Banking & Finance 2023

Last Updated October 12, 2023

Mexico

Law and Practice

Authors



Nader, Hayaux & Goebel (NHG) is a market leader in M&A, banking and finance, fintech, securities and capital markets, structured finance, telecoms, tax, insurance and reinsurance, project finance, real estate, energy and infrastructure, restructuring and workouts, government procurement, antitrust and compliance. The firm comprises 16 partners, three of counsels and more than 40 associates. NHG is the only Mexican law firm that has an office in London, with a strong focus on developing and pursuing business opportunities between Mexico, the UK and other European countries. NHG also enjoys excellent working relationships with law firms in all major cities around the world.

The recession triggered by the COVID-19 pandemic in 2021 certainly impacted the loan market in Mexico as in most other jurisdictions. Needless to say, economic conditions changed dramatically, altering both the demand for and supply of financing.

The impact of the pandemic was also felt in an increase in loan defaults. With many companies at risk of failing to meet debt obligations, as well as the potential risk for Mexican banks to face serious issues relating to capitalisation and reserves, the Mexican banking authorities introduced temporary regulations to mitigate such issues. These regulations were designed to ease the technical and regulatory requirements for Mexican banks in order to help them navigate the crisis.

While 2022 brought renewed optimism for growth in certain markets, the lingering global economic impact of the pandemic and disruptions to supply chains presented significant hurdles.

The ripple effects of the pandemic in 2021 and 2022, coupled with geopolitical tensions in early 2022, contributed to a global inflationary trend, and Mexico was no exception. In line with international trends, the Mexican Central Bank has raised and maintained high interest rates in 2023 to mitigate rising inflation. Despite the high interest rates, the first half of 2023 saw higher-than-expected levels of economic activity and employment, alongside a declining inflation rate. This confluence of factors led to a revitalisation of the loan market in the first half of 2023, mainly driven by consumer credit.

Markets in Mexico are fairly liquid and loans are flowing in a variety of forms, including in Mexico and across the border. The Mexican banking system remains stable, and the appetite among foreign lenders to invest in Mexico continues to be robust.

As Mexico does not have significant commercial relations with either Russia or Ukraine, the direct impact of the war on the Mexican economy has been limited. However, the war, combined with the international sanctions on Russia, escalating geopolitical tensions, and the ripple effects of the COVID-19 pandemic, have exacerbated the global inflationary trend. As a result, the Mexican Central Bank raised and maintained high interest rates throughout 2022 and 2023. Despite these headwinds, the loan market in Mexico has shown resilience, with positive performance in 2022 that has continued into 2023. The recovery of financial intermediaries’ activities and effective risk management have collectively bolstered the loan market’s performance.

From a transactional perspective, even though the Mexican government has not imposed any sanctions on Russia, Mexican banks with foreign affiliations are likely to adhere to the compliance policies set by their parent financial institutions. This includes stringent “know your customer” (KYC) processes and use-of-proceeds covenants, potentially limiting credit access for Russian borrowers in Mexico.

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 from rating agencies.

More often than not, innovation helps to establish adequate legal and financing structures that may accommodate market needs.

The lenders market has again been diversified in Mexico. Non-bank institutions have taken a leading role in financing sectors of the economy that are not 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 active in the market; many of them receive funding from traditional banking sources. Nevertheless, in 2021 and 2022 a few non-bank institutions failed to comply with debt obligations, which created concerns about market stability and resulted in several restructurings and workouts.

Fintechs in the consumer lending business represent approximately a third of the Mexican fintech market. Initially operating without a comprehensive regulatory framework, these entities are now subject to specific regulations designed to instil consumer confidence.

Fintech companies have been a transformative force in Mexico’s lending market, primarily due to their innovative use of technology and adoption of new business models. Their influence is particularly evident in several key processes:

  • prospective client selection;
  • implementation of compliance measures (especially KYC);
  • risk assessment;
  • fund disbursement; and
  • determination of rates and payment terms.

The disruptive influence of fintech companies in the lending market has opened up new avenues for potential borrowers, particularly those keen on financing digital products and services. The fintech sector in Mexico has seen further robust growth in 2023, with the number of fintech companies increasing by approximately 20% compared to the previous year.

As mentioned in 1.4 Alternative Credit Providers, banking and finance techniques are primarily adjusting to technological means that permit transactions to occur in a faster and safe manner.

ESG lending is increasingly prominent in the Mexican lending market. Banks are prioritising loans that incorporate ESG elements and striving to comply with all the associated requirements. At the same time, the bond market is also growing extensively in the area of green and sustainable bonds. Over the past year, the number of ESG-related transactions has grown significantly.

For example, the disclosure of ESG information and adherence to the recommendations of multiple agencies, such as the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board, have been broadly promoted. However, in most cases, compliance with such recommendations remains optional. 

In Mexico, lending is not in itself a regulated activity. In other words, a regulatory licence is not always mandatory to conduct lending activities. However, if lending constitutes a company’s primary activity, it will likely need to operate as a regulated financial entity.

