Contributed By Gonzalez Calvillo, S.C.
After being in office for nearly a year, and as a consequence of the adoption of what has widely been seen as a series of poor decisions by President Lopez Obrador’s administration, a slowdown of Mexico’s economy is now well underway (to the level of stagnation), generating increasing market uncertainty and raising significant concerns for local and foreign investors.
The cancellation of key infrastructure projects, including the new Mexico City airport and the pending rounds for oil blocks in the Gulf of Mexico, combined with the replacement of these projects with new ones with (in the best of cases) questionable technical, social and economic feasibility (eg, Santa Lucia airport, the Dos Bocas Refinery, and the so-called Maya train), have caused local and international investors to become concerned about the government's ability to generate the economic growth levels promised during the 2018 political campaigns. Furthermore, significant reductions in government salaries and a threatened relocation and decentralisation of several of the main government agencies have instigated lifetime public servants with relevant career expertise to leave key governmental positions, undermining the administration’s capacity to properly manage the country’s public affairs.
In an attempt to counter the foregoing, among other strategies, the administration is seeking to reform the Mexican pension system by providing greater flexibility to allow for the investment of pension fund flows in different financial instruments. AMLO (as the President is known in Mexico) has also issued a number of tax incentives for certain transactions carried out in Mexican stock exchanges, in a measure that seeks to incentivise corporations to use the securities markets in Mexico. Finally, AMLO recently heralded a government-spending programme that some expect to generate additional economic activity.
On the international front, Mexico's ties and business relationship with the US, its largest commercial partner, have maintained a positive sense of stability. A strong US economy trend has benefited Mexico with, among others, all-time highs in remittance payments from Mexican immigrants into the country, and a growing demand for Mexican products, services and tourism. Also, Mexico has profited from trade wars between the US, China and Europe, which benefit looks set to continue due to the successful renegotiation of NAFTA in the form of the USMCA/T-MEC/CUSMA, although this is still waiting to be ratified by the US congress.
In summary, economic and financial activity in Mexico has shown a slowdown as a result of AMLO's policies; however, international conditions have bolstered some sectors of the economy, thereby partially offsetting some of the administration’s missteps.
Mexican bonds remain among the most competitive in both emerging and developed countries. However, risks associated with the country and negative outlooks from rating agencies have affected the high-yield market and investors’ appetite for it. On the other hand, the Mexican banking sector continues to show sustained growth while default rates are stable, as they have been for the past few years.
Even though Mexico's banking sector has continued to grow, there is still a large part of the population (mainly the lower and middle classes) that have been unable to access banking services, and thus have had little or no access to banking credit. There are several reasons for this: clients are too costly to serve, they might be perceived as risky, or they simply do not or cannot meet the strict borrowing requirements and thresholds set by banks.
Considering that Mexico has one of the largest lower and middle-class populations in Latin America, new financing alternatives tailored to such sectors have arisen slowly but steadily. Similarly, new borrowing opportunities focused on small businesses have also come into play, such as payday and asset-backed loan mechanisms, crowdfunding, and online lending. As a result, some traditional banks have come to understand the size of this unattended market, and are already noticing the success of these small-yet-new and innovative players, and have started to offer similar products, mainly through non-banking SPVs.
Banking and financial techniques are mainly evolving in relation to financial technology, including digitalisation trends, alternative financing methods, new and innovative players, and the evolution of traditional banks, with all of these looking to meet a broader borrower base more efficiently, as well as giving more people access to the financial system.
In this sense, Mexico is the first Latin-American country to regulate financial technology, including crowdfunding, cryptocurrencies and a regulatory sandbox for innovative technologies in the financial sector.
The last tax reforms were passed in the Mexican Congress more than four years ago, and expert impressions are that they carried mostly positive results. As for the future, AMLO's administration has pledged not to create or increase existing taxes and, as stated above, has even created some tax incentives for certain transactions carried out in Mexican stock exchanges.
