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Top junk bond rally hinges on Mexico's Lopez Obrador, for better or worse

Cesar Rodriguez /Bloomberg

Offshore Drilling's bonds jumped 28 percent this year. Investors worry that Amlo could roll back energy laws.

By Ben Bartenstein and Justin Villamil

NEW YORK/MEXICO CITY
Petroleumworld 05 15
2018

Offshore Drilling Holding SA's world-leading corporate bond rally may be set for a reality check.

The junk-rated Mexican oil service provider's securities due 2020 have rocketed 27 percent this year, more than triple any other emerging-market corporate bond. Yet the debt is threatened by prospects that leftist presidential front-runner Andres Manuel Lopez Obrador will roll back a four-year-old effort to open the nation's oil industry to new technology and foreign joint ventures.

Offshore Drilling, based in Mexico City, depends on contracts with Petroleos Mexicanos . Executives at the state-owned oil firm, better known as Pemex, are also unnerved by a potential reversal of measures that lured billions in investment. The policy allows auctions of reserves to foreign companies -- and potential Offshore Drilling clients -- such as Royal Dutch Shell and Chevron.

Backtracking on Enrique Pena Nieto's policies would be " a shame ," Pemex Chief Executive Officer Carlos Trevino said in March. Offshore Drilling didn't respond to a request for comment.

Another cause for concern: the populist candidate has promised to review old contracts for signs of corruption, a move that could stall existing projects even if it's a positive long-term move.

The $950 million of distressed notes have rebounded to 51 cents on the dollar from a low of 35 cents in July as investors bet Offshore Drilling could survive payment-to-payment. The debt rallied in late August before the company dipped into an interest reserve account to make its coupon payment and again in March when the account was refilled. Rising oil prices and a renewed contract with Pemex also helped.

The company's latest coupon payment was a surprise to Sergey Goncharov, a money manager at Vontobel Asset Management in Zurich. He sold his bond holdings in February on concern the firm wouldn't be able to replenish its reserve account. The dual risks of company finances and Lopez Obrador's proposed oil sector changes were enough to steer clear, he said.

"If I knew the answers to all those questions, I would probably own the bond," he said of Offshore Drilling's strategy under Lopez Obrador.

Fitch Ratings cut the notes to CC in October and said a default is " unavoidable ."

Yet Offshore Drilling has largely escaped the emerging-market rout sparked by a rising U.S. dollar that sapped investor appetite for riskier assets. Its double-digit return this year compares with a 2.8 percent decline in the Bloomberg Barclays index of emerging-market corporate bonds denominated in dollars.

It's possible that Lopez Obrador's nationalist tendencies could benefit Offshore Drilling if his administration gives priority to local firms over foreign rivals. Yet that's unlikely to outweigh his threat to slow the energy industry overhaul, said Mariela Anguiano, an emerging-markets analyst at Nomura Corporate Research and Asset Management Inc. in New York.

"The question will be what he can actually get done," Anguiano said.

Petroleumworld.com

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Story by Ben Bartenstein and Justin Villamil from Bloomberg.

bloomberg.com/ 05 14 2018

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