Requirements to operate as a regulated financial 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:

  • information and corporate documents about the bank and its direct and indirect equity holders;
  • corporate documents of the stockholders;
  • information regarding proposed operations of the Mexican bank;
  • multiple additional documents required by the CNBV;
  • corporate structure information about the bank;
  • information relating to the capitalisation of the bank; and
  • information about officers and directors of the bank.

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.

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:

  • the securities should be placed through bank or broker-dealers in a country with which Mexico maintains a tax treaty for the avoidance of double taxation; and
  • filings with the CNBV and the tax administration must be completed.

Foreign lenders may secure their loans with Mexican assets, while Mexican entities can guarantee the payment of loans of foreign lenders. However, it is important to be aware of Mexican laws regarding the granting of personal guarantees such as fianzas, obligaciones solidarias and avales. Statutory laws concerning fianzas, in particular, can limit the liability of the guarantor under a number of circumstances. Therefore, it is important to consider waiving certain rights granted 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. Among other things, these laws allow the holder of the note to pursue claims through executive legal proceedings. To be enforceable, avales must adhere to the formal requirements outlined by Mexican law.

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.

In Mexico, both loans and security interests can be transferred via the appropriate assignment and amendment mechanisms. The transfer of security packages may require the authorisation of third parties or of the entity granting the respective collateral. Additional steps, such as filings with regulatory and registration authorities, may also be required.

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; however, it is not 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.        

In July, 2021, the World Bank announced that the Secured Overnight Financing Rate (SOFR) would replace the London Interbank Offered Rate (LIBOR) for USD-denominated loans, as well as the timeline for the implementation of the SOFR interest rate with respect to new loans and existing loans.

Even though the transition was made progressively, 30 June 2023 marked the final milestone in the transition as LIBOR settings ultimately ceased to be published. As of such date, parties were not allowed to enter into any USD loans referencing the LIBOR rate and any USD loans referencing such rate should be amended in order to implement the SOFR interest rate.

As a result, the Mexican legal and banking industries developed and implemented new legal provisions that would govern the interest rate in USD loans and its fallback provisions.

Mexico has general usury statutes in place, but there are no explicit caps on the interest rates that can be charged to borrowers. However, limitations could arise from these usury statutes if a lender is deemed to be engaging in abusive practices, typically as determined by a competent judicial authority. Additionally, existing judicial precedents and market conditions may influence the rates that can be applied.

In respect of related party transactions, tax-related limitations may exist to prevent non-standard market interest rates. Such transactions often necessitate market studies to justify the application of a particular rate or other pricing considerations.

Under Mexican banking law, there is a general rule preventing banking institutions from disclosing any information concerning the transactions or services that they provide to their clients. This confidentiality extends to anyone other than the respective client or their legal representative, unless there is a prior written order from a Mexican authority with the requisite power and jurisdiction. This rule is replicated in several financial Mexican laws regulating different types of Mexican financial entities in order to protect the confidentiality of users of financial services.

In the case of interest payments to non-residents, withholding tax rates tend to range from 4.9% to 40%, depending on the tax residency of the beneficial owner of the interest and the existence of a double tax treaty with the lender’s country of residence.

Mexico has enacted more than 40 double tax treaties and is in the process of negotiating more. Such tax treaties may reduce the withholding tax applicable in accordance with the Mexican domestic tax legislation. Under a number of these treaties, a preferential 4.9% withholding tax rate applies to interest paid to financial institutions resident for tax purposes in a treaty country.

Interest payments made to export‒import banks granting or guaranteeing loans may not be subject to any withholding tax, 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:

  • interest derived from securities issued by the federal government or the central bank, provided that the beneficial owner of the interest is a non-resident for tax purposes;
  • interest derived from loans granted to the federal government, the central bank or derived from bonds issued by them; and
  • interest derived from loans granted under preferential conditions, payable to foreign development financial institutions.

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.

VAT may apply to interest payments, subject to certain exceptions. Exceptions include interest payments made to Mexican financial institutions that may be exempt from such tax in certain instances.

It is not unusual for cross-border financing transactions to be governed by foreign laws; in the case of US lenders, it is common to choose the laws of New York. However, when a Mexican borrower is involved, foreign lenders are typically concerned with the tax rate applicable on interest accrued on the respective loan, as this shall be subject to Mexican law.

A careful analysis is required to determine the applicable tax interest rate and to customise adequate gross-up provisions for each specific lender. However, as a general rule, Mexican law provides for a 4.9% withholding tax rate on interest payments of debt securities issued by a Mexican issuer and placed with a foreign holder, subject to the following conditions: (i) the securities should be placed through a bank or a broker-dealer in a country with which Mexico has a double taxation treaty; and (ii) filings with the CNBV and Mexican tax authorities shall be made.

