The recession that the COVID-19 pandemic brought about during 2020 certainly impacted the loan market in Mexico and in most other jurisdictions; needless to say, economic conditions changed dramatically, as did the need for, and availability of, financing funds.
The impact of the pandemic was also felt in an increase of defaults in existing loans. The risk for many companies of being unable to comply with their debt obligations, as well as the potential risk for Mexican banks to face serious capitalisation and reserves issues as a result thereof, prompted Mexican banking authorities to enable transitory regulations that eased technical and regulatory requirements applicable to Mexican banks, in an effort to facilitate their navigating through the crisis.
2021 has seen renewed expectations in terms of growth. As a result, the loan market in Mexico is currently more stabilised. Markets are fairly liquid and loans are flowing in a variety of forms, including in Mexico and across the border. The Mexican banking system is solid and foreign lenders’ appetite remains strong to lend into Mexico.
As previously mentioned, COVID-19 seriously impacted the loan market. Regulations were successfully enacted to reduce the impact in the banking industry during a transition period. Nevertheless, efforts to reactivate the economy fell short and no significant funds were injected into the commercial business market, which has delayed the recovery of many companies and businesses, and their access to financings.
Please also see 1.1 Impact of Regulatory Environment and Economic Cycles.
High-yield transactions will always offer structuring challenges and complex collateral structures, particularly with regard to project finance transactions, where structuring and risk assessment is so dependent on prospect valuations and a number of additional considerations, including ratings form rating agencies.
Innovation, more often than not, helps the establishment of adequate legal and financing structures that may accommodate market needs.
The lenders market has again been diversified in Mexico. Non-bank institutions are once again taking a leading role in financing sectors of the economy that are not necessary fully served by the traditional banking industry. Sociedades financieras de objeto múltiple, sociedades financieras poulares and a large number of new fintech-related lenders are currently very active in the market; many of them receiving funding from traditional banking sources.
Fintechs in the consumer lending business represent approximately a third of the Mexican fintech market. An industry that was born without an adequate regulatory framework is now subject to specific rules aiming at creating confidence in the customer.
The main effect of the presence of fintechs in the lending market is the use of technology and new business models in the sector, including with regard to processes to accept or disregard prospective clients, implement compliance measures (including relating to know your customer), measure risk, disburse funds, determine rates, and payment terms and conditions, among many others. As disruptive as they can be, fintechs in the lending market bring about a new playground for potential borrowers, eager to fund digital products and services.
As mentioned above, banking and finance techniques are primarily adjusting to technological means that permit transactions to occur in a faster and safe manner.
Please also see 1.4 Alternative Credit Providers.
There are no new tax-related initiatives or other recent developments that may negatively impact the loan market in Mexico.
Please note that interest payments to non-residents are generally subject to withholding tax rates ranging from 4.9% to 40%, depending on the beneficial owner of the interest. Lower withholding tax rates may be available to tax residents in countries with which Mexico has entered into a tax treaty to avoid double taxation. Interest payments to export-import banks may not be subject to any withholding, provided that the conditions set forth by the relevant tax treaty are complied with.
Please see 3. Structuring and Documentation Considerations for further details.
ESG lending is certainly taking a predominant role in the Mexican lending market. Banks are prioritising loans that contemplate ESG elements and striving to comply with all the requirements related thereto. At the same time, the bond market is also growing extensively in respect of green or sustainable bonds. Over the past year, the number of ESG-related transactions has grown significantly.
As an example, the disclosure of ESG information and adherence to the recommendations of multiple agencies, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), have been broadly promoted. In most cases, though, compliance with such recommendations remains optional.
Lending is not a regulated activity in itself in Mexico. In other words, a regulatory licence is not necessarily mandatory to conduct lending activities; however, to the extent that such lending activities constitute the main purpose of a given company, most likely it will be required to operate as a financial regulated entity.
