Mexican law generally allows a Mexican target or purchaser to obtain acquisition financing from diverse local and international sources, including local and international banks, direct lenders and debt funds (both in Mexico and abroad), resulting in acquisition financing being available in the market. Acquisition finance lenders play a pivotal role in the Mexican M&A market, where a majority of transactions are financed.
Local banks continue to play a leading role in structuring and financing M&A transactions, and in many instances may be regarded as the go-to structuring agents of banking acquisition finance as they usually have well-established business relationships and a deep knowledge of the sectors of either the target or the local purchasers. Local banks that have taken advantage of the restructuring facilities provided by the National Banking and Securities Commission with respect to their corporate portfolio will be the natural source of funding for upcoming acquisitions of restructured targets.
A number of Mexican banks have a well-established reputation with respect to acquisition finance facilities and are known to actively participate in the market. Commercial banks are increasingly participating in industrial real estate purchase transactions, especially in the purchase and financing of industrial properties boosted by “nearshoring” opportunities. Mexican state-owned development banks are also playing a very active role with respect to acquisition financing (usually participating in working capital tranches or in refinancing) in connection with a number of projects, particularly real estate acquisition transactions. Longer term and higher volume commitments are often assumed by international banks that take advantage of their comparatively larger capitalisations and, as the case may be, less stringent reserve requirements for transactions of this type.
Local banks usually act as structuring and administrative agents with respect to banking acquisition finance facilities, joined by other local and international banks. International banks also assume the role of agents and lead arrangers, usually in cross-border acquisitions. International banks often participate in acquisition financings that are structured and managed by their Mexican affiliates; however, in many instances, they also participate in club deals that are arranged by unrelated institutions. International institutions play an active role in the structuring of acquisition facilities, and international banks actively contribute key legal items in the relevant facility documents, especially when they assume larger commitments than local banks.
International Debt Funds
International debt funds also continue to play an important role in acquisition financings in Mexico. Although local and international funds have funded acquisition financings alongside Mexican and foreign banks, they are of particular interest for purchasers and targets that may not be financed by banks. In a few transactions, funds have participated as subordinated or mezzanine lenders, and this kind of facility structure has been increasing recently.
Despite the slowdown in acquisition transactions during 2020 and 2021, the market has been clearly recovering during 2023, in a trend that is set to continue. International debt and private funds are constantly exploring business opportunities in Mexico with respect to rehabilitated or struggling Mexican targets, with the purpose of purchasing an interest in them and refinancing their debt, as well as new business ventures requiring a substantial inflow of funds. Funds are substantially participating in acquisition financing opportunities with respect to SMEs and certain mid-market companies in the form of mezzanine financing, as many local and international banks traditionally do not grant these kinds of financings.
State-owned Mexican development banks will continue to have the opportunity to play a key role in restructuring the debt of a target and providing working capital in the context of an M&A transaction, especially with SMEs and mid-market companies. The COVID-19 pandemic brought opportunities to acquire troubled Mexican companies and assets, and these sorts of financings are now helping to accelerate the pace of recovery in several industries in a post-pandemic context.
Special Purpose Acquisition Companies (SPACs)
Mexican listed SPACs make it possible to carry out an IPO in order to implement an acquisition, although only a couple of these vehicles have been listed since 2017. Such listed vehicles (which may not have any operations or assets) are allowed to receive capital investments to finance the acquisition of a certain company or project within a limited timeframe. A SPAC should have a renowned and solid group of managers, as investors would rely on them rather than the balance and operation of the SPAC. No new IPOs or M&A acquisitions have been carried out by SPACs.
Although SPACs debuted in Mexico a few years ago, acquisition financing is not usually directly or fully sourced by the capital markets. Instead, publicly listed investment vehicles that are managed by a general partner – such as capital development certificates (CKDs) and investment project fiduciary securitisation certificates/certificados bursátiles fiduciarios de proyectos de inversión (CERPIs) – raise capital through the placement of certificates in the capital markets, and then create subsidiary vehicles to carry out private equity and M&A transactions in addition to their usual investment activities. Several CKDs, CERPIs and/or their vehicles have obtained financing facilities from local or international banks in order to carry out M&A transactions in Mexico through a two-layered structure, whereby lenders have a senior position with respect to any other financing, and the interests of the CKD, its vehicles and certificate holders are structurally subordinated.
Although Mexican pension funds (AFORES) do not participate in acquisition financing directly, they participate in the market indirectly through capitalising the CKD and CERPI vehicles. AFORES were first allowed to invest in CKDs in 2008, and have done so consistently ever since. CKDs are amongst the most common instruments issued in Mexico, and about 17% of that market has been invested as mezzanine debt. In addition, companies may issue high-yield bonds in order to finance M&A transactions, although this sort of financing is rather rare in Mexico, and such instruments are usually issued in the context of a Rule 144A/Reg S offering or quasi-public offering in other jurisdictions.