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:

  • the traditional pledge, where the collateral is (in principle) delivered to the secured party or a depositary;
  • the non-possessory pledge (prenda sin transmisión de posesión), which permits the borrower to maintain custody and use of the pledged assets; and
  • the guaranty trust (fideicomiso de garantía), where the collateral is actually transferred to a Mexican trustee (ie, a Mexican banking institution).

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:

  • borrowers to continue to use and manage the collateral and maintain regular business activities; and
  • parties to the guaranty trust to contractually establish their own tailor-made rules of extrajudicial foreclosure (within reasonable due process and other requirements).

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 non-possessory pledge, with respect to the use of collateral and business activities of the borrower.

The non-possessory pledge and the guaranty trust are the most common forms of granting and perfecting a security interest in receivables and accounts. The non-possessory pledge and the guaranty trust must be registered with the Movable Property Registry (Registro Único de Garantías Mobiliarias or RUG) to be effective against third parties. A guaranty trust over real estate property shall also be registered with the corresponding local Public Registry of Property (Registro Público de la Propiedad or RPP).

Also, the most common form of granting a security interest over real estate is through a mortgage, which must be registered with the Public Registry of Property that has jurisdiction over the place where the real estate is located.

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 non-possessory pledge or a guaranty trust.

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. The issue of costs must also be taken into consideration. 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 in order for the release to be effective against 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 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 regulating the relationship between lenders in a syndicated facility, or between 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 is a trust containing a payment waterfall with subordinated payments.

Mexican Bankruptcy Law provides for several types of creditors and establishes a specific hierarchy for the prioritisation and payment of their respective claims. By law, labour and tax credits take precedence and are paid immediately after any creditor holding collateral over a specific asset, such as a pledge or mortgage, but before any other type of creditor.

Due to their inherent nature, the payment of labour and tax credits is accorded special status and takes priority over the payment of common credits, solely by virtue of the law.

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 the 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 promissory notes (pagarés). The documentary formalities applicable to promissory notes (pagarés) are very strict and failure to meet them may result in a court refusing to grant them specific procedural benefits. A promissory note (pagaré) will entitle its holder, whether a Mexican or foreign lender, to claim a judicial “executive action”, which carries certain procedural benefits, 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.

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 to the enforcement of a security include gaining possession over the collateral to be realised either due to statutory restrictions or because the collateral is in the possession of a third party.

Under Mexican law, the choice of foreign law should be recognised and enforced, other than in specific cases, such as, for example, collateral instruments that create a security interest over assets located in Mexican territory, which shall be generally subject to Mexican law.

With respect to the submission to a foreign jurisdiction, there are no specific limitations for Mexican parties to do so.

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:

  • such judgment is obtained in compliance with:
    1. the legal requirements of the jurisdiction of the court rendering such judgment; and
    2. all legal requirements of the respective transaction documents;
  • such judgment is strictly for the payment of a certain sum of money, based on an in personam (as opposed to an in rem) action;
  • the judge or court rendering the judgment was competent to hear and judge on the subject matter of the case in accordance with accepted principles of international law that are compatible with Mexican law;
  • service of process is made personally on the defendant or on its duly appointed process agent; note that service of process by mail does not constitute personal service of process under Mexican law and, given that such service of process is considered to be a basic procedural requirement, a final judgment based on such process would not be enforced by the courts of Mexico;
  • such judgment does not contravene Mexican law, the public policy of Mexico, international treaties or agreements binding upon Mexico, or generally accepted principles of international law;
  • the applicable procedure under Mexican law is complied with when enforcing foreign judgments, including:
    1. the issuance of a letter rogatory by the competent authority of such jurisdiction requesting enforcement of such judgment; and
    2. the certification of such judgment as authentic by the corresponding authorities of such jurisdiction in accordance with the laws thereof;
  • the action in respect of which such judgment is rendered is not the subject matter of a lawsuit between the same parties that is pending before a Mexican court;
  • such judgment is final in the jurisdiction where it is obtained;
  • the judgment fulfils the necessary requirements to be considered authentic; and
  • the courts of such jurisdiction recognise the principles of reciprocity in connection with the enforcement of Mexican judgments in such jurisdiction.

See 6.2 Foreign Law and Jurisdiction regarding enforcement of a foreign court judgment.

The following additional matters might impact a foreign lender’s ability to enforce its rights under a loan or security agreement.

  • In the event that proceedings are brought in Mexico seeking performance of the obligations of the borrower in Mexico, pursuant to the Mexican Monetary Law, the borrower may discharge its respective obligations by paying any sums due in a currency other than Mexican currency in Mexican currency at the exchange rate prevailing in Mexico and fixed and published by the Mexican Central Bank (Banco de México) in the Official Gazette of the Federation (Diario Oficial de la Federación) of Mexico on the date preceding the date of payment.
  • In the event that any legal proceedings are brought in the courts of Mexico concerning transaction documents prepared in English, a Spanish translation of such documents required in such proceedings prepared by a court-approved translator would have to be approved by the court after the defendant had been heard with respect to the accuracy of the translation. Proceedings would thereafter be based on the translated documents.
  • The enforceability of the terms of certain financing and collateral documents may, for example, be limited by bankruptcy, insolvency, concurso mercantil or other laws relating to creditors’ rights generally.
  • When evaluating available enforcement options, it must be considered that remedies may not be cumulative or exercised concurrently.

