On Sept. 24, 2015, Pemex’s board of directors approved deferral of payments to existing trade creditors from the current payment date of 20 calendar days following approval and receipt of the relevant invoice by the contracting area up to 180 days, following field approval. Pemex has announced that this unilateral change will be applied to existing contracts, as well as forthcoming contracts.
The Effect on Pemex Contractors:
Contractors and oilfield suppliers with significant credit exposure to Pemex will face a slowdown in collection of Pemex accounts receivable. Most oilfield suppliers and contractors use working capital financing secured by their accounts receivable. Many, if not most, of those loan agreements have borrowing base requirements which are negatively impacted by slow paying customers, and generally exclude from the borrowing base accounts receivable older than several months. Pemex’s new policy may reduce the working capital available to those contractors.
What to Do:
First, review your short term cash flow budgets. Pemex’s policy will result in slower payment terms than already exist, so adjust accordingly. Second, check your loan covenants to see if the slower than usual payment terms will trigger a technical default or reduce your borrowing base. Third, if necessary, start discussions with your lender regarding amendments to your loan agreement. Finally, consider whether you need, and your loan agreement permits, factoring or other monetization of Pemex accounts receivable. The ultimate collectability of the Pemex receivables will not change, but the timing will.
Although Mexico’s energy market has been opened, Pemex continues to represent 30 percent of the government’s income and remains a key player in the Mexican economy. So long as Pemex is the dominant developer in Mexico’s oilfields, this new slow pay policy will have a deep impact on the market by affecting the cash flow of service providers.
Daniel Aranda Rabago is a partner in Gardere's Corporate Practice Group. For more information, contact Mr. Aranda at [email protected].