Requirements to operate as a lending regulated entity vary significantly depending on the type of financial entity involved. As a general rule, authorisation from the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) is required to operate as a regulated financial entity.
Mexican banks, for example, need to file an authorisation request with the CNBV, which shall include:
Licences are generally granted by the CNBV on a discretionary basis.
Foreign lenders are not restricted from granting loans to Mexican borrowers, nor from obtaining a security interest over assets owned by Mexican counterparts or located in Mexican territory to secure their financings.
Foreign lenders are not required to be specifically registered with, or approved by, governmental authorities in order to conduct lending activities in Mexico.
Lending activities of both foreign and local lenders in Mexico may be conducted through multiple structures, including unsecured lending, secured financing, club deals, syndication, structured finance, securitisation transactions, capital and operation leasing, bond offerings and factoring. Both Mexican and foreign banks are subject to specific regulations and limitations.
With regard to debt securities, subject to certain exceptions, to achieve a 4.9% withholding tax rate on interest payments of debt securities issued by a Mexican issuer and placed with foreign holders, the following conditions apply:
Foreign lenders may secure their loans with Mexican assets. Also, Mexican entities may guarantee the payment of loans or foreign lenders. In doing so, it is important to consider Mexican laws regarding the granting of personal guarantees, such as fianzas, obligaciones solidarias and avales; particularly, statutory laws concerning fianzas can limit the liability of the guarantor under a number of circumstances and, therefore, it is necessary to assess waiving multiple rights afforded to the guarantor under Mexican law.
In the case of avales, which apply to Mexican pagarés (promissory notes), it is necessary to comply with Mexican laws applicable to negotiable instruments, which, among other matters, afford the benefit of being entitled to file your claim through an executive proceeding; avales shall comply with the formalities set forth by Mexican law to be enforceable.
Other than tax reporting obligations that may apply to the borrower, there are no governmental registrations or approvals required for a Mexican borrower to contract debt obligations in a foreign currency or to remit funds abroad.
There are generally no restrictions on the borrower's use of proceeds from loans or debt securities, except for limitations in certain regulated industries, and as otherwise contractually agreed to.
Agency and trust concepts are recognised in Mexico.
Please see 5. Guarantees and Security, 6. Enforcement and 8. Project Finance for information regarding Mexican trusts.
Both loans and security interests can be transferred in Mexico through the respective assignment and amendment mechanisms. Please note that the transfer of security packages may require the authorisation of third parties or from the entity granting the respective collateral, as well as conducting additional activities, such as filings with regulatory and registration authorities.
The transfer of account receivables does not require the authorisation of the debtor, unless otherwise contractually stipulated.
A debt buy-back by a related party is not expressly prohibited, although it is not necessarily a common practice in the commercial lending industry. Alternative mechanisms may be implemented to achieve a similar result.
No information has been provided in this jurisdiction.
As previously indicated, in the case of interest payments to non-residents, as a general rule, withholding tax rates range from 4.9% to 40%, depending on the beneficial owner of the interest and the existence or not of a tax treaty to avoid double taxation with the country of residence of the lender.
Please note that Mexico has enacted more than 40 double tax treaties and is in the process of negotiating more. As mentioned above, such tax treaties may reduce the withholding tax applicable in accordance with the Mexican domestic tax legislation. Under a number of those treaties, a preferential 4.9% withholding tax rate applies to interest paid to financial institutions resident for tax purposes in a treaty country.
Please note that interest payments made to export-import banks granting or guaranteeing loans may not be subject to any withholding, provided that the conditions set forth by the relevant tax treaty are complied with.
Also, favourable tax treatment can be granted in a variety of cases, including the following:
There are generally no different taxes applicable to loans payable to lenders in Mexico and loans payable to lenders in a foreign jurisdiction. In both cases, income tax is the only tax levied on interest payments. As noted above, interest payments may be subject to different withholding tax rates depending on the tax residency of the beneficial owner.
