Factor Capital

When Fitch Ratings upgraded Pemex to BB+, one notch below investment grade, markets reacted with optimism. Headlines framed it as a comeback story. But to anyone trained in corporate finance, the upgrade said something else entirely: Pemex’s turnaround is not financial — it’s fiscal.

What the markets are celebrating is not operational recovery, but the sophistication of Mexico’s fiscal engineering.

A Turnaround Written in Treasury Ink

On paper, Pemex’s Q2 2025 results look strong:
Net profit of MXN $59.5 billion, EBITDA up 34% year-on-year, and revenues reaching MXN 392 billion.
Debt remains stable at USD $98.8 billion, and Fitch rewarded the apparent stabilization.

But the fundamentals tell a more complex story. Working capital is still negative (–MXN $755 billion). Over 90% of total debt is dollar-denominated. And crude output has fallen 8.6% year-on-year to 1.63 million barrels per day — the lowest in two decades.

In the language of corporate finance, Pemex operates within a distressed capital structure. The company’s internal liquidity cannot sustain its leverage. Any notion of self-funded recovery remains a mirage.

The Architecture of Fiscal Innovation

In 2025, the Mexican Treasury redefined what it means to support a state-owned enterprise.
Through a USD 12 billion issuance of pre-capitalized securities
(P-CAPS), the government effectively re-capitalized Pemex off its own balance sheet.

The structure — a sovereign-backed hybrid instrument — allows proceeds to be invested in U.S. Treasuries, creating a collateralized liquidity pool that Pemex can draw from without registering new sovereign debt.

It’s elegant. It’s sophisticated. And it’s profoundly revealing.

Mexico found a way to transfer risk from company to State while preserving rating optics.
Fiscal engineering became the new upstream.

The Ratio That Tells the Truth

Beyond the innovation, the Debt Service Coverage Ratio (DSCR) remains the purest signal of Pemex’s financial reality. With quarterly EBITDA of MXN $76 billion (annualised at roughly MXN $304 billion) and total debt service of MXN $383 billion, Pemex’s DSCR stands at 0.79x. In Wall Street terms, that’s not a turnaround — it’s a transfer. Operating performance hasn’t improved; debt service is sustained through fiscal liquidity. A sub -1.0x DSCR isn’t a metric of risk — it’s a symptom of sovereign substitution.

Looking Ahead: Fiscal Elasticity and the Limits of Sovereign Support

The question for 2026–2027 is not whether Pemex can meet its debt payments.
It’s whether Mexico can keep extending its fiscal reach without compromising its own rating.

If sovereign support weakens or fiscal elasticity tightens, Pemex’s credit standing will mirror that constraint immediately. Because in today’s financial architecture, Pemex’s solvency is a function of thesovereign’s capacity, not of its own operations.

While Mexico’s use of pre-capitalised securities (P-CAPS) has been hailed as a masterstroke of fiscal innovation, the structure introduces a subtler form of leverage: contingent liabilities. These instruments are formally off the sovereign balance sheet, yet economically they embed a deferred guarantee. If Pemex fails to service its obligations, the Treasury’s collateralised exposure through Eagle Funding LuxCo would crystallise into sovereign debt. In accounting terms, the risk has not disappeared — it has simply migrated from explicit debt to the State’s contingent liability perimeter.

Similarly, discussions around potential asset-backed securitisations (ABS) of Pemex receivables may improve liquidity optics and isolate specific cash flows, but they do not fully detach the sovereign from residual risk. If structured with credit enhancements or implicit government support, such securitisations remain quasi-sovereign in nature — transferring timing, not ownership, of fiscal exposure.

In essence, the evolution of Pemex’s funding model reflects a deeper macro-financial truth: emerging markets are learning to manage optics as carefully as they manage solvency. Debt may no longer sit on the balance sheet — but it remains on the sovereign’s conscience.

About the Author
Javier Casanova, MBA

Javier Casanova is an International Corporate Finance Executive who integrates a Global Financial Perspective with deep regional expertise in corporate strategy and credit risk. He manages Credit Risk and Financial Strategy for the Americas at Deacero, a major Mexican industrial Group operating across global markets.

He holds an International MBA from Tecnológico de Monterrey Business School, with advanced executive studies at Audencia Business School (France) in Financial Engineering and Global Markets. He also completed executive training at Boston University’s Questrom School of Business, specializing in Cross-Border Credit, Strategic Risk, and Global Economics across the Americas, Europe, and Asia.