Why Does Bond Giant Pimpco Worry About Post-AMLO Pemex’s Debt Management?

The bond investor’s emerging-market debt head called the bonds “over-owned” and said the market should be prepared for Mexico to reduce its support for Petróleos Mexicanos after AMLO leaves office next year

Petroleos Mexicanos (PEMEX) headquarters in Mexico City, Mexico.
By Maria Elena Vizcaino and Esteban Duarte
May 12, 2023 | 09:26 AM

Bloomberg — One of the world’s biggest bond investors is limiting its exposure to Pemex debt out of concern that government support for the state driller will dry up once Mexico’s oil-friendly president is out of office.

Pacific Investment Management Co., which oversees about $1.8 trillion of assets, is underweight on the company’s bonds and “keeping exposures relatively short-dated,” according to Pramol Dhawan, the firm’s head of emerging-market debt.

In an interview Wednesday, Dhawan called the bonds “over-owned” and said the market should be prepared for Mexico to reduce its support for Petróleos Mexicanos SA after President Andres Manuel Lopez Obrador leaves office next year.

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“This administration was perhaps the most pro-Pemex administration you would likely be able to get,” he said. Subsequent governments “may not be as friendly toward the credit.”

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Since taking office in 2018, AMLO, as the president is known, has cut Pemex’s tax burden, injected cash when needed and even floated the idea of the government assuming some of the company’s obligations. He is not eligible to run in next July’s general elections.

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AMLO’s support has helped make the company a favorite among emerging-market bond buyers, who argue they pick up about six percentage points from the driller’s notes more than they would holding the sovereign for what’s essentially the same risk of default.

JPMorgan Chase & Co’s analysts have recently recommended investors load up on the notes as global risk aversion takes a toll on prices. Goldman Sachs said the front-end of the Pemex curve offers an attractive entry point should market volatility subside.

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Pemex debt has handed investors losses of 2% over the past month, compared to an average 0.4% return for Latin America corporate bonds, according to data compiled by Bloomberg.

Dhawan, however, pointed to technicals which he said “are not great.” Production hovers near an all-time low and, with more than $100 billion of obligations, it ranks as the world’s most-indebted oil major.

The bigger concerns is the next government, he said.

“After the election then it raises very, very meaningful concerns to investors,” he said.

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--With assistance from Michael O’Boyle

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