Whenever possible or convenient, larger public companies tend to avoid the higher rate and covenant-heavy bank loans, and turn to stock offerings or private or quasi-public debt offerings in order to fund their M&A transactions. Depending on the size and complexity of the M&A transaction and the time constraints associated with each particular transaction, larger companies may take out bridge financings to fund the transaction, and seek to refinance such bridge loans through a syndicated facility or with the proceeds of a securities offering.
M&A activity in Mexico had reduced substantially by 2019 due to the change of the federal administration, and this deceleration deepened through 2020 and 2021 as a consequence of the COVID-19 pandemic. During 2022, there was a clear trend towards active recovery, which played an important role in reactivating several regions in Mexico; this trend is set to continue and increase during 2023. The maquila sector has shown an important increase in activity. The downturn of the market is reversing following the expected recovery of the Mexican economy. In spite of inflation, the gross domestic product in Mexico increased by 3.1% during 2022, driven mainly by industrial and manufacturing activities.
M&A activity in Mexico has been consistent since 2021, according to Transactional Track Record. During 2022, there were 167 M&A transactions for an aggregate amount of USD10.265 billion.
The international political climate has become a key factor in the analysis of markets in which to invest, with Mexico maintaining a stable overview for external players. Local politics will be at the centre of the analysis as federal elections will take place in June 2024 and the party currently in power is preparing for its last year in office.
Over the past few years, Mexican companies have incurred a large amount of low-cost indebtedness. A fair portion of the outstanding Mexican corporate debt is set to mature in the following couple of years, and this debt will need to be refinanced under more complex international and domestic economic conditions.
As a result of the aftermath of the COVID-19 pandemic and the downturn in the global economy, the increasing number of troubled or insolvent companies will likely result in a somewhat proportional increase in financed acquisitions of companies, as well as asset transactions. This may represent an opportunity for international and local funds to engage in M&A activities, and their ability to secure financing or refinancing for their targets will be of paramount importance to closing M&A transactions in Mexico. M&A activity with respect to distressed companies is expected to rise substantially over the next few years, and acquisition finance will gravitate towards workouts and restructurings of the targets.
As has been the case in recent years, LBO facilities and corporate loans with a rather substantial component of refinancing are likely to be seen more often, and players are likely to seek new structures to obtain LBO financings that partially refinance the target in order to maximise the tax attributes of targets. Consequently, asset deals (except for asset purchases from distressed companies, which may actually increase) and mergers may decline in the following year, and loan documentation of acquisition financings may be increasingly covenant-heavy.
M&A activity continues to be customary in the real estate and hospitality sectors, and is dominated by listed real estate investment trusts (FIBRAs), where managers are able to leverage their real estate assets under management to acquire or build new assets.
Although international acquisition financing in Mexico has traditionally been led by US, Canadian and European banks and funds, Chinese and other Asian players are expected to begin to penetrate the market, as they have done elsewhere in Latin America. Bolstered by soft acquisition financings granted by Chinese financial institutions and incentivised by trade conflicts with other countries and opportunity costs in Mexico, Chinese companies may engage in M&A activity more broadly in the near future.
The Mexican market and the Mexican economy overall have been affected by the disruption of the supply chain and the resulting increase in prices. However, as Mexico has few to no direct commercial relationships with Russia or Ukraine, the impact of the war in Ukraine has been mitigated to an extent.
It is possible that the uncertainty resulting from the global economy might also impact foreign investments in Mexico and cause a decrease in M&A transactions.
The COVID-19 pandemic has affected the timing of financed acquisition transactions for several reasons, ranging from difficulties in carrying out on-site due diligence and appraisals to closing mechanics.
Some municipal, state and federal authorities have yet to catch up on the workload accumulated during the COVID-19 pandemic as a result of functioning with limited mobility and personnel. Therefore, in some instances, secured financings have impacted the execution timelines of acquisition financings, as obtaining certificates, permits and assignment clearances depends on these authorities.
However, many authorities (mostly federal agencies, and notably the National Banking and Securities Commission) quickly adapted to the lockdown and now function in a more efficient manner than in pre-pandemic times, through the use of technology.
As a result of the experience gained during the pandemic, the language used for covenants, for cases of acts of god and force majeure has changed. It is possible that the language of these covenants will also be amended in reference to the war in Ukraine.
Mexican banks (including credit and risk committees) also adapted quickly to the lockdown, and performed very well despite the pandemic restraints and the increased workload derived from numerous “COVID-19 restructurings”. Mexican banks have now returned to their physical facilities, and their officers and employees are returning consistently to their offices.
Remote working has been reduced, although it has been embraced by several institutions. In any event, tech-savvy post-pandemic borrowers will increasingly demand financings to be negotiated, underwritten, documented and closed through digital means.
Acquisition finance is a broad term that refers to the use of capital (obtained through equity, mezzanine, hybrid or debt instruments) to purchase a company or business, and encompasses corporate loans, LBOs and other sorts of financing structures to that end.
A corporate loan is, in a broad sense, a loan made to a company for a specific business purpose. In the context of acquisition finance, a corporate loan is usually made to the purchaser with the purpose of acquiring the target, refinancing its debt or providing working capital to the target.