Value added tax (VAT) may apply to interest payments, subject to certain exceptions, including interest payments made to Mexican financial institutions, which may be exempt from such tax in certain instances.
There are general usury statutes. While there are no specific limitations in terms of the amount of interest that may be charged to a borrower, there may be limitations stemming from such usury statutes in the case of abuse from the lender, generally as assessed by a judicial competent authority. Also, existing judicial precedents and market conditions may limit the amount of the applicable rate.
Also, please note that in respect of transactions among related parties, there may be tax-related limitations to prevent an interest rate that is not standard in the market. Such transactions may prompt the use of market studies to sustain the application of a rate or other price-related considerations.
Assets typically available as collateral include real estate, machinery and equipment, stock or equity interests, receivables and collection rights, among many others. There are generally no restrictions with respect to creating security interests over any sort of movable assets that can be transferred, including rights.
Collateral instruments include:
Pursuant to a guaranty trust, a borrower may transfer to a trustee ownership of certain assets. The trustee will hold ownership of such assets as collateral for the primary benefit of the corresponding lender, who will be appointed as a beneficiary (fideicomisario) of the guaranty trust. The guaranty trust permits:
Such foreclosure procedure permits the transfer of collateral to a lender subject to compliance with the applicable legal requirements. Similar benefits may be attained through a prenda sin transmission de posesión, with respect to the use of collateral and business activities of the borrower.
The pledge with debtor in possession and the guaranty trust are the most common forms of granting and perfecting a security interest in receivables and accounts. The pledge with debtor in possession and the guaranty trust shall be registered with the Movable Property Registry for effectiveness vis-à-vis third parties. A guaranty trust over real estate property shall also be registered with the corresponding local Public Registry of Property.
Also, the most common form of granting a security interest over real estate is through a mortgage, which shall be registered with the Public Registry of Property with jurisdiction over the place where the real estate is located.
Please see 6.1 Enforcement of Collateral by Secured Lenders for further information regarding formalities and perfection requirements.
Mexican law permits a security interest over all present and future assets of a company, primarily through a prenda sin transmisión de propiedad or a fideicomiso de garantía.
It is possible for entities in Mexico to give downstream, upstream and cross-stream guarantees. There are typically no associated limitations; however, the guarantee shall generally create a benefit for the guarantor to avoid the risk of being considered null in a bankruptcy scenario.
There are no particular restrictions.
There are a number of additional Mexican legal considerations in connection with loans to borrowers and the granting of security interests or guarantees. Please refer to the responses throughout this chapter in this respect.
Each transaction must be assessed considering a variety of factors, including tax treatment, the regulatory framework, bankruptcy scenarios, the parties involved and the nature of collateral. Also, costs associated thereto. Implementing collateral structures involving trustees or real estate assets may be more costly, as they require the involvement of third parties, including notaries, and registrations with public registries.
Typical forms of security are released through amendment, termination and/or release instruments. Collateral instruments – such as mortgages, pledges and security trusts – that have been registered in public registries require the filing of such termination or release documents in the respective registries, for the release to be effective vis-a-vis third parties. Additional filings may be required when dealing with regulated entities.
As a general rule, secured lenders have priority over the assets granted to them as collateral in the event of foreclosure and in an insolvency scenario, although subject to a variety of exceptions.
Since the 2014 amendment to the Mexican Insolvency Law, contractual subordination is expressly recognised in the case of an insolvent entity. Mexican courts would recognise the subordination of contractually subordinated claims with respect to other secured or unsecured claims of creditors of an insolvent entity.
Also, intercreditor agreements are commonly used in Mexico. They constitute the framework that regulates the relationship among lenders in a syndicated facility, or among lenders under several financings. It is common to appoint an administrative agent (also known as a collateral agent).
The most common vehicle to achieve structural subordination consists of the implementation of a trust containing a payment waterfall with subordinated payments.
