Ratings Agency Ready to Classify BiddersWed, 01/21/2015 - 16:06
Q: In 2014, Mexico saw its credit rating raised to A3 after the Energy Reform. Does this signal Moody’s confidence in the country to investors?
A: The sheer force and momentum of the Energy Reform took us by surprise. We did not expect such radical changes and Moody’s was the only credit rating agency that took action based on this. As the first credit rating agency in the world, Moody’s has had a unique trajectory, such as rating the creation of the railroad and steel industries. This means that the firm has accustomed itself to rating across cycles and looking at long-term risk. Prior to the Reform, Mexico was already an attractive investment destination. Five years ago, institutional investors from North America, Europe, and even Asia were setting their sights on this market. For the past 20 years, Mexico has worked to improve on the economic front and the A3 upgrade was a confirmation to all investors that the country is on the right path.
We are optimistic when we compare Mexico’s competitive position to other markets. In the oil and gas industry, companies across the world are starved for reserves while having the right technology to extract Mexico’s resources. All companies will be coming here for the long term, and while there might not be as many small players as we had hoped for, the real bidders are here. While companies might make less money due to current oil prices, we will see how they will negotiate to obtain prices and conditions for the government.
Q: What impact has the opening of the energy industry had on your business opportunities?
A: Participants in the bidding rounds must have ratings regardless of their size, which will create a lot of competition among rating agencies. We expect companies of different profiles in future rounds and all of them will need to be rated, including from companies that have never been rated before. Moody’s has increased the size of its Mexico office by a third to grow alongside these trends.
Q: What are the challenges associated with giving smaller players accurate credit ratings?
A: We do receive applications from smaller companies, for which we follow strict criteria. We want to know who the auditors are, who the owners are, and what their track record and reputation is like. Moody’s maintains a conservative approach, especially for lower-rated credits. Furthermore, there are also a lot of new entities being created, so obviously we draw a line for who we give credit ratings to. For example, if the auditors do not meet our standards, we simply do not rate the company, but we will rate a company that is only a year old if the auditor has an outstanding reputation. We also take into consideration who is behind the company, such as a local family that has successful businesses across sectors. We will seek to have a series of questions about ownership thoroughly answered, such as the expertise of the owners, who the partners are, and what their track record is. Companies have to provide a direct guarantee of their business strategy. Even enterprises that have renowned parent companies do not necessarily obtain the same rating because they need their own capital and funding to do so. The oil and gas industry must also be wary of cowboy investors. These will create a vehicle, obtain a contract, secure the funding, and begin operations haphazardly. I cannot say how many companies I have seen go bust due to being managed by cowboys. Serious companies are managed by experienced investors and these are the only ones that can truly be rated. Since the Energy Reform, I have not seen many oil and gas companies rushing to get a rating. This is because companies typically resort to credit rating agencies at the end of the process as they have to tick several boxes before knocking on our doors.
Q: What are the main questions potential investors ask regarding the Mexican oil and gas market?
A: The one question we do get from investors is whether PEMEX could go bankrupt. According to banks, this cannot happen but what would happen if an issue arose meaning PEMEX could not pay its liabilities. This is a difficult question to answer because if PEMEX cannot file bankruptcy, how can it pay? This situation is still in limbo and we are seeing new financing schemes emerge due to PEMEX’s new position as a productive enterprise of the State. New instruments are needed to help PEMEX fund itself without raising its debt level as this would be a major concern for Moody’s and investors alike.