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Pemex's credit default swaps rise after Mexico finmin's surprise resignation

By Abraham Gonzalez
FILE PHOTO: Mexico's Finance Minister Urzua listens during a news conference in Mexico City

By Abraham Gonzalez

MEXICO CITY (Reuters) - Following the surprise resignation of Mexican finance minister Carlos Urzua last week and doubts over what the business plan for state oil company Pemex would entail the cost of insuring Pemex bonds rose to the highest level in three years.

Credit default swaps (CDS) for Pemex bonds, which traders use to insure against a Pemex default within five to ten years, rose on Wednesday, a day after Urzua stepped down, Refinitiv Eikon data shows.

The Mexican peso, Pemex and sovereign bonds all fell on the news of Urzua's resignation. CDS prices have since fallen as market experts said investors had started selling the swaps to take advantage of high prices in the market.

Urzua was known for his commitment to fiscal discipline and considered a moderate in the administration of leftist President Andres Manuel Lopez Obrador. His resignation less than eight months into office had shocked investors.

The last time the five-year CDSs had reached this level - a spread of more than 360 basis points - was when oil prices for Mexico's export mix in 2016 dropped to below $20 a barrel, according to Refinitiv Eikon data.

"Urzua hinted that one of the reasons he resigned was the disagreements regarding the Dos Bocas refinery and the Pemex plan, so this raised suspicions about the feasibility of the Pemex rescue plan," said Sebastian Miralles, spokesman for CFA Society Mexico.

Mexico unveiled part of its business plan on Tuesday, including setting aside about $2.1 billion next year to finance the new $8 billion Dos Bocas refinery, a project ratings agencies see as adverse to getting the ailing company back on track.

While investors were largely unimpressed, CDS prices rose only slightly, suggesting doubts were already priced in.

On Tuesday, the spread was 346 basis points, implying a cost of insuring one million dollars of the oil national's bonds of$34,600 per year.

In comparison, CDSs for Brazil's Petrobras registered a spread of 161 basis points, Eikon Refinitiv data shows.

Jose Carreno, at Mexico's Banco Base, said that while investors normally used CDSs to insure against a risk of default, there were also some traders who were buying them for speculative purposes.

"(Investors who bought CDSs) are selling them now, taking advantage of that violent movement, maybe this works better for them than directly investing in Pemex bonds," Carreno said.

Miralles added that since last week there had been an additional factor that generated an increase in uncertainty about Pemex: the Upper House of Congress is discussing changes to Mexico's bankruptcy law.

"With this modification, the subsidiaries of Pemex and (national electricity company) CFE could file for bankruptcy and avoid some payments," Carreno said, adding that this had also influenced the performance of CDSs.


(Reporting by Abraham González; Writing by Stefanie Eschenbacher; Editing by Marguerita Choy)