In LBO transactions, the assets of the purchaser and the target collateralise and are an important source of repayment of an acquisition financing facility. LBO transactions generally require a well-capitalised and creditworthy target, and are based on the idea that the cash flow produced by the target is sufficient to cover the financing taken by the purchaser in the M&A transaction.
An acquisition financing may be granted in the form of a loan that is directly granted to the target simultaneously with the closing of an M&A transaction, or in the form of a loan that is granted to the vendor and subsequently pushed down to – or assumed or collateralised by – the target at the closing or shortly thereafter. Vendors may be required to co-operate to implement acquisition financings where the funds are disbursed directly to the target and thereafter distributed to the vendors, or where the target should assume obligations under the acquisition financing or perfect security interests to secure such financing upon the closing of the M&A transaction and the disbursement of the loan proceeds.
Where international banks and funds are involved, acquisition financing documents are likely to be governed by New York or English law (or the laws of such other jurisdiction elected by the lenders). In transactions led and funded by local banks and funds, the loan documents are typically governed by Mexican law. In some instances, loan documents of club deals that are funded by international institutions together with Mexican lenders are governed by Mexican law.
M&A financing transactions governed by Mexican law are generally regulated by federal commercial statutes and the relevant case law of Federal Collegiate Courts and the Supreme Court. The Mexican Securities Law and regulations usually govern securities issued and distributed in the Mexican market, and foreign securities laws apply to those securities issued and distributed abroad.
The security documents would generally be governed by Mexican federal or state law, as applicable, depending on the nature and location of the collateral. A number of international institutions prefer a local bank to act as security agent of the bank syndicate, given the expertise of a local bank with respect to the monitoring and foreclosure on collateral located in Mexico.
M&A transactions of distressed companies also raise considerations under the Concurso Mercantil Law, especially with respect to preferential payments to any refinanced creditors and other types of creditor fraud. With respect to debtor-in-possession financings and M&A transactions relating to an insolvent target placed under concurso mercantil, the relevant transaction requires special approvals from the governing bodies for the relevant concurso mercantil procedure.
Other federal and state statutes may indirectly affect the acquisition financing to the extent they are applicable to the M&A transaction, depending on the nature of the transaction and the target, such as antitrust laws, the Securities Market Law (with respect to acquisitions of publicly traded companies) and other special laws applicable to financial institutions and other regulated companies.
The loan documents of an acquisition finance loan may be based on the LMA form of agreement, particularly if the loan is governed by English law and granted by international institutions. Loan documents of acquisition financings granted by US banks and funds are usually based on LSTA forms and governed by New York law. When applied to Mexican acquisition financings, such forms of agreement should be adjusted so as to conform to certain aspects of applicable Mexican law.
Special lenders’ counsel usually drafts and controls the loan documents governed by non-Mexican law for a particular transaction. More often than not, such loan documents are based on the LSTA or LMA forms. In many cases, however, such forms are practically redrafted by lenders’ counsel for the relevant transaction. Depending on the complexity of the transaction, lenders’ counsel may decide to use their own form of loan documentation, or to tailor the loan documents from scratch.
In Mexico there are no widely accepted standard forms for loan documentation similar to LMA or LSTA. Similar to international facilities, lenders’ counsel is usually in charge of the loan documents. Mexican banks and funds may sometimes have preferred or internally approved forms of loan documentation, which are adapted for each particular transaction. In most cases, however, Mexican lenders’ counsel has a lot of leeway with respect to the preparation of the loan documents, and many firms opt to customise their forms of loan documents to the relevant transaction.
Mexican law-governed loan documents for an acquisition finance normally include a loan agreement and a wide array of security documents, depending on the nature of the collateral. The most common collateral documents include mortgages for real estate assets, non-possessory pledges for movable property and certain intangible assets, stock pledge agreements and management and security trusts, which concentrate the revenue stream of the target and/or the purchaser (together with other assets) in a bankruptcy-remote vehicle to use for the repayment of the relevant facility.
Loan documents may be signed in a language other than Spanish and still be effective in Mexico (except documents that require a specific formality, such as mortgage deeds, which must be granted in Spanish before a Mexican notary public). Loan documents signed in a foreign language may be introduced as evidence of such agreement in a procedure before a court sitting in Mexico, but such documents shall be translated into Spanish in order to be considered in such procedure. If a mutually agreed Spanish translation of a document does not exist, then the party introducing the document should also present a translation certified by an expert witness translator. However, the other party has the right to controvert such translation and provide another translation prepared by another expert witness translator, and such controversy would be solved by the translation of an expert witness translator appointed by the court.
In order to avoid procedural delays derived from the translation of loan documents (which are usually voluminous), lenders’ counsel usually recommends either signing bilingual versions of certain documents, or producing Spanish translations of the loan documents and having them acknowledged by the parties in writing as being true and correct.
Most collateral documents are either granted in public deeds or ratified before Mexican public attestors. Such public deeds must be signed in Spanish. Mortgages and industrial mortgages (like any other document in connection with a real estate asset) must be signed in Spanish, as must collateral documents that are to be recorded in a public registry. Generally, public instruments can only be signed in Spanish, as can other documents subject to registration in public registries and certain private registries.