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.

Under Mexican Insolvency Law, trust assets are excluded in principle 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 unsecured obligations in Mexican pesos will be converted into indexed units of account (unidades de inversión, or UDIs), and interest will stop accruing;
  • any unsecured obligations contracted in foreign currency will be converted into Mexican pesos and then into UDIs; and
  • secured obligations will be kept under the currency they were contracted in, and may continue to accrue ordinary interest up to the amount of the respective collateral.

The insolvent entity’s obligations will then become due. However, their payment is subject to:

  • entering into a reorganisation agreement between the insolvent entity and its court-approved creditors; or
  • the bankruptcy declaration of the insolvent entity, containing the sale of its assets under a court-supervised liquidation.

Under Mexican law, the distribution of proceeds from the liquidation of an insolvent entity's assets for creditor repayment is structured as follows:

  • (i) labour claims for salaries and severance corresponding to the immediate calendar year preceding the insolvency judgment;
  • (ii) claims arising from financing incurred for the management of the estate of the insolvent entity or financing that is essential to maintain the ordinary operations of the company and the necessary liquidity during the insolvency proceeding – in each case, as approved by the mediator or by the Insolvency Court;
  • (iii) liabilities and obligations of the estate of the insolvent entity;
  • (iv) costs and expenses incurred as a consequence of the judicial and extrajudicial proceedings for the benefit of the insolvency estate;
  • (v) amounts paid to the secured creditors;
  • (vi) labour claims different from those described in (i) above;
  • (vii) claims of “preferred” creditors under the Mexican commercial laws only to the extent of the value of their respective privilege;
  • (viii) claims of unsecured creditors; and
  • (ix) claims of subordinated creditors and creditors qualifying as related parties of the insolvent entity.

Notwithstanding the above, claims of secured creditors would be paid on a supra-priority basis up to the amount of the respective collateral. However, this is contingent on the following claims having priority over the amount of such collateral in the order that follows:

  • labour claims for salaries and severance for the calendar year preceding the issuance of the insolvency judgment;
  • litigation expenses related to the defence or recovery of secured assets; and
  • expenses necessary for the maintenance, disposition and repair of the secured assets.

The first stage in bankruptcy proceedings is to determine whether the legal requirements to declare the respective merchant bankrupt are met. The lawsuit may be filed by the merchant, its creditors or the Public Prosecutor (Ministerio Público). The first stage lasts around a month and a half and if proceedings move forward, the judge will issue a bankruptcy ruling.

Once an insolvency ruling is published in the Federal Official Gazette (Diario Oficial de la Federación), the bankrupted company has up to 185 days to enter into an agreement with its respective creditors. Such period may be extended for an additional term if the creditor(s) who represent(s) 50% or more of the aggregate debt consider(s) an agreement is likely to be entered into soon. The conciliation stage cannot exceed 365 days. 

In the event no conciliation or agreement is reached, the quiebra (liquidation) stage shall begin. This stage has the purpose of dissolving the company and selling and distributing any remaining assets among its creditors (in the order and priority provided under Mexican Bankruptcy Law). The duration of this stage largely depends on the speed at which the company’s assets are sold; however, the law provides for a six-month term for the assets to be sold before starting a public auction. In the event a public auction is conducted, it shall occur within a 90-day term.

Mexican legal proceedings and resolutions issued thereunder are subject to several legal remedies which may substantially delay the issuance of a final ruling and the enforcement thereof. 

Whether creditors will obtain full repayment of their credits depends on the size of the bankruptcy assets and the amount of the credits. If the entity is technically insolvent (the amount of liabilities exceeds the amount of assets) it is unlikely that all creditors will be able to obtain repayment of 100% of their respective credits, as Mexican Bankruptcy Law provides a particular order and priority in which credits would be repaid. Creditors without any legal privilege or preference would be repaid from any remaining assets, alongside other creditors in similar circumstances, on a pro-rata basis.

Other than the insolvency proceedings (concurso mercantil), there are no other statutory rescue or reorganisation procedures in Mexico.

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. This is known as fraudulent conveyance, and would take place if:

  • the securing entity received considerably less consideration than that of a fair market standard; or
  • 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 guarantees 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. Banks and private investors are also 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:

  • the Public-Private Partnerships Law (the “PPP Law”);
  • the Regulations of the Public-Private Partnership Law (the “PPP Regulations”); and
  • the guidelines that establish criteria for determining the feasibility of executing a project under a PPP scheme.

PPPs might also be impacted by provisions contained in:

  • the Mexican Constitution;
  • the Public Sector Acquisitions, Leasing and Services Law;
  • the Code of Commerce;
  • the Federal Civil Code;
  • the Federal Law of Administrative Procedure; and
  • the Federal Code of Civil Procedure.

