Contributed By Santamarina y Steta SC (México City - HQ)
The first Mexican securities law was enacted in January 1975 It focused on figures like brokers and securities agents, and included regulations regarding the fundamentals for the registration and public offering of securities in Mexico, as well as some disclosure obligations applicable to issuers.
As a result of the global reaction to corporate and accounting scandals in 2005, a new Mexican securities law was enacted and took effect in 2006, primarily to include higher corporate governance requirements for issuers and sanctions for managers and directors of public companies. This new securities law allowed the effective development of Mexico's financial market, enabling the use and enforcement of new financial products and instruments.
The 2008 crisis affected the Mexican market, particularly hitting companies with debt or financial instruments in US dollars. Although the securitisation regulation was already in place, Mexican regulators enacted amendments to the secondary Stock Market regulation in order to include the issuing of structured finance asset, as well as its registration requirements. Since then, the term “Structured Assets” (Valores Estructurados) has been included in other financial norms and regulations.
Mexican corporate debt issuing trends have been linked to macroeconomic conditions. Mexico has experienced a time of relative economic stability, leading to an increase in corporate debt issuance by means of “Certificados Bursátiles” (“CB”). The CB was included in the Mexican Stock Market Law as a financial instrument in 2001 and was very innovative for the Mexican debt market, becoming the most used financial instrument for debt issuance in Mexico. In 2001, the CB represented 12% of the total debt instruments used in the Mexican Market, increasing to 95% by 2007, with an average growth rate of 76% in those six years. The CBs not only allowed public companies to acquire financing through debt, but also allowed governmental entities such as decentralised governmental organisms like PEMEX (Petróleos Mexicanos) and INFONAVIT (Instituto del Fondo Nacional para la Vivienda de los Trabajadores) to issue debt. The versatility and flexibility of the CB as a financial instrument has definitely contributed to its development, since it is highly adaptable to the financial needs of the issuers. Such development has contributed to the growth and increased sophistication of the Mexican structured finance market and debt market.
In 2014, a reform of financial legislation was published in the Mexican Official Gazette, including initiatives to amend different legislation in Mexico. In terms of financial regulation, the main purpose of such reform was to improve the securities market, making it more efficient and providing more transparency for investors and other participants in the financial market, in order to get investors to take part in the debt and capital markets in Mexico. Such reform has provided the possibility for financial institutions to offer more financial products as well as more sophisticated financial products.
Another important development in the Mexican market is the creation of Exchange Traded Funds (“ETFs”), which are also known in Mexico as Securities Assets Referred (tracs or trackers). ETFs are investment vehicles that seek to replicate indexes in order to obtain returns equal to the benchmark index, which allows the investor to obtain exposure to markets of different countries, regions or sectors, as well as fixed income assets and commodities, at a low cost and with relative ease. In Mexico, ETFs date back to 2002, when Nacional Financiera (Nafin) decided to list the first ETF on the Mexican Stock Exchange (BMV), NAFTRAC. NAFTRAC is an example of an ETF that looks to replicate the Mexican Stock Exchange own price and listing index, and was the first instrument of its type in all of Latin America. Given its success, it became the most traded security in the market by 2010, representing 26% of the total trading volume of the Mexican Stock Exchange.
As of today, Mexico is considered to have one of the most active and innovative markets in Latin America, with securitisation growing in sectors with receivables like airline tickets, highway tolls, credit and financial leases.
Mexico's strong trade ties with the US and the renegotiation of NAFTA, as well as other internal economic and political changes, have jeopardised the stability of the peso. Despite this, the M&A market has continued a steady development, affecting the financing of such transactions. There are several structures available under Mexican law for the acquisition of business and the financing thereof.
One structure that has become available under Mexican law since the enactment of the new securities law is the Real Estate Investment Trust (in spanish, “FIBRAS”). The FIBRA is a fiduciary security, generally documented through a fiduciary CB, dedicated to invest in real estate, whose partial or total return is linked to the trust assets that grant rights over the income generated by such trust.
The FIBRA has specific features, including the following:
Additionally, in September 2009, the Mexican Stock Exchange sponsored the creation of a new type of security, the Development Capital Certificate (“CKDs”), which consists of a fiduciary security that, like the FIBRA, is generally documented through a fiduciary CB. The CKD is dedicated to the financing of one or more projects or promoted companies whose partial or total return is linked to the underlying trust assets that grant rights over the profits and/or products of the investments made in said projects or promoted companies and, where applicable, to the result of the disposal of the assets.
