Mexico and Pemex credit ratings cut by Moody's and Fitch
April 20, 2020
Fitch Ratings also downgrades CFE, IEnova and Cometa following the recent cut in Mexico's sovereign ratings
Moody's downgraded its credit rating on Mexico to Baa1, and joined Fitch Ratings with a cut to the Mexican state-owned oil company Pemex's rating as well, with both companies on Friday citing weak economic growth prospects and sharp drops in the price of oil.
Moody's cut Pemex to junk status, lowering the rating to Ba2 from an investment grade Baa3. Meanwhile, Fitch cut the company further into junk status, dropping the rating to BB- from BB. Fitch's rating on Pemex now stand three notches below the sovereign ratings due to the "continued depreciation" of its stand-alone credit profile and its "limited flexibility" to make it through the downturn in the global oil and gas industry, Fitch said in a report. As Fitch cut Pemex's ratings, it improved the outlook to stable from negative.
Fitch also took aim at three other Mexican energy companies, lowering the ratings on Comision Federal de Electricidad (CFE), Infraestructura Energetica Nova, S. A. B. de C. V. y Subsidiarias' (IEnova) and Cometa Energia, S. A. de C. V. after cutting its rating on the Mexican sovereign to BBB- on April 15 saying the COVID-19 pandemic will likely cause a severe recession.
Moody's maintained negative outlooks on both the sovereign and Pemex, the firm said in separate statements. It said Mexico's medium term economic growth prospects have materially weakened and that the "continued deterioration in Pemex's financial and operational standing is eroding the sovereign's fiscal strength, which is already pressured by slower revenue growth due to a weaker economy."
"Economic policy decisions and mixed policy messages under the current administration have materially altered business sentiment and will likely continue to dampen private sector investment in the coming years, further lowering Mexico's medium term growth prospects," Moody's said about its view on sovereign credit.
Moody's cited the decision to cancel the building of a new Mexico City airport, calling it "a political decision that dismissed clear warnings about negative economic ramifications." It also pointed toward a lack of clarity over private investment in the electricity sector and the cancellation of a large brewery project already under construction as blows against investor confidence.
Pemex is also expected by Moody's to tap all of its existing credit facilities this year, despite the government giving it additional rounds of tax relief due to the low market prices for oil.
State-owned utility CFE went down a step to BBB- and stands level with the sovereign ratings "given its strong linkage to the government," Fitch said.
IEnova, the Mexican subsidiary of the US company Sempra Energy, and Cometa Energía, a division of the UK-based emerging markets investor Actis, were downgraded because rely on state-owned businesses for a good portion of cash flow, Fitch said.
IEnova gets 45% to 50% of EBITDA from CFE, Pemex and the national natural gas pipeline system operator Cenagas, while Cometa gets 50% of EBITDA from CFE and Cenagas.
"Additional negative rating actions on [government-related entities] will factor in IEnova and Cometa's ratings," Fitch said.
Fitch downgraded Pemex on April 3, saying the oil company could not generate enough cash flow to cover the costs of production at current prices. Mexico's crude basket price stood at $14.35 per barrel on Friday, while Fitch puts Pemex's break-even point at $25 per barrel.