In international facilities, most of the financing documents are executed in English, and the collateral documents are signed in Spanish or are bilingual documents.
Lenders will usually require a legal opinion from both parties’ external legal counsel in each relevant jurisdiction as a condition precedent for closing. Such legal opinions would cover the usual aspects addressed in an opinion issued for any other financing, including:
The legal opinion of lenders' counsel would be more focused on aspects related to the loan documents, including security documents and intercreditor agreements.
In the context of an LBO, many of the matters encompassed by the legal opinion of the borrowers’ counsel shall also be referred to in relation to the target and other guarantors and security providers; if additional collateral or guaranties will be granted upon closing, the borrower's external counsel is likely to be required to issue a legal opinion with respect to such guaranties and security interests. Opinions are addressed to the parties of the lenders’ side (including agents and hedge providers), and may be relied upon by any assignee or successor. Legal opinions will include qualifications with respect to claw-back risk if collateral is granted by a company under financial distress, among others.
Senior secured loans are the most frequent structure for an acquisition finance transaction in Mexico, as lenders commonly expect to obtain security interests and guaranties from both the borrower and the target and its subsidiaries. In larger transactions, banks and funds may participate in other types of loans where there would be an agreed ranking of debt in the event of the insolvency of the borrower, with the corresponding differences in rates and fees. There may be different kinds of commitments among senior lenders, including revolving facilities, term loans and line of credit facilities. Senior lenders will usually obtain first priority security interests. In certain M&A transactions, lenders may provide asset-based financing as a tranche of the senior loans or as an additional facility, in which case certain eligible assets are carefully defined and carved out from the security package of other lenders.
Mezzanine lenders assume higher risks in view of their payment priority, and obtain higher margins than senior lenders. As banking regulations usually require reserves for the loans made by banks based on the quality and priority of the collateral, mezzanine financings are usually provided by other sources. Debt service of mezzanine loans is usually subordinated to senior loans.
Mezzanine financing usually adopts the form of a term loan, which mimics many aspects of the senior loans and includes subordination features that are consistent with the relevant intercreditor agreement, and may be secured by a security interest that ranks below the senior lenders’ security interests. A mezzanine loan may also be documented as convertible and/or subordinated debentures, which may be statutorily subordinated to all the debt of the issuer, and the interest thereunder is exempt from VAT. PIK loans are rarely seen in Mexico (in and outside the context of acquisition finance) due to their higher risk, and for tax and legal considerations.
Bridge loans are usually granted by banks; they adopt the form of senior secured term loans and are used in acquisition finance to deal with time constraints in connection with smaller acquisitions, or if the purchaser is not able to secure longer term loans for any other reason. Bridge loans may also be taken by an affiliate of the purchaser to cover a portion of the purchase price that exceeds the leverage level up to which other lenders and creditors are willing to grant or maintain other financings. Such loans are taken by a borrower with the intention of refinancing them in a rather short term with proceeds from other sources of financing. Therefore, borrowers normally negotiate for voluntary prepayment rights without prepayment fees. Bridge loans normally include mandatory prepayment clauses that are triggered upon the occurrence of certain events that increase the liquidity of the borrower.
Loans are usually the go-to source of financing at the inception of an M&A transaction. Larger purchasers may issue bonds in order to partially finance the transaction, or to refinance senior loans. Bonds are more commonly used after the transaction has taken place, to refinance the acquisition financing, and are sometimes issued until the target has been stabilised and the synergies and benefits derived from the transaction are more tangible and ripe for disclosure to the market.
High-yield notes offer several advantages to purchasers, as they usually have longer maturities than loans, may include bullet repayments and can be comparatively cheaper and covenant-lighter than senior loans. The high-yield bonds market in Mexico does not have the depth of other markets abroad, so a Mexican purchaser that opts to issue high-yield bonds will usually seek a Rule 144A/Reg S placement, and to list such bonds in overseas markets.
Private placements have standard statutory requirements to circumvent the authorisation requirements of the National Banking and Securities Commission, including that the offering is made exclusively to institutional or qualified investors, or to fewer than 100 persons.
Private placements may be done with the purpose of obtaining mezzanine financing, as mentioned in 3.2 Mezzanine/Payment-in-Kind (PIK) Loans. Debentures, notes and other credit instruments may be secured or unsecured, and may be subject to different priority rankings as described with respect to senior loans.
Most acquisition financings in Mexico are collateralised with the assets of the target. Mexican banks in particular usually require the real property of the target as collateral for an acquisition financing.
More often than not, purchasers try to preserve any existing equipment, inventory and accounts receivable financings that the target has in place, and lenders are usually amenable to such alternatives, depending on the final capital structure of the target. Factoring and reverse factoring facilities are also preserved to the extent possible as purchasers strive to preserve the liquidity sources of the target and the continuity of its supply chain.
