Petroleos Mexicanos (Pemex) recently sold the remaining $950 million in bonds authorized by its $5 billion future flow oil-backed program through Morgan Stanley Dean Witter.

The transaction consisted of a $150 million tranche of 11-year bonds featuring a 7.8% coupon and wrapped by MBIA-Ambac and an unwrapped $800 million tranche of eight and a half year bonds yielding 9.03%.

The wrapped piece was rated triple-A by all four international agencies. The uninsured tranche received an A-rating from Fitch IBCA, Baa1 from Moody's Investors Service, BBB rating from Standard & Poor's and A from Duff and Phelps Credit Rating Co.

More Pemex paper will be coming soon, after the Mexican oil giant received some positive feedback for the expansion of the securitization program to $7 billion when the agencies affirmed their ratings for the $5 billion Pemex notes now outstanding.

The enlargement of the structure would turn Pemex Finance into the largest securitization program in Latin America and enable the oil giant to continue issuing triple-A rated bonds wrapped by MBIA-Ambac as well as unwrapped paper that is rated between single-A and triple-B.

Despite some earlier market talk regarding the possible effects of the program's expansion on the ratings and the value of the notes issued by the program so far, investors did not seem worried. "I only received one call from an investor," said Nancy Gigante Chu, analyst with S&P in New York. "I was actually surprised that more people weren't questioning the rating and the affirmation."

All four agencies were in agreement over the fact that Pemex Finance could issue up to $7 billion of notes without affecting its current debt ratings.

The affirmation of the ratings is based on the premise that the receivables generated by export sales of Maya crude oil will be enough to generate the necessary amounts for payments on the notes, even under conservative export volume and oil price scenarios.

In addition, the agencies felt that the Cantarell region, which accounts for over 75% of Mexico's heavy crude oil production, will likely have sufficient production capacity over the life of the notes to cover both growing internal demand for Maya and the export volumes required to service the Pemex Finance notes.

However, Moody's noted that any increase in the program size above $7 billion would most likely trigger a downgrade in Pemex ratings.

"If the program exceeds the $7 billion there might not be enough coverage ratio under conservative stress scenarios," explained Alexandra S. Parker, analyst with Moody's in New York. "In addition, we wouldn't be able to demonstrate that a sufficient amount of cash flow is returning to the Mexican government, which could increase the risk of potential interference and potential diversion of either cash or crude."

Gabriel Torres, analyst with Fitch IBCA, said that the agency was not adverse to Pemex expanding its securitization program beyond $7 billion. "I think they have room to issue over the $7 billion, but our decision would be based on a case by case analysis."

The key reasons behind the expansion of Pemex Finance is that the Mexican government, which owns Pemex, still determines the company's budget.

Certain infrastructure projects, such as the development of the Cantarell region that generates the receivables for the Pemex Finance transactions, were designated by the government to be off budget. As a result, Pemex resorted to securitizations as a way to generate funds for the development of the Cantarell fields.

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