Moody’s downgrades Mexico’s sovereign note and places Pemex in “trash”

MEXICO CITY, Apr 17 (Reuters) – Ratings agency Moody’s downgraded Mexico’s credit rating on Friday amid poor economic prospects in the country and reduced the note from state-owned Pemex to “junk” in the latest hit for the indebted oil.

Moody’s downgraded Mexico’s note to “Baa1” from “A3” and cut Pemex’s to “Ba2” from “Baa3”, in line with the actions of other rating agencies announced this week.

The rating agency said that the cut to the sovereign note is due to the fact that the country’s economic growth prospects have weakened, the continued deterioration of Pemex’s finances and a deterioration in the framework of public policies.

Although Mexico maintains an investment grade rating, the cut in Pemex is expected to increase the company’s financing costs, on which Moody’s said it maintains a negative outlook, as well as for the sovereign.

“The negative outlook reflects the risk that economic and fiscal strength will deteriorate further,” Moody’s said in a statement.

Moody’s became the second major agency after Fitch to downgrade Pemex. This is likely to lead to a sale of billions of dollars of bonds among investors whose mandates say they must hold investment-grade assets.

“Next week we are likely to see strong outflows in Pemex bonds,” said Luis Gonzali, portfolio manager at Franklin Templeton.

Pemex, which has a financial debt of more than 100,000 million dollars, becomes the largest “fallen angel” in the world, the term for a borrower that descends from investment grade to “garbage”.

Moody´s said that the company faces greater liquidity risk and that it took into account the expectation of a prolonged period of negative free cash flow and the need for external financing.

Regarding Moody’s announcement, which followed Fitch’s earlier downgrade of the oil company’s long-term international credit notes, in local and foreign currency, for the second time so far in April, Pemex said that the decision is partly explained by the company’s higher liquidity and business risk.

“The oil and gas sector has been one of the most affected sectors, given its sensitivity to demand and consumer confidence,” Pemex said of the effects of the coronavirus epidemic worldwide.

THIRD DISCOUNT FOR MEXICO

With Moody’s, they add three discounts for the Mexican note in less than a month.

In late March, S&P downgraded Mexico’s long-term foreign currency credit rating to “BBB” from “BBB +”, and maintained its negative outlook, while Fitch downgraded it this week to “BBB-” from “BBB”, one notch above the level of speculation, with stable outlook.

The rating agencies’ reasons include a panorama of a strong recession, the deterioration in Pemex’s finances and the policies with which President Andrés Manuel López Obrador has faced the effects that the coronavirus epidemic will have on the economy and public finances.

In response to the rating agencies’ actions, the Finance Secretary said Friday afternoon that the government can still access financing on favorable terms and that Mexico’s economic fundamentals “are solid.”

“National and foreign investors maintain a strong demand for government debt instruments in all their terms and modalities,” the Treasury said in a statement, in which he assured that the country has buffers to face the complex global financial context.

Mexico entered a mild recession in 2019 and analyst estimates are that the Gross Domestic Product (GDP) could fall as much as 10% this year due to the coronavirus crisis.

(With additional report by Sharay Angulo, Abraham González and Stefanie Eschenbacher. Edited by Miguel Angel Gutiérrez)