Mexico's agreement of $ 12 billion to help Pemex encourage more P-Caps

(Bloomberg) -An obscure financing tool used to hide from the obligations of the world’s most debt oil -major, Petroleos Mexicanos, is now a model for other struggling borrowers. In July, the Mexican government completed a $ 12 billion debt offering in the form of pre-capitalized securities, or P-caps-the first time a sovereign deployed the instrument. It is a type of tool that enables issuers, typically insurance companies, to borrow money without incorporating it as debt to their balance sheets and possibly jeopardizing their credit rating. Credit analysts and advisers believe that other borrowers also take note. One such person is Eddie Best, a partner at the law firm Willkie Farr & Gallagher LLP, who says banks and issuers who started learning more about P-Caps began to reach out after the firm served as structuring lawyer for the lenders who introduced the P-Cap agreement of Mexico, including JPMorgan Chase & Co. “We started a call with an interview. “We have discussed how P-caps or variations can be used on the structure in different jurisdictions or in different industries.” Both sovereign and businesses are, according to the best, the move, which says lenders in Latin America and the Middle East are the most likely candidates. Based on the discussions his firm experienced, he said he would “not be surprised” to see three or four transactions before the end of the year, adding that they should be large enough to compensate for the extra costs the structure is incurring. Peru is a potential candidate, says Jeff Grills, head of emerging market debt at Aegon Asset Management. It is one of the few countries in the investment degree in Latin America, and Petroleos del Peru SA, its oil drill in the state, has been plagued by liquidity cross. Finance Minister Raul Perez Reyes said this month his department would receive proposals from as many as five banks for reorganizing Petroperu’s debt. “Petroperu is a very, very logical one for them to try to do it,” Grills said. According to a Bloomberg index, the effects of the company yielded 8.5%, the second-best performance in emerging markets. A representative of the Ministry of Finance of Peru did not respond to a request for comment, while a Petroperu spokesman refused to comment. Roxana Muñoz, a vice president at Moody’s Ratings, also pointed to Peru as a potential candidate. ‘Normally we have seen these transactions in companies that helped their subsidiaries. I think this transaction opens the door to other countries like Peru, which helps Petroperu, ‘she said. Structure, costs in the Mexican P-Cap agreement, the country door an entity called Eagle Funding Luxco. – The securities sold and used the proceeds to buy US government debt, including treasury. Pemex can use the portfolio as collateral for loans. There are a number of benefits for the P-Cap structure. In Mexico’s case, it enabled the government to support Pemex while holding the obligations of its books and avoiding pressure on the credit rating. The structure can provide refinancing to companies that are now facing credit conditions, said Franck Bekaert, senior credit analyst at Gimme Credit. Given the demand for Mexico’s agreement – according to the government, it was enrolled twice too much – the country could use the structure again, Bekaert said. “Considering the needs of the business and the successful outcome of the issue, Pemex is likely to issue a new P-cap soon,” he said. Pemex and Mexico’s finance ministry did not respond to requests for comment. In the case of insurance firms, the issuer creates a special vehicle to utilize public investors, but keeps the blame from his balance sheet until needed. The increased cash purchases assets, such as treasury, which generate revenue to cover some of the interest payments. This allows the issuer to include interest rates without affecting the leverage. “The more a product spreads per region and sector, the more issuers understand that it is not just for US insurance companies,” says Salvatore Seguna, head of Capital Solutions at Santander’s Corporate and Investment Banking Division, which was part of the group that created the structure more than a decade ago. The structure makes sense for state -owned businesses, or companies that cannot place additional obligations on their balance sheets, according to Best. On the other hand, businesses with higher judgments are likely to get cheaper money elsewhere. Issuers who want to raise less than $ 500 million are likely to find that the complexity and costs are not worth it, he said. The expenses associated with the construction of a vehicle for special purposes and the rental of law firms and other advisors may ‘double the cost or double the cost of a vanilla covenant offer’, according to Best. The idea, which initially started as a rainy day fund, has evolved as a liability management tool, says Robert Delamater, a partner at Sullivan & Cromwell LLP. The law firm often represents banks that arrange P-cap transactions. “I am clumsy about the use of this product increasing dramatically as interest rates fall,” he said. -With help from Scott Squires. More stories like these are available on Bloomberg.com © 2025 Bloomberg LP