Mexico will offer its ailing state oil company Pemex a lifeline for only one year by dipping into its budget stabilization fund, Finance Minister Carlos Urzua said on Friday, ruling out that the government will absorb the debt.
With $106 billion in financial debt, Pemex is the world's most indebted oil company and is teetering on the brink of having its debt downgraded to junk. Investors have shown little enthusiasm about the possibility of a new bond issuance.
Investors are also increasingly concerned that Mexico's sovereign rating will suffer if Pemex is downgraded or if new government support for the company hurts federal finances.
"What we want to do is to allow Pemex not to go to the market if they don't want to go to the market," Urzua said at an event at the IMF World Bank meetings in Washington. "Take off part of its debt. Once. Only this year. Later on, that is their problem."
Mexico's budget stabilization fund was set up to cushion the effects on public finances if there are sudden variations in international oil prices.
Last month, Urzua said the government was considering redesigning the fund to allow the government to use some of the money to pay Pemex debt. Changes to the fund would have to be approved by Congress.
Urzua said the plan was to take about 100 billion pesos ($5.3 billion) from the fund but that the government would not assume any of Pemex's outstanding debt.
"There are some people that believe that we should assume as federal government the debt of Pemex make it sovereign debt, but we don't like that," Urzua said. "That would contaminate our own debt. But we are aware that in the short term Pemex needs some help and we will provide that help."
Pemex, whose debt is rated just one notch above junk, said in a presentation to investors dated April that there had been no bond issuances in the first three months of 2019. Pemex has not issued any debt this year.
Urzua said Pemex had been able make savings by reducing administrative costs and cracking down on fuel theft.
Investors said efforts to reduce Pemex's need to borrow more or refinance were welcome, but were not a long-term fix to the company's problems of falling production and a high tax burden.
"It is not solving anything in the long run," said Dorthe Nielsen, fixed income emerging markets manager at GAM. "Just tapping the rainy-day fund is giving it a lifeline of a year or to two years."
Aaron Gifford, an emerging market sovereign analyst at T. Rowe Price Associates, said there was little appetite from investors for a bond that many investors already hold.
"Just given how widely Pemex is held, and how concentrated some of these positions are, many investors probably do not want to add more Pemex risk," said Gifford. "So reducing issuances is probably the right thing to do."
(Reporting by Rodrigo Campos and Stefanie Eschenbacher; Editing by Frank Jack Daniel and Alistair Bell)