Given that an acquisition financing usually replaces most of the financing of the target and entails the collateralisation of virtually all its assets, a purchaser will seek to either maintain or enhance the position of existing lenders (including through entering intercreditor agreements or collateral sharing arrangements or a parent guaranty of the purchaser), or to obtain a commitment for a revolver working capital facility together with the term loan acquisition financing.
Assets are collateralised through diverse security documents, depending on the industry and the structure of the borrowers. Such security documents usually include security trusts, non-possessory pledges, pledges on equity and mortgages. Depending on the nature of the lender, special privileges may apply to these security instruments, such as the “industrial mortgage”, which encumbers all the assets associated with a certain facility (including real estate). Security instruments may also vary depending on the nature of the borrower. Borrowers engaged in regulated industries such as telecommunications usually require special administrative permits to create security interests on concessions and their covered assets.
Security structures will also depend on the nature of the collateral. For instance, oil rigs and other vessels may be subject to maritime mortgages or security trusts that may be primed by certain maritime privileges.
Non-possessory pledges and fideicomisos de garantía (security trusts) may have the effect of a floating lien, allowing the debtor and its corporate group to continue to operate their assets, and providing security interests to the lenders on assets at any stage of the business cycle, from raw materials to final manufactured products, and from accounts receivable to cash.
Acquisition transactions are often funded by several sources, in the form of equity, debt, asset-based debt, mezzanine debt, bonds, convertible debt and hedge agreements, among others. Purchasers take the highest risk in acquisition financing. Investors and shareholders may also be lenders of some sort, and there may be a variety of lenders and administrative and security agents with respect to the acquisition financing.
Intercreditor agreements are usually negotiated at length, particularly if they include all the stakeholders in an acquisition finance. Intercreditor agreements will include:
Control of enforcement and collateral normally rests with senior lenders (who may share their collateral and priority with their relevant hedge providers). When international banks participate in the financing, they usually propose that the intercreditor agreements are prepared based on the LMA or LSAT forms. More often than not, the cash flow of the target and/or the purchaser is concentrated in a security trust, which serves as both a security instrument and a payment vehicle where the relevant trustee makes payments (including recovery proceeds) in accordance with the priority set forth by the parties. Such trust agreements double as a self-executing intercreditor agreement in many instances.
Transactions with dual bank and bond financings may not include an intercreditor agreement, as the bondholders may be structurally subordinated or otherwise separated from the bank lenders' sources of payment and their collateral; otherwise, the parties will seek an intercreditor agreement, which must be approved by the banks (pursuant to their own intercreditor agreement or agency provisions) and by the bondholders, through a bondholders’ meeting.
Hedging plays an important role in any major financing, as financial models usually include caps to variable interest rates and/or exchange rate variations. Hedging transactions cover the borrower (and, ultimately, the lender parties to the financing) from external variations that may affect the payment of the facilities, and such risks are assumed by the relevant hedge providers at a premium. The common financial derivative transactions used to hedge the interest rate and exchange rate risk associated with a financing are swaps, puts, forwards and options referred to the relevant interest rate and/or the loan currency. Hedge providers usually share the security package and the priority of senior lenders to whom they provide coverage and rank pari passu with respect to the relevant senior lenders. Hedge providers in turn make their payments either directly to the senior lender or to the security trust concentrating all the funds to repay the acquisition financing.
Mexican law allows for the creation of a security interest on virtually any kind of asset, with few exceptions (governmental assets that are subject to a concession, copyrights, tax refund rights, etc). Secured lending matters are basically governed by the Civil Code (Código Civil) of the jurisdiction where a real property is located and, with respect to other assets, by the Commercial Code, the General Law of Credit Instruments and Transactions, and the Credit Institutions Law, among others. Other laws provide for special security interests or special procedures to perfect a security interest, depending on the nature of the assets (including pledges on trade marks and intellectual property, mortgages on vessels and aircrafts, and pledges on securities) and the nature of the secured party (Mexican banks may create a floating lien on an industrial unit pursuant to the banking law, known as an “industrial mortgage”).
Common Security Arrangements
The most common security arrangements on Mexican assets are mortgages, pledges and guaranty trust arrangements. The type of security to be used in each case will depend on a variety of factors, including the following:
Once these key aspects have been assessed, lenders should also consider the following elements before deciding which security instrument is to be used.
Form requirements vary depending on the type of collateral.
Mortgages must be executed in a public deed before a Mexican notary public. A mortgage will be effective vis-à-vis third parties upon its registration in the relevant Public Registry of Property. Mortgages on other assets that may be mortgaged will be perfected upon registration in the relevant registry (eg, mortgages on vessels must be recorded before the National Maritime Public Registry).
Pledges on Equity Interests
Depending on the nature of the equity interest, the requirements for creating and perfecting a pledge will vary. With respect to equity quotas or partnership interests (eg, Sociedad de Responsabilidad Limitada), a non-possessory pledge agreement must be executed in writing between the grantor and the secured party; such pledge agreement should be ratified before a notary public and registered in the partners’ registry kept by the company. Beneficiary interests in a trust may be pledged in the same manner, and the pledge should be registered in the Sole Registry of Security Interests on Movable Assets. With respect to shares, in addition to a stock pledge agreement, the share certificates must be endorsed in security and physically delivered to the lender or its security agent, and the stock pledge should be registered in the shares registry kept by the company.