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.

Generally, under Mexican law, parties to civil and commercial transactions may validly designate the applicability of foreign laws and submit expressly or tacitly to the courts of a foreign jurisdiction (which may be the domicile of any of the parties, the place where the obligations shall be performed or the location of the assets subject to the transaction). Other than specific exceptions (such as public policy), a Mexican judge will apply any foreign laws that the parties have validly designated as governing laws to the particular transaction. Likewise, subject to several requirements, a final and conclusive judgment obtained from a court of a foreign jurisdiction to which the parties have validly submitted, will be recognised and enforceable by a Mexican court in Mexico. Note that, in all cases the Mexican courts will apply Mexican procedural law.

In the case of project financing, the parties shall carefully analyse whether it is permissible and convenient to subject a particular contract or agreement to a specific governing law or to have the parties thereto submit to a specific jurisdiction. For purposes of such analysis, the following factors may be relevant: the domicile of the parties, the location of the assets underlying the specific contract, the place where the obligations will be performed, and whether the respective agreement is subject to mandatory local legislation (eg, in case of regulated industries).

In accordance with article 27 of the Mexican Constitution (Constitución Política de los Estados Unidos Mexicanos), it is expressly prohibited for foreign entities or foreign individuals to directly own real property or water rights within a 100-kilometre radius along the borders and 50-kilometre radius along the coastline (the “Restricted Zone”).

However, foreign entities and foreign individuals may acquire indirect ownership or rights over land or water located within the Restricted Zone; this could be done either through a Mexican company (of which the foreign acquiror is a shareholder or partner) or through a Mexican trust (in which a Mexican financial institution acts as the trustee and direct owner of the property and the foreign acquiror acts as the beneficiary).

In any case, indirect ownership through any of the alternatives mentioned above may be subject to obtaining authorisation from the Ministry of Foreign Relations (Secretaría de Relaciones Exteriores) or filing notices with such authority.

The main issues that need to be considered when structuring the deal and the legal form of a project company, and the laws relevant to project companies, are outlined below:

  • construction and operational risk;
  • prospect valuations;
  • deployment of funds and contractor performance;
  • rating agency assessments of the transaction;
  • debt servicing structures and waterfalls;
  • identifying all parties involved in the transaction and their respective roles;
  • collateral package and flow of funds; and
  • specific regulations applicable to the project entities, and permits and licensing.

Foreign investment restrictions in Mexico apply to a few industries.

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. Two common sources of funding available are project bond offerings (both public and private) and bank syndicated loans, including those with the participation of export credit agencies (which are generally subject to beneficial tax treatment).

As 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:

  • pledges over the equity of the borrowers;
  • specific liens on the project assets, achieved through security trust, pledge and mortgage collateral instruments; and
  • assignment mechanisms of receivables stemming from the operation of the respective projects.

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) via the issuance of securities in local and foreign markets. In the infrastructure market, for example, it has been possible to securitise payments under PPP 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, allowing the perfection of security liens over both movable and real estate assets.

No information has been provided in this jurisdiction.

The main environmental, health and safety laws that apply are:

  • the Ecological Balance and Environmental Protection General Law and its regulations;
  • the Environmental Liability Federal Law;
  • the Law of the National Agency for Industrial Security and Environmental Protection for the Hydrocarbon Sector;
  • the National Waters Law; and
  • the Prevention and Comprehensive Management of Residues Law.

The main regulatory bodies include:

  • the Ministry of Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales);
  • the Federal Attorney Office for Protection of the Environment (Procuraduría Federal de Protección al Medio Ambiente); and
  • the National Water Commission (Comisión Nacional del Agua).        
Nader, Hayaux & Goebel

Paseo de los Tamarindos No 400-B
7th Floor
Bosques de las Lomas
05120 CDMX
Mexico

+52 55 4170 3000

info@nhg.com.mx www.nhg.com.mx
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Trends and Developments


Authors



Villarreal, García Campuzano, Gómez y Fernández (Villarreal-VGF) is based in Monterrey, Mexico. The firm’s 15-strong team of lawyers has extensive experience in debt and financial transactions and in-depth knowledge of the Mexican financial market. Villarreal-VGF advises Mexican and foreign companies, public and private, including family offices, FIBRAs, CKDs, highly leveraged issuers and companies in restructuring processes. Villarreal-VGF also represents Mexican and international financing sources, including some of Mexico’s largest commercial banks, such as Banorte and BBVA, international development banks, such as NADB, non-banks, such as sofomes and sofipos, debt structuring firms, private debt funds and private debt managers, insurance companies and other international institutional lenders. Villarreal-VGF has participated in and contributed value to a wide variety of financing transactions, including domestic and cross-border transactions, which include syndicated facilities, senior and unsecured financings, acquisition financings, project financings, aircraft financings, structured financings to Mexican non-banks, and real estate financings, including in the industrial, retail, offices, and housing areas.

