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Pemex eats into funds for pension liability to comply with debt ceiling
Significant Corporate Event
Image source: Redd Intelligence

Strategic Considerations: Pemex received USD 4.75bn to pay short-term debt by monetizing 2015 government promissory notes linked to pension liabilities. Those notes were issued so the company could ease its pension costs each year until 2036, and this transaction has almost depleted those funds, said multiple sources. The transaction will allow Pemex to comply with its 2020 debt ceiling that only allows for a USD 1.7bn increase in net borrowings, which the company had already surpassed by almost USD 5bn. While positive in the short term, it pushes up mid-term and long-term risks for Pemex as the pension burden is once again unfunded.

  • The company has used almost all the aid granted by the government in 2015
  • Pemex has received around USD 10bn in government support this year

Mexico’s Pemex cashed in around USD 4.75bn in promissory notes to pay off short-term liabilities and avoid breaching its 2020 debt ceiling, said multiple sources. 

The state-owned company swapped the notes into government bonds, which it will sell to pay short-term debt such as credit lines, the sources said. But the move only shifts costs to the future as the notes were meant to fund pension payments until 2036.

Congress authorized Pemex to increase net borrowing by USD 1.7bn this year, but it had already increased its debt by USD 6.5bn in 9M20, as reported. The company had said the situation was due to declining oil prices and a drop in sales, but it was temporary and would be corrected by year-end. 

As of 30 September, Pemex had USD 13.5bn in maturities due in the last three months of the year, mainly because it drew down its credit lines during the year, said an energy analyst.  

“Pemex will probably pay down its more expensive credit lines that will soon expire with the funds from this transaction, and will try to renegotiate and renew some of the other revolving credit lines,” said Victor Gonzalez Ayala, a financial analyst with Casa de Bolsa Finamex.

The promissory notes were granted to Pemex in 2015 following an agreement between the company and the Finance Ministry (SHCP, in Spanish) to help the oil giant fund its pension liabilities, and strengthen its financial situation after the 2013 approval of the energy reform, said Rosanety Barrios, former deputy energy minister. 

The government issued around MXN 184.23bn (USD 9.15bn at today’s exchange rate) in promissory notes to Pemex, as the company had lowered its pension costs by the same amount after negotiating with its workers’ union. At that time, the cost of its pension liabilities were rising, and the promissory notes were designed to help the company to avoid using cash flow to pay pensions, said Barrios and the energy analyst. 

The promissory notes were divided into tranches that mature each year until 2036, so Pemex would use them exclusively to cover the pension costs for that year, said the energy analyst. Per Pemex 3Q20 earnings, it had MXN 119.52bn (USD 5.94bn) in notes that matured between 2021 and 2036. 

The early exchange of these promissory notes into government bonds, called Bondes D, which can be sold to banks, allows Pemex to pay off debt due now without refinancing, issuing new bonds, or taking out new loans, and as a result comply with the debt ceiling established in the federal budget for 2020, said Gonzalez, and a second financial analyst. But since the promissory notes were listed under assets, it doesn’t actually change the balance sheet, the analysts said.

“In reality it doesn’t change the nature of the balance sheet because the debt doesn’t go away. It just gets transferred from one place to another,” said the second financial analyst. 

This exchange should be seen as a government support for Pemex as it is directly helping the company to pay some short-term debt and get some breathing room, the sources said. However, it doesn’t change the company’s outlook, added the sources.

“It’s like Pemex is selling grandma’s jewelry to eat. The company is only buying a little time," said Barrios.   

Pemex hasn’t been able to generate enough cash to meet its financial commitments for years but the situation has worsened under Andres Manuel Lopez Obrador's administration, said the energy consultant. 

The government provided Pemex with USD 10bn in 2019, and another USD 10bn this year, consisting of tax relief of around USD 3.2bn, a USD 2bn injection, and USD 4.75bn via this bond transaction, the sources added. 

While this government support helps in the short-term, it creates a new problem regarding how the company is going to fund its pension liabilities in the mid-term, said Gonzalez. This was a risk the government had mitigated with the 2015 promissory notes. The Ministry of Finance estimated that Pemex had about MXN 97bn (USD 4.82bn) of these notes as of September, Gonzalez added. 

Pemex’s net cost related to pension benefits, which includes pension payments and healthcare services, was USD 7.87bn during 3Q20, an 8.9% YoY increase, per earnings. Total pension liabilities reached USD 67bn as of 30 September.

by Edgar Sigler and Xochitl Herrera Mexico City

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