A secured lender who has a perfected security interest over its collateral has, in principle, no limitations to enforce its rights in a court of law, subject to bankruptcy and insolvency rules. Enforcement of security in Mexico is generally conducted through Mexican courts.
Loan and collateral documents must comply with Mexican legal formalities required for their enforceability and perfection in Mexico. Enforceability of obligations before a Mexican court may often be contingent on the valid existence of the borrower, the authority of the borrower and its representatives to assume such obligations pursuant to any provisions of relevant by-laws, corporate authorisations and powers of attorney, and the absence of conflicts with applicable law and third-party obligations or contractual arrangements. A number of formalities concerning loan documentation must be met to avoid difficulties in the enforcement process.
Loan obligations are usually documented in pagarés. The documentary formalities applicable to pagarés are very strict and failure to meet them may lead a court to disregard such instruments’ procedural advantages. A pagaré will entitle the holder thereof (either a Mexican or foreign lender) to claim a judicial “executive action”, which carries certain procedural advantages, including the right to attach assets of the debtor upon service of process being made. Note that Mexican banks and certain other financial entities also have executive actions through other types of documents, including certified account statements and loan agreements.
With regard to collateral documents, certain security instruments – including mortgages, pledgor-in-possession pledge agreements and guaranty trusts on real estate assets – are required to be formalised before a Mexican notary public and registered with the corresponding Mexican public registry (ie, the local Public Registry of Property or the Federal Registry of Movable Property). A lien on other assets may require additional formalities; for example, registration with intellectual property registries if such lien is created on certain intellectual property rights.
As previously mentioned, a guaranty trust permits a borrower and a lender to agree on the terms and conditions to conduct an out-of-court foreclosure procedure, which may consist of a sale process to third parties or a direct transfer of collateral to a lender. Any agreed-upon out of-court foreclosure procedure must comply with very specific rules and may be subject to challenges in a Mexican court.
Challenges in enforcing a security may include, in some circumstances, gaining possession over the collateral to be realised either because of statutory restrictions or given that the collateral is in the possession of a third party.
The choice of foreign law should be recognised and enforced provided that security documents should not otherwise be subject to Mexican law. For example, collateral instruments that create a security interest over assets located in Mexican territory shall be generally subject to Mexican law.
With respect to the submission to a foreign jurisdiction, there are also no specific limitations for Mexican parties to do so (except with respect to collateral instruments that should be subject to Mexican jurisdiction, as mentioned in the previous paragraph).
A judgment rendered by a foreign court, pursuant to a legal action instituted before such court in connection with an outstanding loan, would be enforceable against the borrower in the competent courts of Mexico, provided that:
Please see 6.2 Foreign Law and Jurisdiction regarding enforcement of a foreign court judgment.
Please note, among other matters, that:
Other than the concurso mercantil (insolvency) proceeding, there are no other statutory rescue or reorganisation procedures in Mexico.
As a general rule, the enforceability of the terms of certain financing and collateral obligations may be limited by bankruptcy, insolvency, concurso mercantil or other laws relating to creditors’ rights generally.
Provided prior authorisation of the Insolvency Court is obtained and subject to its supervision, secured creditors under a mortgage or a pledge may foreclose on their collateral.
According to the Mexican Insolvency Law, trust assets are, in principle, excluded from the estate of the insolvent entity, to the extent that they have been validly conveyed to the security trust. Therefore, if the collateral is subject to a security trust, the first beneficiary (lender) under the trust agreement may commence an extrajudicial foreclosure procedure outside the insolvency proceeding. Such rule, however, may be subject to exceptions and the final determination of the Insolvency Court.
