(Bloomberg) -- Petroleos Mexicanos SA bonds rallied after JPMorgan Chase & Co. said it’s time to load up on the debt ahead of a possible credit-rating upgrade.
The state-owned company’s dollar notes gained across the curve with those due in 2050 rising 2.5 cents to 79.6 cents on the dollar, the highest since February 2023, according to Trace data. The rally drove the extra yield investors demand to hold those bonds over sovereign debt to the lowest level in over two years.
JPMorgan analyst Alejandra Andrade upgraded the bank’s recommendation to overweight from neutral, citing the possibility of the oil driller being reclassified as a “public company” from its current label as a “state productive company.” The change would result in a tighter relationship with the government and potentially trigger an upgrade from Fitch Ratings, Andrade wrote in a note published Thursday.
“Although negative from a governance perspective, this change could have positive rating implications at Fitch,” she wrote, referencing a recent panel in London attended by Fitch representatives. She recommends clients buy bonds due in 2035 and 2048, specifically, which trade below par and offer 10% yields.
Representatives for Fitch and Pemex didn’t reply to messages seeking comment.
Mexico would need to pass a constitutional reform with approval of two-thirds of both houses of the legislature to reclassify Pemex and JPMorgan said there is no timeline for such a change.
In 2013 Pemex was reclassified as a “state productive entity,” which gave it more independence to make decisions on management matters like its budget. Under the “public company” label, the company would be closely managed by the government and focus on its social mandate over profits, Andrade wrote.
The change would would be negative from a governance and financial perspective, but likely result in an upgrade to investment grade and spark massive inflows from bond buyers. Fitch currently scores Pemex four notches into junk, while Moody’s Ratings has it two levels lower. S&P Global Ratings assigns Pemex the same score as the Mexican government, BBB, two notches into investment grade.
Claudia Sheinbaum, the hand-picked successor of President Andres Manuel Lopez Obrador, will take office next week and her policies are seen as a broad continuation of state support for Pemex. So the bonds are a buy regardless of the company’s taxonomy, JPMorgan said.
“A classification alone does not dictate where Pemex will go and how it will behave,” Andrade wrote. “But rather the government will continue to shape Pemex’s future regardless of the classification.”
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