Rating Lowered On Pemex Finance Ltd. Notes Series 1998-A

Stocks and Financial Services Press Releases Thursday December 21, 2017 09:22
NEW YORK--21 Dec--S&P Global Ratings
OVERVIEW
  • Pemex Finance Ltd.'s series 1998-A issuance is a Mexican export future flow securitization backed by current and future receivables generated from the sale of Maya crude oil that Petroleos Mexicanos (PEMEX) produces and exports.
  • We lowered our rating on class A-4 to 'A-' from 'A'.
  • The downgrade reflects the lowering of our rating on Pemex LC and subsequent review of the corporate performance assessment, which reflects our review of PEMEX's ability to generate the necessary assets to service the transaction's timely interest and principal payments, as well as the application of our recently published rating above the sovereign criteria.

NEW YORK (S&P Global Ratings) Dec. 20, 2017--S&P Global Ratings today lowered its rating to 'A-' from 'A' on class A-4 from Pemex Finance Ltd.'s senior unsecured notes series 1998-A. The note issuance is a Mexican export future flow securitization backed by current and future receivables generated from the sale of Maya crude oil that Petroleos Mexicanos (PEMEX) produces and exports.

The rating on the notes reflects three interrelated analytical assessments. These three assessments, which include the structural risk assessment, the corporate performance risk assessment, and the sovereign interference risk assessment, are the fundamental analytical building blocks of S&P Global Ratings' emerging markets future flow ratings (see "The Three Building Blocks Of An Emerging Markets Future Flow Transaction Rating," published Nov. 16, 2004).

The rating action does not reflect any deterioration, in our view, of the transaction's credit quality. Instead, it reflects recent revisions to S&P Global Ratings' methodology for sovereign ratings, which affected the local currency rating on Mexico, and subsequently, the rating on PEMEX, the originator of the flows.

On Dec. 18, 2017, S&P Global Ratings revised its sovereign rating methodology (see "Sovereign Rating Methodology"). The revised methodology modifies our existing criteria for sovereign ratings. Among the modifications, we have reduced the potential gap between foreign and local currency ratings to only one notch from two. Following the implementation of our revised methodology, we lowered the local currency rating on Mexico to 'A-' from 'A' to reflect a gap of one notch with the foreign currency rating.

As a result of the local currency rating revision on Mexico, we also lowered our local currency rating on the state-owned company PEMEX to 'A-' from 'A'. This in turn lowered our corporate performance assessment of the series 1998-A transaction, in which we analyze PEMEX's ability to generate the necessary assets to service the transaction for timely principal and interest payments during the transaction's life. We believe this assessment would move in tandem with our local currency rating on PEMEX because in the event of a default scenario under the local currency, we assume that the government would also be in default, and therefore it would be difficult for the government to support PEMEX.

The rating action also reflects our review of the other two interrelated analytical assessments--a structural risk assessment and a sovereign interference risk assessment. For these assessments, there were no changes since our last review where we considered the transaction's structural enhancements intended to mitigate sovereign risk, a liquidity facility to cover debt service for the next scheduled payment date, and the overcollateralization levels that reflect the transaction's ability to withstand a decline in both oil prices and the generation of receivables. The rating also reflects:

  • Strong debt service coverage (DSC). Our stressed cash flow analysis, which is based on export receivables and the $62.5 million outstanding principal balance due over the next year, indicates that the minimum DSC will be approximately 41.51x the quarterly debt service at the point at which maximum debt service is due (including amortization). The high DSC level in relation to the 3x DSC ratio requirement demonstrates that the transaction can withstand further combinations of stressed price and volume assumptions.
  • The structural enhancements in place to mitigate sovereign risk, including the assignment of receivables generated from the sale of Maya crude oil to Pemex Finance. Maya is a heavy and sour crude oil requiring special refinery configuration to achieve optimal refinery economics. This would make it difficult and uneconomical for PEMEX to divert Maya crude oil to non-designated customers. The majority of Maya crude oil has to be processed by refineries owned or operated by companies located in the U.S. and Canada. All of these companies are customers of PEMEX and have been designated by PEMEX to participate in the program (designated customers). Before closing, these designated customers signed agreements acknowledging the assignment and agreeing to make any future payments directly to an offshore collection account.

As of Nov. 7, 2017, the reported monthly DSC ratio was 136.69x, above the transaction's threshold of 3x to declare a specified event. We will continue to surveil the rating on this asset-backed transaction and revise the rating as necessary to reflect any changes in the transaction's underlying credit quality.

RATING LOWERED
Pemex Finance Ltd.
US$1.5 billion notes series 1998-A due 11/15/2018
Rating
Class           Identifier           To           From
A-4           706448AG2         A-           A

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