Can Pemex get through its latest debt squeeze?

Pemex’s short-term debt squeeze will ease later in the year due to announced support from the federal government, according to a financial expert.

Mexico’s government is expected to defer the payment of over US$2bn in tax to help the firm address its short-term debt, which would allow it to free up enough cash to pay its contractors.

According to Luis Miguel Labardini, a partner at business development consultancy Marcos y Asociados and a former financial advisor to Pemex, the move may be enough to get the company through a tough year without additional support.

The deferral in the shared utility tax (DUC) totals about US$2.5bn, said Labardini, which is about the same as the debt the company has left to pay its creditors this year after shelling out US$6bn of an US$8.5bn debt pile due in 2023.

"The expected result is that, in a couple of months, Pemex should have enough free cash flow to pay its contractors out of pocket," Labardini told BNamericas. "This is how it should happen if the plans of Pemex and the finance ministry are followed through."

Pemex's debt with suppliers and contractors has been mounting steadily and it totaled 96bn pesos (US$5.3bn) at the end of March, up 88% year-on-year.

The company said earlier this month that it was looking for a new mechanism to pay back suppliers. Last year, it unveiled a strategy focused on exchanging up to US$2bn in debt to providers for debt securities with an 8.75% coupon and maturity set for 2029. But the swap was not enough to lighten what has become a permanent drag on the company's short-term finances.

The government of President Andrés Manuel López Obrador (AMLO) has long covered a portion of Pemex's debt payments via the public treasury to help the company liberate funds for new investments. 

Direct support was suspended in early 2022 amid high international crude prices. The administration has also reduced the Pemex DUC tax progressively since 2020. It now seems set to avoid making direct transfers this year, despite pleas by the company's leaders last December, and the DUC payment deferral would replace direct aid.

"This is a short-term solution. It doesn't solve Pemex's structural problem, which has to be resolved definitively, as soon as possible, through a complete restructuring of Pemex's finances, which would include a renegotiation of the debt," Labardini said. Another less likely option, he has argued elsewhere, would be for Pemex to go public.

AMLO has mentioned the idea of turning Pemex's debt pile into sovereign debt several times. This would effectively be a type of debt restructuring, and could be achieved through multiple different mechanisms.

It would also be the complete reverse of the way Pemex's relationship with the treasury has worked in past administrations. During the tenure of former president Enrique Peña Nieto, for example, Pemex's debt pile doubled, while investment, output and refinery utilization fell sharply. Today, Pemex's net worth is US$95bn in the red, with total liabilities almost doubling its total assets.

This is because, since Pemex's credit rating used to be better than Mexico's sovereign rating, the government routinely extracted the state giant's value through the DUC, effectively making Pemex increase its debt to finance public spending indirectly. 

While the current administration has changed gears and attempted to support Pemex, other decisions like emphasizing refinery output at the state firm, which swaps profitable crude exports for fuel production that routinely generates losses, have also contributed to the company's financial problems.

The cumulative result is that Pemex's rating situation vis-a-vis the government has reversed. The firm's debt has been downgraded to junk status by Moody's and Fitch, meaning it borrows at higher rates than Mexico. So, if the state were to try a debt rescue, it would have to be careful to avoid its own credit rating being dragged down in the process. 

"The issue is that the government doesn't have the funds to restructure Pemex. It would have to go out and tell debtors, look, I will capitalize the company, but you will take a haircut ... In effect, the haircut would be offset by the fact the debt would now be investment-grade. This is something we've been proposing for a long time," Labardini said.

"But you would have to calculate in detail how this would affect Mexico's own investment rating. You have to be really careful, talk it out with the ratings agencies," he added.