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Fixed Income: Hot on Pemex

  • Pemex is a major contributor to the Mexican government’s balance sheet

  • If this bond was to trade to fair value, we would expect a capital appreciation of just under 60 points

  • We do not believe a Pemex default is likely as the consequences are far reaching for the government’s ownership

As regular readers are aware, we favour investment in sovereign and quasi-sovereign bonds; our Global, Renminbi and segregated bond funds have ~90% exposure in government and government-owned entities, currently. Moreover, we favour countries with three-to-seven-star NFA ratings. One of those countries is Mexico, rated 3 stars using our proprietary NFA model. We have a holding in the Mexican government in our NFA Bond Fund, however, our main exposure to Mexico across our global strategies comes from holdings in state-owned oil company Petroleos Mexicanos (Pemex).

Pemex is a major contributor to the Mexican government’s balance sheet and is therefore of integral importance to the nation’s financial health. Andrés Manuel López Obrador, Mexico’s president, has vowed to support Pemex and there is a demonstrable track record of government backing.

Rated BBB/B1/BB- by S&P, Moody’s and Fitch, respectively, the 6.625% 2035s and 7.69% 2050s are some of the few lower-rated holdings we own. Both offer exceptional value, the 2035s issue currently offers an expected return close to 50% and a yield of 11.4%. Trading with over 6 notches of credit cushion using the highest rating, and 2 notches using the lowest, this bond continues to offer us sufficient downside protection.

The 7.69% bond maturing in 2050 is also priced at over 6 notches cheap, and trades ~570bps wider than similarly rated bonds with a duration of 8.6. If this bond was to trade to fair value, we would expect a capital appreciation of just under 60 points. We could compare this with Brazil’s state-owned petroleum company, Petróleo Brasileiro, or Petrobras. Rated Ba1/BB-, the 6.75% 2050s bond offers an expected return of only 4.24% and 0.45 notch cushion.

We do not believe a Pemex default is likely as the consequences are far reaching for the government’s ownership. We therefore intend to retain our position in Pemex as the pricing and yield are attractive given our assessment of the current financials of the company and Mexico.