The Impact of “Nearshoring” in Mexican Banking Deals

In 2023, the term “nearshoring” has become a buzzword in Mexican business circles. Through this practice, foreign companies are relocating their production sites closer to their US and Canadian consumers to minimise supply chain disruptions.

The increase in Mexican nearshoring has been driven by several factors, including US tariffs imposed on China, supply chain disruptions caused by global events such as the outbreak of the war in Ukraine and the COVID-19 pandemic, as well as the economic advantages offered by Mexico’s geographic location, its numerous free trade agreements, and its labour force.

The nearshoring trend has led to increased foreign investment in Mexico, job creation, and a demand for land to develop industrial sites. Both local and foreign investors are now focusing on investing in industrial real estate portfolios, and the banking sector is supporting these investments by financing the acquisition of stabilised industrial assets or the development of industrial sites.

Considering the significant impact of nearshoring on the increase in banking deals related to industrial portfolios, this article shall provide an in-depth analysis of the main legal terms and conditions of a banking transaction involving Mexican borrowers whose funds are used to finance the acquisition or development of industrial properties.

Financed Assets and Uses of Funds

Uses of funds

These financings are used to fund:

  • the acquisition of industrial real estate stabilised assets leased to tenants with good credit ratings and acceptable to the lenders;
  • the construction of industrial sites under long-term leases agreed upon between the borrower and a tenant with a good credit rating and acceptable to the lenders; or
  • the construction of industrial sites with speculative purposes, located in primary markets, to be leased during or after their construction.

Construction financing involves multiple disbursements of a loan amount determined by the project’s cost. Borrowings are made based on the financial and physical progress of the construction, validated by an independent supervisor appointed by the lenders and the borrower.

Primary markets

The real estate and financing market in Mexico has recognised certain geographic locations within Mexican territory as primary markets. Nearshoring has had a greater impact in these areas due to, among other reasons, their qualified labour force, geographical location, tax benefits, and investment facilities. Such locations include the northern states of Mexico, such as Nuevo León, Baja California, Coahuila, and Chihuahua, as well as Mexico City, the State of Mexico, Querétaro, and Guadalajara.

Interest rate and currency

Applicable margins on interest rates vary depending on whether the financed asset is stabilised or under construction. If under construction, the interest rate may differ depending on whether the industrial building is being developed pursuant to an executed lease agreement or for speculative purposes. The currency of the financing (usually Mexican pesos or US dollars) is determined based on the currency of the rent payments agreed upon by the borrower with the tenant. Dual currency financings are structured when the financed assets comprise a portfolio of tenants paying rent in US dollars and Mexican pesos.

VAT financing

Financing conditions may include an additional tranche to be used to finance the VAT payable by the borrower in the acquisition of stabilised assets or in the expenses incurred during the construction of the industrial site. The source of payment for the financing is the refund of VAT in favour of the borrower from the tax authorities. Such refunds are deposited by the tax authorities in a bank account maintained by the borrower. VAT refunds by Mexican tax authorities are made in Mexican pesos. This is an important factor when the primary financing is denominated in US dollars. Lenders typically request an opinion from an independent tax expert to verify the correct calculation of VAT subject to a tax refund and ensure compliance with Mexican tax regulations.

Macro facilities

A macro facility can be structured to encompass financing for future projects to be acquired or developed by existing or additional borrowers under the same credit agreement. However, as these projects have not been analysed and approved by the credit committees of the lenders, special considerations need to be addressed in the credit agreement to allow for such approval before financing. In the case of a syndicated facility, the credit agreement should outline the approval process among the lenders and regulate the scenario if one or more lenders do not approve a future project (eg, if a tenant is not acceptable to one or more lenders).

Sustainable financing

Some lenders offer the possibility of accessing preferential interest rates if real estate projects comply with key performance indicators related to environmental sustainability. Compliance is measured periodically during the financing and audited by an independent sustainability expert.

Credit Agreements, Lenders, and Promissory Notes

Credit agreements

The loans and financing terms and conditions are documented and agreed upon through a credit agreement involving the borrowers, the lenders, and, in the case of a syndicated facility, an administrative agent. The credit agreement may be governed by Mexican laws or foreign laws, and the parties to the credit agreement may submit to the jurisdiction of Mexican or foreign courts. While Mexican law does not require specific formalities or registration for the execution of a credit agreement governed by Mexican law or for its perfection, Mexican banks and non-banks usually request that such credit agreement governed by Mexican law be ratified before a Mexican public attester (notario or corredor público).

Lenders

Lending in Mexico is not restricted to a particular type of entity. Any person, whether national or foreign, may grant loans to Mexican individuals or entities. However, the tax treatment of interest payments varies depending on the type of entity acting as the lender. Interest payments to non-residents are subject to withholding tax, ranging from 4.9% to 40%, depending on the beneficial owner of the interest. Interest payments to Mexican residents who are non-financial entities are subject to VAT. Foreign lenders are not required to be licensed, registered, or otherwise qualified to engage in lending activities in Mexico.