On the regulatory side, AMLO is seeking to reform the Mexican pensions system by providing flexibility towards the investment of pension funds in different types of financial instruments. Due to the significant size of the system, this legislation could have important implications in generating economic activity in financial markets.
Also on the legal and regulatory side, the recently enacted Fintech Law – which mainly regulates the rendering of legal services through technological platforms and innovative financial instruments such as crowdfunding, cryptocurrencies, and a regulatory sandbox for innovative technologies in the financial sector – is also expected to generate a significant amount of activity in the financial sector.
Generally, the granting of credit in Mexico is not a regulated activity, and can be carried out by any person within the Mexican territory.
However, certain financing activities are regulated by Mexican financial laws and regulations; the performance of these activities requires a registration and/or authorisation from Mexican financial regulators, and the entities that perform them are subject to the supervision of these regulators and need to meet certain requirements, such as minimum capitalisation, corporate governance controls, and disclosure of information. The financial entities that can carry out reserved financial activities include the following:
Foreign lenders are not restricted in any way from granting loans in Mexico.
The granting of security or guarantees to foreign lenders is not generally restricted or prohibited. However, in the event of a foreclosure procedure, foreign lenders may be restricted from owning certain assets (including stock) because of limitations on foreign investment, or in the case of some regulated assets. Notwithstanding, lenders can structure their guarantees in such a way that allows for a foreclosure on Mexican collateral and the consequent sell-off of the underlying assets to a third party without becoming the legal holder (owner) thereof.
Under Mexican law, there are currently no such restrictions or controls.
There are no restrictions on the borrower’s use of proceeds from loans or debt securities, as long as the use is for legal activities.
The concepts of agent and trust are both recognised in Mexico. In the financial context, trusts are commonly used as collateral structures (security trusts), and as debt-service or payment mechanisms. Other alternatives exist to secure obligations; these basically refer to personal guarantees, pledges (over intangible and movable assets, including stock) and mortgages (over real estate). It is worth noting that, contrary to other jurisdictions, only certain entities may act as trustees pursuant to Mexican law, such as authorised banking entities.
Although not expressly recognised by Mexican law, the concept of agent is not opposed in the legal system and can be implemented within its context.
The assignment of creditor rights is possible under Mexican law, and is widely and frequently used. The specific requirements that need to be met depend on the type of creditor rights being assigned, but they generally consist of – in addition to any applicable contractually agreed requirements – the execution of an agreement setting forth the terms governing the assignment, a notice to the debtors, and additional formalities to those necessary for the creation of the relevant rights.
Debt buy-back by a borrower or sponsor is possible under Mexican law, subject to certain “claw-back” provisions (generally, 270 days prior to a declaration of concurso mercantil in detriment of creditors under a bankruptcy or reorganisation proceeding). Note that debt acquired by an affiliate of a borrower has a different voting treatment and ranking for purposes of a concurso mercantil.
Under Mexican law and in the context of a public acquisition finance transaction, an acquirer must disclose the amount and the source of the resources that it will use in the transaction, as well as whether all or part of these resources will come from financings, in which case it must also disclose a summary of the terms and conditions of the relevant financings, pointing out the direct and indirect consequences that such financings may have for the relevant issuer. These provisions are common in other acquisition finance transactions.
This disclosure is made by the acquirer in an offering memorandum, which is publicly filed. The offering memorandum has to be drafted based on the form provided by the Mexican securities regulator in the relevant Mexican regulations.
Generally, amounts for interest paid and proceeds that result from the enforcement of collateral that was specifically intended to be used for the payment of interests or other fees by a Mexican lender to a foreign lender will be subject to withholding taxes. Withholding taxes rates will vary, depending on the specific transaction or scenario, and double-tax treaties will come into play to determine them.
Mexican banking institutions are not subject to withholding taxes, and are taxed as provided for in Mexican law. Furthermore, loans to certain Mexican financial entities may qualify for a preferential withholding tax rate.
