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A Tax Break Is Not Enough

30 January 2019 by lberuti

The market was fairly confident going into the FOMC meeting, and risk enjoyed a positive session across the board. There were a few outliers and things did not pan out very well for PEMEX’s (Petroleos Mexicanos) credit investors. The company has seen oil output decline every year since 2004 and is Latin America’s most indebted borrower. It loses money on its inefficient refining business and because of endemic fuel theft – the company reports as many as 41 illegal pipeline taps every day -, which led to the tragedy that killed more than 100 people 10 days ago. Yesterday night Fitch downgraded Mexico’s oil producer to one notch above junk despite the government proposed $3.5Bln cut from its taxes. The downgrade to BBB- reflects the “continued deterioration of PEMEX’s standalone credit profile” and the “under-investment in the company’s upstream business” according to Fitch. They added that the company had been technically insolvent since 2009 by having a negative total equity balance. PEMEX’s 5-year risk premium jumped 29bps to 315bps, off the 270bps tights reached a couple of days ago.