Promissory Notes

Promissory notes (pagarés) are credit instruments executed by the borrower and guarantors (as avales) in favour of each lender to document a borrowing under the credit agreement. These promissory notes are executed on the borrowing date, indicating the principal amount of the borrowing owed to the respective lender. The execution of promissory notes entitles the lenders to access executive judicial proceedings in the event of a default.

Promissory notes must comply with certain requirements stipulated in Mexican law and must include specific text to be recognised as “pagaré” under Mexican law. There are no specific formalities or registration requirements for the execution or enforcement of a promissory note governed by Mexican law. However, the attorney-in-fact of the debtor and the guarantors (avales) require specific authority for the execution of promissory notes, which must comply with certain formalities required by Mexican law.

Interest rate hedge

The structure of these financings usually requires the borrower to obtain an interest rate hedge, typically in the form of a cap or a swap. Hedge providers typically request that the payment obligations of the borrower under the hedge be secured with the same collateral package granted to the lenders.

Collateral

These financings are structured as senior secured facilities. The collateral is established in favour of the lender (in the case of a bilateral facility) or in favour of a collateral agent (in the case of a syndicated facility). There are no restrictions in Mexican law regarding the creation of liens in favour of a foreign lender or collateral agent. However, the collateral documents must be governed by Mexican law, and the parties must submit to the jurisdiction of Mexican courts.

The common collateral package for these financings in Mexico typically includes the following.

Real estate assets

Real estate assets can be transferred to a security trust (fideicomiso de garantía) established with a Mexican trustee for the benefit of the lender or the collateral agent, or mortgaged in favour of the lender or the collateral agent.

Security trust agreement

A security trust is created through an agreement entered into by the borrower (as trustor), a Mexican financial institution (as trustee), and the lender or collateral agent (as the first-place beneficiary). Under the security trust agreement, the borrower transfers ownership of the real estate property to the trust estate, primarily to secure obligations arising from the credit agreement, provided that the borrower typically retains reversion rights, allowing the transferred assets to revert to the borrower upon satisfaction of the secured obligations.

The inclusion of reversion rights is designed to ensure that the transfer of property is not treated as a sale solely for tax purposes, thereby avoiding the payment of transfer taxes related to real estate property sales. However, the trustee is considered the owner of the transferred property for civil and commercial purposes. Under insolvency procedures, trust assets are typically excluded from the estate of the insolvent entity (ie, the borrower).

In cases where the borrower is structured as a trust, which is common in real estate investment structures, it is recommended that the financial institution serving as a security trustee is different from the one serving as the trustee of the borrower’s trust. This helps avoid potential conflicts of interest in foreclosure procedures.

The security trust agreement covers various aspects, including the rights and obligations of the borrower related to the management and operation of the real estate property and an extrajudicial foreclosure procedure. The trust agreement must be ratified before a Mexican public attester (notario or corredor público) or executed through a public deed prepared by a notary public and registered with the public registry of property corresponding to the location of the real estate assets.

Mortgage

An additional option for creating a lien on real estate assets is a mortgage in favour of the lender or collateral agent. The mortgage must be executed through a public deed prepared by a notary public and registered with the public registry of property corresponding to the location of the real estate assets. Under the mortgage, the property remains in the borrower’s estate and may be subject to additional liens of lower priority in favour of other creditors.

Debt service reserve

Typically, these structures include a three-month debt service reserve, established in a reserve account opened by the security trustee.

Collection rights and waterfall

Collection rights arising from lease agreements and hedge agreements are assigned to the security trustee through assignment agreements. These assignment agreements must be ratified before a notary public or executed through a public deed and registered with the Sole Registry of Liens over Movable Assets. Tenants and hedge providers must be notified of the assignment of collection rights. The assignment notice may be delivered before two witnesses or a notary public or executed by a legal representative of the tenant or the hedge provider. Rent payments and payments in favour of the borrower under the hedge agreement are required to be deposited directly by tenants and the hedge provider into the trust accounts.

The application of payments deposited in the trust accounts is governed by a waterfall clause set forth in the trust agreement. A typical waterfall arrangement includes the following elements:

  • transfer of VAT paid by tenants to the borrower;
  • payment of trust expenses;
  • payment of debt service in favour of the lender or collateral agent;
  • maintenance of the debt service reserve; and
  • transfer of any residual amounts to the borrower.

Pledge over VAT bank account

VAT refunds are deposited by tax authorities into a bank account maintained by the borrower. A pledge over this account is created by the borrower in favour of the lender or collateral agent. This pledge must be ratified before a Mexican public attester and registered with the Sole Registry of Liens over Movable Assets.

Due Diligence

A comprehensive due diligence process for the financed assets is essential for the proper structuring of financing and the drafting of credit documents. This process includes a detailed review of lease agreements. Lenders and their advisers need to have a clear understanding of various concepts, as outlined below.