Provided there is an insolvency judgment in place, the following effects will arise:
The insolvent entity's obligations will then become due but their payment is subject to:
According to Mexican law, proceeds obtained from the liquidation of assets of an insolvent entity will be applied for creditors’ payment as follows:
Notwithstanding the above, claims of secured creditors would be paid on a supra-priority basis up to the amount of the respective collateral; provided, however, that the following claims would have priority over the amount of such collateral in the order that follows:
Under Mexican law, a creditor’s claim cannot be subordinated by a court. However, if a creditor's conduct has injured other creditors, there may be other possible remedies available under Mexican laws.
Mexican law recognises subordination in terms of 7.3 The Order Creditors Are Paid on Insolvency. In general terms, creditors must be paid in full prior to any distribution to shareholders.
Lenders should always make sure that they observe all the requirements applicable to the perfection of security interests over assets. Provided that all the formal requirements have been met when issuing a guarantee or a security by a third party, a risk area for lenders is that guarantees and securities may be at risk of being set aside if they were granted by an entity within a certain period prior to the onset of the insolvency, which is known as fraudulent conveyance, and which would take place if the securing entity received considerably less consideration than that of a fair market standard, or if the guarantee was created within the statutory criterion of 270 days before the date on which the guarantor is found to be insolvent by a Mexican court. Therefore, upstream guaranties may be problematic under the Mexican Insolvency Law, unless the Mexican guarantor receives a corporate benefit from the financing that serves as legitimate consideration for the grant of the guarantee or collateral.
Project finance in Mexico has existed for many decades. Thirty years ago, infrastructure projects were primarily funded through government spending and through international governmental agencies, such as the Export–Import Bank of the United States. More recently, public-private partnership (PPP) structures have diversified project finance alternatives. Also, banks and private investors are more willing to absorb the risks associated with project finance given the confidence they have gained with regard to collateral structures and the viability of certain projects.
Please refer to 8.2 Overview of Public-Private Partnership Transactions regarding PPPs.
Federal PPPs in Mexico are, among other statutes, regulated by:
PPPs might also be impacted by provisions contained in:
In accordance with the PPP Law, PPP projects can only apply to sectors in which private individuals or entities can participate according to the applicable laws of each sector. Also, the PPP Regulations may prohibit state productive enterprises from executing PPP contracts with developers for activities related to the exploration and exploitation of hydrocarbons.
There are many other requirements and restrictions applicable to PPP projects.
The need to obtain government approvals or pay taxes, fees or other charges depends on the project and industry involved. Many project finance transactions may require government approvals or be linked to the terms of specific licences, concessions or authorisations, and may be required to comply with obligations and requirements thereunder.
The responsible government bodies with respect to the oil and gas, power and mining sectors are:
The primary laws and regulations with respect to the oil and gas, power and mining sectors are
The main issues include:
Foreign investment restrictions in Mexico may apply to a few industries.
As previously mentioned, lending activities of both foreign and local lenders in Mexico may be conducted through multiple structures, including secured lending, club deals, syndication, structured finance, securitisation transactions and bond offerings.
There are no specific restrictions applicable to the structuring of project financings. The common sources of funding available include project bond offerings, both public and private, and bank syndicated loans, including with the participation of export credit agencies (which are generally subject to a beneficial tax treatment).
As occurs with every project financing, the structure can be as complex as the project itself, depending on a variety of factors, including construction, operational and management risks. Project finance structures tend to be heavily collateralised. Collateral usually includes:
Most recently, project financings in Mexico have taken place in the infrastructure and real estate industries. In both cases, financings have occurred through bank lending and bond offerings, both private and public, through the issuance of securities in local and foreign markets. In the infrastructure market, for example, it has been possible to securitise payments under private-public partnership agreements for the development or improvement of toll roads, through complex structures that have been well received in the marketplace.
As previously mentioned, there are generally no restrictions with regard to foreign lenders implementing security structures with Mexican parties or with assets located in Mexican territory. Mexican law is innovative and sophisticated to permit the perfection of security liens over both movable and real estate assets.
No information has been provided in this jurisdiction.
The main EHS laws that apply are:
The main regulatory bodies include: