported. Although oil and gas production growth has been below management targets, Moody's acknowledges that PEMEX has been successful in reverting production and reserves declines in the last two years and believes that this trend will continue in 2021. However, Moody's expects that PEMEX's cash flow generation and credit metrics will deteriorate further in the next three years as the company increases fuel production.” 

PEMEX's Baseline Credit Assessment (BCA), which reflects its standalone credit strength, was also lowered by Moody’s, from caa2 to caa3. Moody’s main basis for the downgrade was based on the fact that PEMEX’s reliance on government support means its credit rating is tied to Moody’s sovereign rating of Mexico’s federal government, which currently stands at Baa1. Since that rating has a negative outlook, PEMEX’s rating does so as well, according to Moody's. 

This also means that a downgrade in Mexico’s rating would directly result in a further downgrade of PEMEX’s rating: “A downgrade of Mexico's Baa1 rating would likely result in a downgrade of PEMEX's rating. Because PEMEX's ratings are highly dependent on the support from the government of Mexico, a change in assumptions about government support and its timeliness could lead to a downgrade of PEMEX's ratings. An upgrade is unlikely in the near term given the negative outlook for Mexico's Baa1 rating and Moody's expectations for continued negative free cash flow at PEMEX.”