CKDs are intended to fund one or more projects aimed at facilitating Mexican economic growth and development with the help of a public investors' fund. Specific features of the CKD include the following:
Mexican Credit Institutions have also financed several transactions in recent years, primarily between private parties. In transactions where public companies act as buyers, the financing instruments used include public debt issuance; in this sense, public companies have a more diverse range of financing opportunities. When acting as buyers, public companies have leveraged their transactions using a combination of financing structured products. One example is the use of bank credits and debt issuance together in a leveraged acquisition transaction.
Recently, some acquisition transactions have been financed by means of debt issuance through CB instruments, due to their convenience and flexibility.
There is a sophistication trend regarding the instruments offered in the Mexican Stock Market, meaning that there is an increase in the financing instruments available. The main objective of the diversification in available financial instruments is to allow investors or issuers to benefit from a tailored instrument that fits their financial requirements and needs. The risks and repayment structures of the financial instruments available, as well as other capabilities, have been welcomed by issuers and investors alike, who can also benefit from combined financing strategies, resulting in reduced risks and better credit terms.
The amount and sophistication of financial instruments offered in Mexico as been increasing over time. As well as CKDs and FIBRAS, other instruments such as Mezzanine Credits are being used more regularly by participants in the Mexican financial market. Mezzanine debt consists of a “hybrid debt” subordinated to another debt from the same issuer, using equity instruments (warrants) in order to increase the value of such subordinated debt and to grant bigger flexibility.
Mezzanine credits in Mexico are increasingly used for leveraged buyouts and in various types of M&A, especially since a large amount of public companies in Mexico are family owned, and the owners of family-owned companies try to avoid diluting their ownership and/or selling equity, which would mean having an outside shareholder.
Even though there is no particular regulation concerning acquisition/leveraged finance, there is, firstly, regulation concerning M&A. Secondly, in connection with acquisition financing, the Mexican stock market laws regulate financing instruments on an instrument by instrument basis, with the regulation for each instrument including mainly disclosure, compliance and corporate governance requirements.
There are also some alternatives provided in the regulation for private companies. One such alternative is the issuance of corporate bonds, which provide companies with the more flexible possibility to issue debt on a private basis.
The documentation of an acquisition finance/leveraged finance transaction varies, depending on the type of transaction and the specifications in question. In the case of a CB, the financing can occur either directly to the issuer or to a special purpose vehicle incorporated for such particular purpose. For the financing to occur directly, the issuer must meet a certain risk rating in order to have the opportunity to be an underwriter without providing any guarantee. If the issuer does not meet a certain risk rating, then they must provide sufficient warranty without the need of transferring the assets, for example by means of a mortgage or a pledge.
When offered through the public market, CBs must comply with the disclosure, compliance and corporate governance requirements in terms of the corresponding Mexican Securities Laws.
In acquisition finance/leverage finance transactions, the entity receiving the financing can either receive investors in exchange for equity, or issue or acquire debt, with the latter being the most commonly used finance strategy for leveraging a transaction. Meanwhile, the type of securities that are typically being used to secure a debt financing transaction are mortgages and pledges without the need of any “true sale” of assets. Nevertheless, a transfer of rights or assets can be carried out when required by the leveraged finance strategy, as is the case in a secured financing by means of the transfer of shares to a special purpose vehicle.
In Mexico, there are no restrictions that limit the use of assets as a security. The general rule is that the property of the assets must belong to the borrower or its financial sponsor. Moreover, such assets shall be transferable by their own nature and shall be considered lawful assets in Mexico. As long as such rules are met, then such assets can be used as security for any kind of debt financing.
The principle of the parties' will prevailing in private agreements applies; therefore, any "non-assignment" or "non-negotiable" clause or provision in a promissory note or other negotiable instrument could restrict the ability to grant security interest with such assets.
