MOODY'S ASSIGNS RATINGS TO FOURTH ISSUANCE OF PEMEX FINANCE NOTES
Moody's Investors Service has assigned ratings to two tranches of notes issued by Pemex Finance Ltd. The notes, which have an aggregate initial principal balance of U.S.$950 million, are supported by cash flows generated by exports of Maya crude oil by Petroleos Mexicanos, the Mexican state-owned oil company. The ratings assigned to the notes exceed substantially the Ba1 foreign currency debt rating of the United Mexican States. Mexico's foreign currency debt rating is currently on review by Moody's for a possible upgrade, but Moody's does not at this time expect any sovereign rating action resulting from this review to affect the ratings of the Pemex Finance notes.
The complete rating actions with respect to the current Pemex Finance note issuance were as follows:
U.S.$800 million 9.03% Notes Due 2011, rated Baa1
U.S.$150 million 7.80% Notes Due 2013, rated Aaa
At the same time it assigned its ratings to the current series of notes, Moody's also confirmed its ratings of notes issued by Pemex Finance in December 1998, February 1999 and July 1999. The ratings confirmed were:
U.S.$500 million 5.72% Notes Due 2003, rated Aaa
U.S.$350 million 8.02% Notes Due 2007, rated Baa1
U.S.$400 million 6.30% Notes Due 2010, rated Aaa
U.S.$250 million 9.15% Notes Due 2018, rated Baa1
U.S.$300 million 6.125% Notes Due 2003, rated Aaa
U.S.$200 million 8.45% Notes Due 2007, rated Baa1
U.S.$300 million 6.55% Notes Due 2008, rated Aaa
U.S.$200 million 8.875% Notes Due 2010, rated Baa1
U.S.$100 million Floating Rate Notes Due 2014, rated Baa1
U.S.$225 million 9.14% Notes Due 2004, rated Baa1
U.S.$600 million 9.69% Notes Due 2009, rated Baa1
U.S.$250 million 7.33% Notes Due 2012, rated Aaa
U.S.$200 million 10.61% Notes Due 2017, rated Baa1
U.S.$50 million 9.22% Notes Due 2004, rated Baa1
U.S.$90 million Floating Rate Notes, Series B, Due 2014, rated Baa1
U.S.$35 million Floating Rate Notes, Series C, Due 2004, rated Baa1
Subject to certain restrictions, Pemex Finance may incur up to U.S.$7 billion of debt under its current program.
According to Diana Weaver, a vice president in Moody's Structured Finance Group - Latin America, the Aaa rating assigned to the 7.80% Notes Due 2013 is based on a financial guaranty insurance policy provided by MBIA Insurance Corporation. The Baa1 rating assigned to the 9.03% Notes Due 2011 reflects PEMEX's significant crude oil reserves and production capacity; the projected debt service coverage provided by the export receivables; the credit quality of the customers to whom the Maya crude oil is exported; legal and structural protections that support the notes; and the low likelihood that the Mexican government would interfere with the transaction.
The ratings assigned to the two new tranches of Pemex Finance notes exceed substantially Mexico's Ba1 foreign currency debt rating (which is currently on review for a possible upgrade). In Moody's opinion, there is relatively little risk that the Mexican government could or would either divert exports of Maya crude oil away from the designated North American customers or otherwise interfere with the payment of the Pemex Finance notes in the event of a Mexican financial crisis or general government default. This view is based on practical and legal impediments that minimize the risk of production or payment diversion. These impediments include the physical characteristics of Maya crude, which is a heavy, sour crude oil, and the lack of incremental capacity for processing heavy sour crude oil at refineries in the U.S. and in other geographic areas, which makes a sustained and systematic diversion of Maya crude sales away from PEMEX's existing customers impractical and/or uneconomical. Also important to Moody's evaluation is the fact that the transaction is structured so that at least two-thirds of the receivables generated from export sales of Maya crude to North America flow back to Mexico, even under conservative price and volume assumptions.
Noteholders gain additional legal protection from the fact that PEMEX's principal North American customers have agreed irrevocably to make all payments for Maya crude purchased from the PEMEX entities directly to a U.S. collection account. In addition, the PEMEX entities have submitted to the jurisdiction of U.S. courts and have waived immunity from legal actions with respect to the notes which they might have as companies that are directly or indirectly wholly-owned by the Mexican government.
Moody's believes that the Baa1 rating assigned to Pemex Finance's uninsured notes are also supported by PEMEX's fundamental credit quality, absent the cross-border transfer risk implicit in PEMEX's Ba1 long-term, foreign currency debt rating (currently on review for possible upgrade). PEMEX's credit quality continues to be supported by its sizable hydrocarbon reserve base, its importance to the Mexican economy, its monopoly powers within the Mexican petroleum industry, and its position as a leading exporter of crude oil to the United States. As the largest company in Mexico, PEMEX also accounts for more than one-third of the federal government's annual revenues and generates significant foreign exchange from crude oil exports. However, according to Alexandra Parker, a vice president in Moody's Oil & Gas group, Pemex's role as an agency of the Mexican government, its high tax burden, and its relatively low operating efficiency are weaknesses that must also be considered when assessing PEMEX's fundamental credit quality.
PEMEX's earnings and cash flow are highly dependent on the level of international oil prices, on the value of the Mexican peso relative to the dollar, and on the company's hydrocarbon production and export volumes. During 1999, oil prices increased dramatically and the peso appreciated against the U.S. dollar, which had a favorable impact on PEMEX's pre-tax operating results. The company's crude oil production declined due to Mexico's decision to cut its oil exports along with OPEC, but the effects of the production and export volume declines were more than offset by the significant rise in international oil prices.
Despite government-imposed budgetary constraints in effect during 1999, PEMEX was able to increase its capital spending on large, off-budget infrastructure projects, and the bulk of these were exploration and production-related. On the other hand, off-budget project-related financings, including the Pemex Finance note issuances, have increased PEMEX's off-balance-sheet obligations, which Moody's includes in its analysis of the company's credit quality. Until PEMEX's infrastructure projects begin to generate incremental cash flow, the company's financial leverage will remain higher than in previous years. However, Moody's also believes that PEMEX's increased financial risk will not likely affect the company's ability and willingness to produce and to export Maya crude oil. Moreover, proceeds from the Pemex Finance program will be used to enhance production in the offshore Cantarell region, which presently accounts for over 75% of Mexico's heavy crude production.
A copy of Moody's New Issue Report for the Pemex Finance notes may be obtained by calling Moody's Investors Relations desk at (212) 553-4796.
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