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Pemex returns with bond deal after long hiatus

NEW YORK, Sept 13 (IFR) - Mexico's Pemex returned to the dollar market for the first time in close to nine months on Tuesday with a two-part bond as it sought to raise new money and retire debt across its curve.

The borrower is approaching investors with seven and 30-year paper with initial price thoughts of 4.75% area and 6.75% area, respectively.

At those levels, both bonds are seen coming about 60bp wide to the company's curve, where 3.5% January 2023s and the 5.625% 2046s had been trading pre-announcement at 4.17% and 6.17%, respectively.

That appears to be a decent enough concession to draw interest, but given the shaky state of Tuesday's market, Pemex may have little room to tighten from here.

"The market is not supportive so we expect that they will need to maintain a decent concession," said Jason Trujillo, a senior analyst at Invesco.

Broader markets looked fragile on Tuesday as oil slipped in early morning trading amid ongoing uncertainty over monetary policies across the developed world.

"Oil credits remain complicated but we are in a much better place now," said a DCM banker away from the trade.

Concessions may have to be decent also because with increased expectations of a US interest rate hike later this year, investors may be cautious about taking on duration risk, said one investor.

"The balance of risk is pointing to the Fed hiking rates at some point this year, and central banks are taking a more conservative stance (on monetary easing)," said Ricardo Navarro, a portfolio manager at asset management firm Noctua.

"At this point people want to be shorter on duration."

The new bonds were announced on the back of a rally in Pemex's outstanding bonds. The yield on its 6.875% 2026s, which was sold in January near the height of the commodities slump, hit a recent low of 4.70% on Friday down from close to 7% in February, according to Thomson Reuters data.

Pemex will be using proceeds of the new bonds to purchase for cash up to US$1.5bn of US$12.74bn in bonds maturing between 2018 and 2044.

Those investors unable to participate in the cash tender in the event it is oversubscribed can also exchange their bonds for the new 2023s or 2047s being issued on Tuesday.

However, outstanding 6% 2020s, 5.5% 2021s, and 5.5% 2044s can only be swapped for the newly issued 2047. As part of a second group, holders of 6.875% 2026s, 6.625% 2035s and 6.5% 2041s can also exchange for the new longer dated security.

The company has also imposed a US$1bn limit on each of the 2023s and 2047s exchanges.

It is assumed that Pemex, which still has substantial funding needs, will be looking to raise a decent chunk of new money alongside the liability management transaction.

"This would be a good deal for the company as they would be able to take out existing bonds at only a slight tender premium of about one point and they are able to term out debt and raise cash at a decent price," said Trujillo.

A successful deal is seen as credit positive for Pemex which took the brunt of spending cuts recently announced by Mexico's new finance minister Jose Antonio Meade who hopes to achieve a primary surplus of 0.4% of GDP in 2017.

Pemex has also suffered a series of quarterly losses following a slump in crude prices as it struggles to adapt to a more competitive environment after losing its monopoly status nearly three years ago.

"Funding is key and the liability management is a sweetener to make sure the bonds are liquid and to improve their debt profile," said a second DCM banker. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)

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