As a particular example, the recently enacted Law to Regulate Financial Technology Institutions (“Fintech Law”) establishes the regulation of Virtual Assets and their operation. The secondary regulation of the Fintech Law, which will address the regulatory framework regarding the use of such Virtual Assets, has not yet been enacted. As such, there is a restriction when such virtual assets are intended to be used as security for debt financing, since they are not yet determined by the secondary regulation. Nevertheless, the fact that there is no yet any secondary regulation does not imply that such regulation will be enacted in Mexico in the near future, and may allow virtual assets to act as security for debt transactions. As of today, there is a practical restriction for the use of virtual assets as security in a debt financing transaction.
It is also important to note that the National Retirement Savings System Commission (“CONSAR“) amended the investment regime for pension mutual fund management companies (Sociedad de Inversión Especializada en Fondos para el Retiro) (“SIEFORES”), allowing SIEFORES to invest in CKDs, since such financial entities have a limited range of investment opportunities. The participation of this type of institutional investor is expected to result in a more straightforward and developed securitisation market.
There are two possible ways of granting security of an asset. The first is by means of establishing collateral over the assets, and the second is by transferring or assigning the assets.
For granting a security interest by means of collateral over the assets, the applicable requirements can vary depending on the nature of the assets, but are generally as follows:
Notwithstanding the foregoing, the registration process shall follow the formalities applicable under the particular law, depending on the type of asset in question.
In connection with the transfer or assignment of assets, the owner shall execute the agreements as required by the applicable laws, once the transfer or assignment formalities are in place and such transfer or assignment is perfected. Such transfer or assignment agreement will then be registered in the Public Registry of Ownership and Commerce (Registro Público de la Propiedad y del Comercio), if required, as applicable under Mexican legislation in the case of real estate, or the registration process shall follow the formalities applicable under the particular law, including the requirements for the transfer of receivables by local or municipal governments. The granting of securities by means of transfer of assets creates the bankruptcy-remoteness of the security.
In Mexico there are different ways of enforcing a security, although such enforcement shall follow the legal nature of the asset and the procedure. As an example, a mortgage granted under civil rules shall follow a special mortgage proceeding. Financing is ordinarily regulated as a commercial transaction, and security interest over a business nature asset shall be enforced by either a mercantile ordinary proceeding or a summary proceeding. A mercantile ordinary proceeding is more complicated to enforce, since the enforcement of judgment is procured at the end of the process, unlike a summary proceeding in which the process starts with the securing of the assets followed by a flexible process.
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Ordinarily, under Mexican law a borrower can assign or transfer the debt to a different financial entity or third party. Such assignment shall always follow the rules of the debt agreed between the parties and shall be restricted if one of the parties has inside information. In order to effect the transfer or assignment, the borrower and the new lender shall engage and enter into an agreement that could lead to the creation of additional security interests for the purposes of securing the debt.
Debt is more actively traded than stocks in the Mexican Stock Market, with more debt issuing transactions occurring in the Mexican Stock Market than initial or secondary public offerings of shares. For such reasons, in the Mexican stock market the debt market is considered to be bigger in terms of trading than the capital market.
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Financial restructuring has been a very useful procedure for Mexican companies that are willing to reorganise their financing. Since the enactment of the new Bankruptcy Law in 2006, companies experiencing financial crunches have gone through restructuring processes that have enabled many to continue in business as well as accrue turnover. Many companies jeopardised their finances after the crisis of 2008, primarily because they were debtors/borrowers of financial instruments agreed in US dollars and the exchange rate was very volatile at the time. Another significant juncture for financial restructurings occurred when regulators changed the regulatory framework applicable to the housing market. As a result of such regulatory shifts, companies in the housing market experienced financial distress, resulting in restructuring processes for such companies.
The main challenges faced in a financial restructuring are to keep the business running and to ensure that workers' wages are paid. It is also relevant to run due diligence on the risks of defaults that could be incurred because of the liquidity shortfalls. From a legal perspective, it is very important to understand the priority ranking of the creditors and to negotiate on an individual basis with each one of them.
There is no pending reform that will have a direct impact on leveraged financing as such, but there are other reforms and pending laws to be enacted in Mexico. An example is the Fintech Law, which has already been enacted but whose secondary regulation is still waiting to be issued by the Mexican financial authorities. As such, the Fintech Law can influence leveraged financing since it addresses crowdfunding in Mexico. Crowdfunding can be used as a vehicle for the acquisition of financing for private companies and/or parties. Another advantage that will affect leveraged financing is that crowdfunding can work as a way of obtaining financing without the extensive compliance required by the acquisition of public debt.
