Contributed By Gonzalez Calvillo, S.C.
Under Mexican law, collateral can be created over all types of privately owned assets, including real estate and movable assets such as property and goods, shares/partnership interests, receivables, intellectual property, and/or cash deposited in bank accounts.
As for the typical structures and related formalities, the following are generally used in financing transactions:
Pledge over equity interests. The equity interests of a Mexican corporation or limited liability company can be granted as collateral to guarantee payment obligations. For a pledge over equity interests to be duly granted, a pledge agreement must be executed and the pledge must be registered in the corresponding corporate book and, depending on whether the specific case requires priority over tax credits, the pledge agreement must by ratified before a Mexican notary public and registered before the Registro Único de Garantías Mobiliarias. In the case of corporations, the pledged stock certificates must also be delivered and endorsed in favour of the pledgee. Finally, a recommended practice is for a power of attorney to be granted to the pledgee to exercise the voting powers of the pledged equity interests in the event of a default.
Pledge over movable assets. There are two ways of creating pledges over movable assets: a regular pledge (possession of the pledged assets is transferred to the pledgee as depository) or a floating/non-possessory pledge (possession of the pledged assets remains with the pledgor). In both cases, a pledge agreement must be executed, then ratified before a Mexican notary public and finally registered before the Registro Único de Garantías Mobiliarias. Bear in mind that other consents or registrations may be required depending on the specific collateral and/or grantor.
Security trust. This structure is one of the most flexible as it allows for collateral to be granted over different kinds of assets and may encompass all (or most) of the assets of the borrower or guarantor. Specifically, the security trust basically works when the guarantor transfers title of the collateralised assets to a trust (to be managed by a Mexican institution as trustee) for the benefit of the secured party. In other words, it has the purpose of securing the relevant payment obligations with the trust assets and of providing a servicing mechanism for the relevant debt.
The formalities required to put in place a security trust depend on the nature of the collateralised assets. In general, these include ratifying the agreement before a Mexican notary public and registering it with the applicable public registry.
The main benefits of having a security trust structure vis-à-vis a combination of pledges and mortgages are: (i) that the collateralised assets will be bankruptcy remote, thus protecting the secured party in the event of the grantor's bankruptcy or insolvency; and (ii) that the secured parties can exert a higher degree of control over the collateralised assets.
The main drawbacks of this structure vis-à-vis a combination of pledges and mortgages are: (i) that it is more costly as it may need to consider additional notarial and registration fees, as well as trustee fees; and (ii) that it can be somewhat intrusive in the day-to-day operations of the borrower.
Mortgage. Mortgages are used to create collateral over real estate (land or building). Mortgages must be executed in a public instrument before a Mexican notary public. Likewise, for a mortgage to produce effects vis-à-vis third parties it must be duly registered in the public registry of property corresponding to the collateralised asset's location; the registration fees for this registration may be material depending on the secured amount and the Mexican state in which the relevant real estate is located.