General Elections

Mexico will hold a general election in June of 2024. Mexicans will vote to elect a new president, all members of Congress, several governors, including the head of Mexico City and 31 local congresses. Most observers believe that the markets have already priced the potential results of this election but any social or political turmoil prior to the election, or within the transition period (which will be shortened this year) might result in increased volatility. The new government will face important issues, most notably, energy supply, water availability, migration, security and capitalising on “nearshoring” opportunities.

Steady Growth in Cross-Border M&A Continues

Nearshoring activity has the potential to become transformational for Mexico. The country has seen robust demand for industrial properties and ancillary infrastructure. There are conditions for portfolio consolidation and increased M&A activity in the industrial real estate and infrastructure projects. As of the date of this article (May 2024), Terrafina, a Mexican REIT (FIBRA) that holds a significant industrial real estate portfolio, has announced that it has received indications of interest from several potential buyers. At the end of 2023, a group of domestic and foreign banks financed the acquisition of 12 project companies from Iberdrola, for the amount of USD6.2 billion.

Companies with healthy capital structures have been, and will continue to be, able to capture certain opportunities, including for target companies in the technology, logistics and digital sectors. On the other hand, valuations of publicly traded companies are low, which may open the door for take-private transactions.

Securities Market Law Reforms and Other Proposed Reforms

At the end of 2023, the Mexican congress enacted several amendments to the Mexican Securities Market Law and the Investment Funds Law. These amendments are primarily aimed to facilitate the registration of securities by new issuers. Other amendments are designed to ease legal constraints related to shareholder structure, poison pill provisions, mandatory conversion, and capital increases. Finally, hedge funds are now regulated to enhance buy-side market participation.

During his term, the current president of Mexico has submitted several ambitious legal reforms with the goal of changing the legal framework in several sectors, including infrastructure, voting, government public information and spending, clean energy, education, hydrocarbons, and public procurement. This administration will likely push for constitutional amendments in the energy sector to enhance the market position of Mexico's state-owned electricity company: Comisión Federal de Electricidad (CFE). Such proposals may be submitted close to the election, in a move viewed by some as opportunistic. It is not clear how such proposals will impact current private energy operators but they might deter future private investment in the sector. The Mexican government’s recent inclination toward state control over the energy sector is covered in further detail in this Chambers Expert Foucs podcast from Galcia Abogados.

Cross-Border Financing Dominates

Large acquisitions in Mexico have been generally financed through cross-border, dollar-denominated transactions. Peso-denominated, domestic acquisition financings have been largely provided by Mexican banks, non-bank banks and other lending vehicles, such as certificates of capital development (CKDs). Fintech companies have increased their participation in the Mexican lending market but not in acquisition financing.

Activity in the Mexican M&A market has maintained slow but consistent growth, led by, amongst others, (i) the Iberdrola sale of its energy plants to the Mexican government, (ii) the Blackstone acquisition of Emerson’s Climate Technologies, and (iii) Global Payments’ acquisition of Evo Payments.

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 sector, 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 are highly sought after.

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 Continues to Matter

The amendments to the Securities Market Law mentioned above include certain ESG-related topics, mainly to promote, inform and evaluate the adoption of enhanced corporate practices by participants in the securities market.

Mexican market actors, including financial institutions, regulators and advisors are conscious of the role that financing has in achieving the transition to a low-carbon economy, 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.

Also, the decision by certain banks not to finance activity in certain sectors (particularly those that are not environmentally friendly) is expected to have an impact on M&A financing.

The authors are not aware of any step-down features in Mexican financing transactions, but this trend has been recognised, especially in the European lending markets.

Financing Structures: Collateral Packages

Delayed draw structures are not widely used in Mexico. Incremental facilities (ie, “accordion” features in a term loan) are becoming more common in the Mexican market, 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 flowing 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.

It is customary practice in Mexico to implement an “all asset” collateral package, whereby all of the assets of the target and its subsidiaries are pledged, together with a pledge by the holding entity on the stock of the operating companies.

Financial Assistance and Insolvency Considerations

There are no financial assistance restrictions in Mexico, so target companies are able to guarantee the debt incurred in connection with their 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 guarantees. In order to mitigate such risk, it has become standard for lenders to request that sponsors pay a fee to such subsidiaries (on market terms and conditions).