A special purpose vehicle for securitisation transactions can be established in several forms or entities:
The assets to be transferred, assigned and/or sold follow the applicable regulatory framework according to the nature of the asset. As explained above, certain applicable rules need to be complied with for the transfer of assets (please see2.3 Security).
Commercial and mortgage-backed securities are the main receivables securitised in Mexico. In Mexico, the housing industry has been very active of late, with strong development in recent years, particularly as a result of securitisations of credits granted by housing companies for the acquisition of houses and the securitisation of bridge loans and mortgage loans (Bonos Respaldado por Hipotecas) that are, in broad terms, bonds secured with mortgages.
Usually, there is no re-characterisation risk if the acquisition of the assets by the SPV is paid for effectively and the assignment is conducted legally.
The “true sale”, transfer or assignment of the assets – meaning a transfer that is paid effectively and conducted legally – is ordinarily documented in a purchase agreement or an assignment agreement between the originator and the special purpose vehicle. Depending on the vehicle, the transfer can also be documented in the underlying trust agreement.
Certain notices to underlying debtors may be required, depending on the type of receivable involved. This is the case for payment rights or credits and commercial receivables. In some cases, such notices require formalisation before a Mexican notary public.
The Financial Protection and Defence of Financial Services Commission requires notification to the underlying debtors in connection with certain receivables, particularly loan/credit receivables or payment rights. Therefore, it is advisable to conduct a thorough review of the receivables to confirm their assignability and whether such receivables satisfy the requirements for the securitisation. In Mexico, the securitisation of whole businesses (collateralised debt obligations (CDOs) and collateralised debt obligations (CBOs)) with publicly issued securities has not yet occurred.
In terms of the Mexican data protection legislation, the transfer, assignment or sale of personal data linked to the receivables is permitted as long as such transfer is carried out between companies of the same corporate group, and that such companies operate under the same policies and principles in terms of data protection. Consequently, the transfer of such data must satisfy the needs and characteristics of the SPV.
Companies can carry out such transfer, assignment or sale once such data has been disassociated and once the profile has been converted to an anonymised profile (ie, no personal data is included and any anonymised data cannot lead to the identification of any person). As such, the anonymised profile can be transferred to third parties for the elaboration of statistical analysis.
Market conditions determine whether or not the consideration for the transfer or assignment of assets will be done on a deferred purchase price basis. The transfer or assignment can be perfected and legally binding even if the price has not been covered in full, as the legal nature of the transfer or assignment of the assets or receivables allows such perfection.
In order to satisfy the requirements of a “true sale” under Mexican law, the transfer, assignment or sale must meet the requirements and formalities for the asset in question.
A “true sale” is a transfer or assignment of assets/receivables that is paid effectively and conducted legally. Depending on the vehicle, the transfer can also be documented in the underlying trust agreement. In connection with the transfer, assignment or sale of assets, the owner shall execute the agreements as required by the applicable laws, once the transfer or assignment formalities are in place and such transfer or assignment is perfected. Such transfer or assignment agreement will then be registered in the Public Registry of Ownership and Commerce (Registro Público de la Propiedad y del Comercio), if required, or the registration process shall follow the formalities applicable under the particular law, including the requirements for the transfer of receivables by local or municipal governments. The granting of securities by means of the transfer of assets creates the bankruptcy-remoteness of the security.
There are different conditions that determine whether issuances should be done via an SPV or a trust; specifically, the market conditions determine whether securities should be issued publicly or privately.
The administration trust (fideicomiso de administración) is the most widely used form of SPV in Mexico, although Mexican companies can also be used. The companies most commonly used are the variable corporate capital business corporation (Sociedades Anónimas de Capital Variable – S.A. de C.V.) or variations thereof, such as the investment promotion business corporation (Sociedades Anónimas Promotoras de Inversión de Capital Variable – S.A.P.I. de C.V.).
Mexican legislation does not have a minimum capital requirement for the incorporation of a company to be used as an SPV.