Pledges on Movable Assets
Pledges on movable assets are created through non-possessory pledge agreements, allowing the pledgee to keep possession of the assets and use them in the ordinary course of business as agreed in the agreement. Such pledges must be formalised before a Mexican public attestor and registered in the Sole Registry of Guarantees. Personal property may also be pledged through a pledge agreement, whereby possession of the assets is transferred to the pledgor or a third party appointed by the pledgor.
A Mexican security trust or fideicomiso de garantía allows the security providers, as settlors, to transfer and convey title to the collateral to a financial institution (usually a bank), as trustee for the benefit of the secured parties. The trustee will hold title to the collateral and be acknowledged as the owner thereof for all Mexican legal (other than tax) and insolvency purposes, creating a preferential right to foreclose on the collateral and a right to be paid with the proceeds deriving therefrom, in favour of the secured parties.
In order for the transfer of the collateral in favour of the trustee to be effective against third parties, the Mexican Security Trust must be registered with the Sole Registry of Guarantees if it is created with respect to personal property, and/or with the Public Registry of Property corresponding to any real property contributed to the trust. A Mexican security trust on movable property must be executed in Spanish, and its signatures must be ratified before a Mexican notary public to be in a form for registration with the Sole Registry of Guarantees. If the trust is created with respect to real property, it should be granted in a notarial deed, which shall be registered in the corresponding Public Registry of Property. The security trust is a bankruptcy-remote vehicle whereby title to the assets conveyed and transferred to it will be segregated from the settlors’ assets in an insolvency proceeding, and will not be commingled with such assets.
As a general rule, security interests granted in the context of acquisition finance are perfected when they are recorded in the registry where the relevant collateralised assets are registered. The entries where the relevant security interest is registered must remain in place for as long as the secured obligations are outstanding.
Certain registries (notably, the Public Registries of Property) allow lenders to deliver a pre-emptive notice with respect to the creation of collateral. The pre-emptive notice is registered with respect to the relevant property and remains in force for a term that varies from jurisdiction to jurisdiction. Once the security interest is created and filed with the registry, the priority of such security interest becomes effective as of the date upon which the pre-emptive notice was filed. Certain states have electronic-based registries that allow for a streamlined filing of pre-emptive notices and definitive notices with respect to assignments and security interests. The registration processes vary in length and requirements, depending on the relevant registry, with some registries requiring the prior review and clearance of a public official of the registry.
In some instances, the registration of a security interest has to be carried out in a privately managed registry, such as the registry of shares of a privately held corporation or privately issued debentures. Such registrations are usually carried out by an officer of the issuer.
There are other security interests that do not require registration as they usually require the delivery of the collateral to the secured party or a special executor, as is the case for a pledge on securities. Special counsel shall determine when and where to register the security interests of an acquisition loan on a case-by-case basis, and also anticipate any matters that may obstruct the registration during the course of due diligence.
There are no limitations on upstream security under Mexican law. The corporate purpose or organisational documents of a security provider must expressly contemplate the possibility of creating security interests to secure a debt owed by a third party.
No prohibitions or restrictions apply to financial assistance.
Under Mexican law, there are no other restrictions on a Mexican company granting collateral for the obligations of an affiliate or even a third party, including restrictions for upstream or downstream security, financial assistance or corporate benefit tests. The securing party does not have to be an obligor with respect to the acquisition financing. Collateral may be granted subject to the generally applicable rules for fraudulent conveyance.
In general terms, foreclosure on collateral requires a final judgment entered in a judicial foreclosure procedure, except for an out-of-court procedure that may be agreed upon by the parties in a collateral trust and in a non-possessory pledge. If the party in possession of the collateral refuses to surrender possession, the secured parties may initiate a judicial foreclosure procedure. Enforcement actions are initiated by the collateral agent, administrative agent, indenture trustee or each particular lender, as applicable, and in compliance with the relevant intercreditor agreement, as applicable.
The basic form of guarantee under Mexican law is known as a fianza, which obliges a third party to pay an obligation due by the main obligor. Mexican law provides several statutory rights to protect the guarantor, including the right to collect from the main obligor before collecting from the guarantor, the right to seek foreclosure on all the assets of the main obligor before attempting foreclosure on the assets of the guarantor, and the right to divide the debt among the guarantors (if several guarantors guarantee the same obligation) so that the creditors may only collect from each guarantor the proportion applicable to the guaranty division, among others. These rights may be waived by guarantors (and usually are).
Certain Mexican-regulated financial entities are authorised to issue surety policies with respect to certain obligations in exchange for a premium. Such surety policies are usually issued upon the granting of a counterguaranty by the obligor, usually a real estate asset.
Another form of “guaranty” for contractual purposes is the assumption of the same obligations of the principal obligor by a joint obligor, who will be jointly and severally liable with respect to such obligations.
For negotiable instruments, a guaranty is called an aval, and may guarantee the full amount or a portion of a negotiable instrument (as is often the case for certain sponsors in promissory notes issued under a loan agreement). An aval guarantor is generally obligated by the same terms as the main obligor.
Bank guarantees are also taken for acquisition financings, and are the undertaking of a bank to guarantee the payment of an obligation owed by one of its clients for the benefit of a beneficiary.
In general terms, there are no restrictions on granting upstream guarantees or financial assistance, although the latter may be affected by insolvency law and fraudulent conveyance, making the solvency of the guarantor relevant as well. The delivery of financial information and representations are usually included for such purposes.
Mexican law does not require the payment of any guarantee fees. Affiliates do not usually charge any fee, but bond institutions and other financial institutions usually do – such fee is expressed as a percentage over the guaranteed obligation, and is determined by the market without legal restrictions.
The concept of equitable subordination has been integrated into the insolvency (concurso mercantil) statute, which provides the following:
Mexican insolvency law provides that the concurso judge must determine the claw-back date upon the judgment declaring the concurso of the debtor. The general rule is a 270-day period from the date of the declaration of concurso. The claw-back period is doubled for subordinated creditors, and may be extended at the request of the receiver or any creditor up to three years before the concurso declaration.
In the context of an LBO, claw-back risk should be analysed with respect to both the purchaser and the target in connection with the granting of collateral and any seemingly preferential payments, and such risk is obviously heightened if the target undergoes financial distress and restructuring.
There is no stamp tax in Mexico.
In terms of the Mexican Income Tax Law, interest paid by Mexican tax residents to non-residents will generally be subject to withholding tax, at rates that vary depending on the nature of the beneficial owner of the interest and the characteristics of the transactions that give rise to the interest. The applicable withholding tax rates contemplated under the law range from 4.9% (applicable to certain foreign banks, as detailed below) to 40% (applicable to entities who are residents in tax haven jurisdictions).
Interest arising from loans granted by foreign banks (including investment or non-bank banks) to Mexican residents shall be subject to a 10% withholding tax. However, this withholding tax rate is reduced to 4.9% through a transitory provision that was enacted in 2014 and is still in force today. Under the transitory provision, the reduced rate shall apply if the beneficial owner of the interest payments (ie, the foreign bank) is a resident in a country that has entered into a tax treaty with Mexico, and if any applicable requirements established in the corresponding tax treaty to apply the reduced tax rate are effectively complied with. “Qualified Lender” usually refers to a lender (or its successor or assignee) that is eligible for a withholding tax rate that is not detrimental to the borrower, considering its gross-up obligations set forth in the loan documents with respect to the relevant withholding tax. Interest paid to domestic financial institutions is not subject to withholding tax.
In general terms, interest payments made by a Mexican resident to its foreign related parties are non-deductible for income tax purposes if the indebtedness of the Mexican resident exceeds a 3:1 debt to equity ratio of the Mexican payer. Exceptions may apply in certain industries (such as certain strategic and infrastructure sectors).
See 9.2 Listed Targets.
The bidder has no obligation to guarantee payment nor to confirm that it has the funds (or loan commitments or confirmations) to carry out a takeover transaction with respect to a listed or regulated target. Settlement of the consideration of a listed target must be carried out pursuant to the regulations of the relevant exchange. However, a financing provider will include conditions and representations with respect to the compliance of the applicable regulatory requirements for the acquisitions, which will vary depending on the nature of the target.
Acquisition finance in Mexico has several relevant features that are either country-specific or industry-specific.
One example is the collateralisation of assets temporarily imported into Mexico. A number of US companies locate their manufacturing facilities in Mexico, so raw materials and other assets are introduced into Mexico under temporary import programmes to be subject to a manufacturing process in Mexico in such facilities. Pursuant to the relevant temporary import programme, such imports may be exempt from import taxes, levies and duties if the relevant legal requirements are met. Foreclosing on such temporarily imported assets may trigger the initially exempted import taxes, levies and duties, which shall be covered prior to the application of proceeds to the payment of the secured obligations. Similar effects may be observed in the temporary imports of vessels and aircrafts, and privileged claims may exist, depending on the industry in which the borrower or the target is engaged. The payment of privileged claims and potential taxes is therefore usually considered in the relevant financial model.
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The Mexican Acquisition Finance Market and M&A Financing in Mexico
Cross-border M&A to grow; potential consolidation in certain sectors
Analysts think that private equity funds have excess cash for investment and are getting ready to deploy such resources, and that cross-border M&A activity will return to significant levels, driven by the tensions with China, the war in Ukraine and other geopolitical events.
Although the economic landscape looks challenging in Mexico, further consolidation is expected in the financial and real estate sectors.
On the one hand, Citi has disclosed its intention to divest its Mexican consumer bank business. On the other hand, recent “nearshoring” activity in Mexico (ie, companies trying to strengthen their supply chain and to stay close to the US market) has spiked demand for industrial properties and ancillary infrastructure, so the conditions are there for some portfolio consolidation and increased M&A activity.
