Oil giant Petroleos Mexicanos (Pemex) is considering expanding its export securitization program to $7 billion from $5 billion, a decision that could affect both the ratings and the value of the $4 billion worth of bonds that have already been sold through the structure.
The timing of this choice coincides with Pemex's preparations to issue the remaining $1 billion in bonds authorized under the original facility within the next four weeks, via lead manager Morgan Stanley Dean Witter.
"Pemex and the Mexican government are very pleased with how this transaction has turned out," said one source familiar with the deal. "It's saved them a lot of money, roughly $500 million since [1998]."
Under the structure Pemex is able to pierce the sovereign ceiling and issue AAA-rated bonds wrapped by MBIA-Ambac as well as unwrapped paper that is rated between single-A and triple-B by the four international agencies.
Such ratings and the pricing they afford may be proving too attractive for Pemex to give them up. Indeed, the 125 basis point spread Pemex paid for a $500 million three-year tranche of the program compares favorably with the 360 basis point spread it paid on a recent four-year E175 million ($180 million) straight bond issue.
An official in Pemex's department of finance declined to comment on the transaction.
But investors and ratings agencies alike may not share Pemex's enthusiasm for the expansion of the program. "It doesn't sound so good," said one portfolio manager at a U.S. insurance company. "It will probably widen out the spreads of the existing debt."
As of press time, the price of Pemex's export-backed debt remained relatively unchanged, dipping slightly with the Mexican market.
Nonetheless, Pemex and its bankers will have to present a new program to ratings agencies for them to review their ratings of the deal. "It will be interesting," said the source familiar with the deal. "Now they want to increase the issuance so the interesting fact is whether the ratings agencies will be comfortable with the increased size. Some may [be comfortable], some may not, some may even downgrade."
From a ratings point of view the most important factor is whether Pemex's cash flows and the underlying collateral can support the larger structure, said Michael Morcom, analyst for international structured finance at Duff & Phelps Credit Rating Co. WerePemex to officially propose a $7 billion facility, this would be the crucial factor determining the ratings of the unwrapped tranches.
"It's a concern, but not a likely concern," Morcom said. "Since we initially rated the transaction in 1998, Pemex has added two long-term supply contracts [that] are excluded from any OPEC production cuts that may come about during the lives of the bonds."
Another risk that could increase should Pemex reopen the facility is that of sovereign intervention, said Nancy Chu, director of Latin American structured finance at Standard & Poor's.
As the debt needing to be serviced increases a larger percentage of cash flow from exports remains offshore, Chu said, increasing the likelihood that the government might interfere in the transaction in times of economic hardship. But as of yet the ratings agency has not been asked to sign off on an expanded facility, she added.
In the meantime, Pemex is preparing documents for the issuance of the last $1 billion under the current program, $400 million to $500 million of which will be wrapped. To date, investors have purchased $1.7 billion of wrapped notes and $2.3 billion of unwrapped securities through the asset-backed structure.