Title deed

Verification of title ownership and proper registration in the public registry of property.

Lease agreements

Examination of lease terms and conditions, including construction phases, rent payments, tenant rights and options, and termination events.

Existing liens

In acquisition financing, it is common for the stabilised assets to be acquired to be mortgaged or form part of a security trust estate created for the benefit of the seller’s creditors. Co-ordination with the seller’s lenders is necessary, and a review of payoff letters and release and termination documents must be conducted prior to closing. The existence of liens is confirmed through lien certificates issued by the local public registry of property.

Preventive notice

In many Mexican states, the issuance of a preventive notice is required before the transfer of real estate property or the creation of a lien on it. This notice is requested by the notary public designated for the transaction and, together with the lien certificate, reserves the relevant property for a specific period to complete the required action before the corresponding notary public.

Tenants’ preferential rights

Mexican state laws grant tenants preferential rights to acquire leased property in case of a sale. In acquisition financing, it is important to obtain properly documented waivers of tenants’ preferential rights before closing. If the property is in a condominium, a review of local condominium laws and applicable condominium regulations is necessary to determine if other condominium unit owners have any preferential rights that need to be waived.

Construction and environmental permits

Construction and environmental permits from governmental authorities should be obtained before the first disbursement of a construction facility.

Governmental authorisations in acquisition financing

Depending on the transaction’s amount and the location of the financed assets, the borrower may require prior authorisations from antitrust authorities or municipal authorities overseeing urban development.

Property taxes and water services

Lenders should receive evidence of payment of local property taxes and utilities. The existence of outstanding amounts owed to local authorities may hinder or delay the registration of the lien in favour of the lender with the local public registry.

Insurance

Insurance policies covering stabilised property or its construction should be in place, with coverage meeting the lenders’ and their insurance advisers’ requirements. The lender or collateral agent is typically designated as an additional insured party.

Financial Ratios and Mandatory Prepayments

Financial ratios

Typical financial covenants included in the credit agreement measure various aspects, including:

  • the principal outstanding amount of the loan in relation to the value of the stabilised industrial property, determined by an independent appraiser acceptable to the lenders;
  • the net operating income generated by rent payments during a calculation period (eg, the last 12 months) in relation to the debt service paid during that period;
  • in construction facilities, the principal outstanding amount of the loan in relation to the project’s cost, which is validated by an independent supervisor; and
  • the net operating income generated by rent payments during a calculation period in relation to the principal outstanding amount of the loan.

Reporting covenants should provide lenders with access to the necessary information to measure the performance of financial covenants with appropriate periodicity. These covenants should typically include monthly or quarterly rent roll reports and regulations for the delivery of new appraisals of real estate assets.

Mandatory prepayments

The credit agreement usually outlines scenarios that trigger mandatory prepayments. Common triggers include:

  • application of insurance proceeds resulting from property damage;
  • expropriation;
  • permitted sales of a portion of the properties comprising a financed portfolio; and
  • a reduction in the debt service coverage ratio.
Villarreal, García Campuzano, Gómez y Fernández, S.C.

Torre VAO 1
David Alfaro Siqueiros 104 – 204
Col. Valle Oriente
66278
San Pedro Garza García, N.L.
Mexico

+52 81 2140 6900

info@vgf.law https://www.vgf.law
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Law and Practice

Authors



Nader, Hayaux & Goebel (NHG) is a market leader in M&A, banking and finance, fintech, securities and capital markets, structured finance, telecoms, tax, insurance and reinsurance, project finance, real estate, energy and infrastructure, restructuring and workouts, government procurement, antitrust and compliance. The firm comprises 16 partners, three of counsels and more than 40 associates. NHG is the only Mexican law firm that has an office in London, with a strong focus on developing and pursuing business opportunities between Mexico, the UK and other European countries. NHG also enjoys excellent working relationships with law firms in all major cities around the world.

Trends and Development

Authors



Villarreal, García Campuzano, Gómez y Fernández (Villarreal-VGF) is based in Monterrey, Mexico. The firm’s 15-strong team of lawyers has extensive experience in debt and financial transactions and in-depth knowledge of the Mexican financial market. Villarreal-VGF advises Mexican and foreign companies, public and private, including family offices, FIBRAs, CKDs, highly leveraged issuers and companies in restructuring processes. Villarreal-VGF also represents Mexican and international financing sources, including some of Mexico’s largest commercial banks, such as Banorte and BBVA, international development banks, such as NADB, non-banks, such as sofomes and sofipos, debt structuring firms, private debt funds and private debt managers, insurance companies and other international institutional lenders. Villarreal-VGF has participated in and contributed value to a wide variety of financing transactions, including domestic and cross-border transactions, which include syndicated facilities, senior and unsecured financings, acquisition financings, project financings, aircraft financings, structured financings to Mexican non-banks, and real estate financings, including in the industrial, retail, offices, and housing areas.

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