Companies with healthy capital structures have been, and will be, able to capture certain opportunities, including for target companies in the technology, logistics and digital sectors. Valuations of publicly traded companies are low, which will open the door for take-private transactions. Although not in the context of M&A transactions, there have been several de-listings in the Mexican stock market during the last 36 months; this trend might be fuelled by further M&A activity.
Upcoming elections and proposed legal reforms
2024 is an important year politically, as Mexico will hold presidential elections. If there is political and social turmoil in the months prior to the election, there might be a degradation in economic activity in Mexico. In addition, the Mexican president recently submitted a bill to the Mexican Congress that is a threat to potential investments in the private sector, as it would give the government discretion to unilaterally terminate contracts with private entities or revoke concessions if subsequent events (such as changes in social, environmental or political circumstances) warrant such termination or revocation.
The reform also intends to reduce the government’s liability to properly indemnify private investors. While it is difficult to predict whether this reform will be passed, it will surely be challenged through all judicial means available if it is enacted. In particular, the railroad, airports, mining and other regulated industries would be seriously affected.
Cross-border financing dominates in larger transactions; increased mid-market M&A activity
The larger acquisitions in Mexico have been funded through cross-border financing, mostly USD-denominated and coming out of the United States of America. Local financings have been mostly provided by Mexican banks, non-bank banks and other lending vehicles, such as certificates of capital development or CKDs. Recently, fintech companies have also started to participate in the Mexican lending market.
In 2022, banks were well prepared to deploy significant resources, which was a driver for an increase in M&A financing activity. Due to the spike in inflation and interest rates and the uncertainties surrounding the financial sector, 2023 has so far been more challenging. In addition, the recent, ideologically driven policies of the Mexican government in the energy sector (especially in the electricity industry) have diminished M&A activity in that sector and in infrastructure projects. Prior to 2020, the Mexican market saw significant transactions in such sectors.
While there have been a few large, well-known M&A transactions in the recent past (including Vinci’s acquisition of a significant stake in airport operator OMA, and Mondelez’s acquisition of Grupo Bimbo’s confectionery business), transactions in the mid-market segment have dominated over the last few months.
Certainty of funds and “SunGard” provisions
Differing from the situation in the UK, Mexican law does not require an offeror to have certainty of funds in order to launch a tender offer for a publicly traded company. In the private world, numerous factors have resulted in the negotiation and implementation of acquisition agreements that do not allow the offeror to walk away if financing is not secured (or a “financing out” clause). Therefore, “certain funds” provisions are the standard on the financing side of the transaction. Such factors include the participation of new and alternative financing sources, the prevalence of bidding processes and the fact that some assets have created good appetite.
The Mexican market generally follows the SunGard clauses usually seen in US transactions, according to which only “specified representations” and “acquisition representations” (those made by the target that are relevant to lenders and that would grant the sponsor the right to terminate) are conditions to closing. As a general proposition, and in line with the US market, the “material adverse condition” to funding in the financing documents matches the MAC condition in the acquisition agreement so that there is no gap in conditionality.
ESG elements continue to be present
Financial institutions and regulators around the globe are conscious of the role that financing will have in achieving low-carbon transition, and that climate and social issues threaten long-term financial stability. M&A financing is also seeing some ESG components, particularly step-ups in the interest rate if certain key performance indicators (KPIs) are not met. The specific KPIs are particular to each borrower. Typically, lenders require an independent third party confirmation as to whether the KPIs have been met. In some cases, “governance” also plays a factor, when loans incorporate KPIs that relate to the presence of women in decision-making positions within a company.
There have not yet been any step-down features in Mexican deals, but such trend has been recognised, especially in the European lending markets.
In addition, the decision by certain banks not to finance activity in certain sectors (particularly those that are not environment-friendly) is expected to have an impact on M&A financing.
Financing structures; collateral packages
Delayed draw structures are not widely used in Mexico. Incremental facilities (ie, “accordion” features in a term loan) are used in some cases, although in such structures borrowers still bear the commitment risk. These structures are often driven by the sponsors’ projections in respect of their potential M&A activity.
The market in Mexico is expected to flow towards more sponsor-friendly and flexible structures. Sponsors generally want to minimise the “market-flex” provisions normally included in syndicated facilities, while sellers want to minimise changes in terms of the size of the financing and the conditionality for funding.
On the other hand, it is typical to implement an “all-asset” collateral package whereby all of the assets of the target and its subsidiaries are pledged, together with a pledge on the stock of the operating companies.
Financial assistance and certain insolvency considerations
There are no financial assistance restrictions in Mexico, so target companies are able to guarantee the debt incurred in connection with the acquisition. However, upstream guarantees granted by the sponsor subsidiaries might be challenged by their creditors in the context of the insolvency of such subsidiaries on the grounds that they did not receive adequate consideration for granting such guarantee. In order to mitigate such risk, it has become standard for lenders to request that sponsors pay a fee to such subsidiaries (in market terms and conditions).
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