In principle, a Mexican trust provides the benefit of bankruptcy remoteness, subject to the actual transfer of title to the assets to the trust. Prior due diligence is required in order to confirm that the relevant assets are capable of legal assignment to the trust (or that any requirements for such assignment are satisfied) and are free from liens or limitations of ownership. If an insolvency procedure (concurso mercantil) is filed with a Mexican court, the assets or goods that are legally held by the trustee cannot be affected by the judicial award, unless the transfer of such assets is considered null and void.
In Mexico, the trustee of an SPV could file an insolvency proceeding or be sued for an involuntary proceeding, if the Bankruptcy Law causes are applicable.
If the entity does not comply fully with the bankruptcy-remoteness requirements, then priority ranking shall be strictly requested in order to ensure investors have priority access to assets in the special purpose vehicle.
Mexican trusts (Fideicomisos) do not have legal personality themselves, as the trustee (Fiduciario – which is normally a credit institution) “lends” their legal personality. The assets transferred to the trust constitute a new patrimony (that is, a collection of valuable assets and rights of any person or legal entity) that is different to that of the issuer or, in this particular case, the trustor. If the ownership of the assets complies with the legal formalities and/or requirements for the creation of this new patrimony, including the transfer or assignment of assets (that is, notice to the debtor in the case of receivables), the assets will not be part of the originator's insolvency proceedings, because they will be part of the trust's patrimony, thereby ensuring bankruptcy-remoteness.
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Financial entities in Mexico offer many types of structured products, such as Range Accrual, Asset Range Accrual, Option linked note, Double Chance, Wedding Cake, Reverse Exchangeable and others. Despite the offering of such products, their growth in the Mexican market and the appetite of Mexican investors may not be as sophisticated as in other global markets, with the result being that the issuance and trading of structured products in Mexico is circumscribed to a constrained amount of issuers and investors.
The players that are active in structured products are mainly banks, brokerage houses and investment funds.
Ordinarily, the legal and regulatory regime for structured products is included in the securities regulation, whereas structured products are considered as a combination of ordinary securities. The issuance of structured products must adhere to and comply with the Mexican securities legislation and its corresponding secondary regulation.
Approval from financial authorities such as the National Securities and Banking Commission and the Bank of Mexico is required for the issuance of structured products. Structured products are considered as regular securities and are therefore regulated by the securities regulation, so similar rules apply for the issuance and offering of structured products. A request must be submitted to the National Securities and Banking Commission and, once the approval is granted, the issuer can offer such securities and/or structured products.
There is no type of regulatory restriction in Mexico that limits the characteristics and particularities of the structured products that can be issued, offered and traded in Mexico. TheNational Securities and Banking Commission has all the necessary capabilities and powers to intervene where any Mexican entity is issuing structured products or offering any type of security or structured product, as long as such participant is domiciled in Mexico.
Mexican legislation is broad and flexible in the type of structured products that can be issued, offered and traded in Mexico, as long as such products comply with the existent securities legislation.
The documentation required for the issuance and offering of a structured product is similar to the documentation required for the issuance and offering of debt securities, since such activities require similar authorisation from the corresponding financial authorities. One of the main differences between the issuance of securities and the issuance of structured products is that authorisation from the Bank of Mexico is required for the latter.
In general terms, no approval or licence is required in Mexico for engaging in OTC derivatives as they are considered agreements executed between private parties, and such agreements are neither standardised nor traded in a regulated market.
As long as the transaction to be executed through the OTC derivative is considered legal in terms of Mexican legislation, any private party can engage in OTC derivatives.
There is applicable legislation for many financial entities in terms of allowed investments, specifically for pension funds. Counterparties that are willing to engage in a specific OTC derivative must take their own risk limitations into account. Broadly, financial entities must consider and analyse not only the instrument but also the performance and risks that such instruments carry.
Mexico does not have a specifically standardised master agreement that applies only to Mexican legislation. The terms of an ISDA agreement are commonly used as a standardised master agreement, following the international standards.
Many legal practitioners are required to obtain and sometimes issue legal opinions regarding the enforceability of standardised master agreements. Since such agreements are agreed between both parties, the conclusion is often that they are, in fact, enforceable for the parties executing such agreements.
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There is no specific regulation in Mexico specifying that an acknowledgment of the stay powers of a regulator or any governmental body is required. Under Mexican law, a regulator/governmental body has stay powers and no requirements are considered necessary to execute such authority or powers.