July 17, 2019 / 4:27 PM / 4 months ago

UPDATE 1-Moody's says Mexico should significantly up support for Pemex

(Adds Moody’s comments, background)

MEXICO CITY, July 17 (Reuters) - Ratings agency Moody’s Investor Services said on Wednesday that the Mexican government should significantly increase financial support for national oil company Pemex, a day after it presented a business plan that underwhelmed the market.

Pemex is the world’s most heavily indebted oil company and on the verge of losing its investment grade rating after Fitch downgraded it to speculative grade, or junk status, in June.

“The government of Mexico would have to increase its financial support to Pemex significantly for the national oil company to increase its capital investment to levels needed to fully replace its reserves,” Moody’s said in a statement.

Moody’s also said the Mexican government might have to fund some of its debt maturities if it cannot refinance them on economic terms on the market and provide more support for higher capital investment.

A second downgrade from one of the three large ratings agencies would trigger forced selling of Pemex bonds worth billions of dollars.

Moody’s said the capital investment for Pemex’s exploration and production would be insufficient to replace reserves, which have been dwindling in recent years, and that it needed more to meet its production targets.

Pemex on Tuesday unveiled parts of a keenly awaited business plan meant to rescue it, but its vow of $7.2 billion in government support failed to dispel worries of a downgrade.

Octavio Romero, chief executive officer of Pemex, said tax for the oil company would also be reduced by 11 percentage points to 54% by 2021, which, according to a Reuters review, would equal savings of $6.6 billion over the next two years.

“The business plan is the first step in a dialogue with the ratings agencies,” Mexican finance minister Arturo Herrera said on Tuesday. “We’re going to have a permanent conversation.”

Moody’s did not make any comments on whether this would impact the rating. (Reporting by Stefanie Eschenbacher Editing by Alistair Bell)

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