The Mexican Supreme Court has issued several precedents and criteria restricting disproportionate interest rates (ie, rates that are lucrative for one party and excessively burdensome for the other). Courts will use a case-by-case analysis to establish whether an interest rate is disproportionate and thus if an equitable reduction is appropriate. Generally, to determine whether a rate is disproportionate, courts will take the specific circumstances of the case into consideration, and will not determine disproportionality when the parties involved are finance and/or commercial experts, merchants or commercial entities.
The payment of interest on accrued interest is not enforceable in Mexico.
Under Mexican law, collateral can be created over rights and all types of privately owned assets, including real estate and movable assets such as property and goods, shares/partnership interests, receivables, intellectual property, and/or cash deposited in bank accounts.
The following structures and related formalities are generally used in financing transactions.
Pledge over equity interests
The equity interests of a Mexican corporation or limited liability company can be granted as collateral to guarantee payment obligations. In order for a pledge over equity interests to be duly granted, a pledge agreement must be executed, the pledge must be registered in the applicable corporate book of the issuer and, depending on whether the specific case requires priority over tax credits, the pledge agreement must be ratified before a Mexican notary public and registered before the Registro Único de Garantías Mobiliarias. Also, in the case of corporations, the pledged stock certificates must be delivered and endorsed in favour of the pledgee. Finally, a recommended practice in this type of collateral is for a power of attorney to be granted to the pledgee to exercise the voting powers and economic rights of the pledged equity interests in the event of a default (stock power).
Pledge over movable assets
There are two ways of creating pledges over movable assets: a regular pledge (possession of the pledged assets is transferred to the pledgee as depository) or a floating/non-possessory pledge (possession of the pledged assets remains with the pledgor). In both cases, a pledge agreement must be executed and then ratified before a Mexican notary public, and finally registered before the Registro Único de Garantías Mobiliarias. Other consents or registrations may also be required, depending on the specific assets being granted as collateral and/or the nature of the grantor.
This structure is one of the most flexible, as it allows for collateral to be granted over different kinds of assets and may encompass all (or most) of the assets of the borrower or guarantor. Specifically, the security trust basically works when the guarantor transfers title of the collateralised assets to a trust (to be managed by a Mexican financial institution as trustee) for the benefit of the secured party. In other words, it has the purpose of securing the relevant payment obligations with the trust assets, and can also serve as a servicing mechanism for the relevant debt.
The formalities required to put a security trust in place depend on the nature of the collateralised assets. In general, these include ratifying the agreement before a Mexican notary public and registering it with the applicable public registry.
The principal benefits of having a security trust structure vis-à-vis a combination of pledges and mortgages are that the collateralised assets become bankruptcy remote, thus protecting the secured party in the event of the grantor's bankruptcy or insolvency, and that the secured parties can exert a higher degree of control over the collateralised assets.
The main cons of this structure vis-à-vis a combination of pledges and mortgages are that it is more costly as it may incur additional notarial and registration fees, as well as trustee fees, and that it can be intrusive in the day-to-day operations of the borrower and/or interfere with them.
Mortgages are used to create collateral over real estate (land or building), and must be executed in a public instrument before a Mexican notary public. In order for a mortgage to produce effects vis-à-vis third-parties it must be duly registered in the public registry of property corresponding to the collateralised asset's location; the registration fees for this registration may be material, depending on the secured amount and the Mexican state in which the relevant real estate is located.
The granting of universal liens is permitted under Mexican law and must be structured under either a non-possessory pledge or a security trust. In this type of structure, it is important to contractually agree the terms and conditions under which future assets will automatically become part of the corresponding collateral.
Another structure that can be used for such purposes is the industrial mortgage, which allows the grantor to collateralise all the assets of a company as a commercial unit. However, this structure is only available for Mexican financial institutions.
It is possible for entities in Mexico to give downstream, upstream and cross-stream guarantees. However, as per common practice (and to avoid interpretation controversies), the authority to guarantee third-party obligations must be contemplated in the relevant grantor's (parent, affiliate or subsidiary) corporate purpose when such grantor is a Mexican entity.
There are no restrictions on a target granting guarantees, security or financial assistance for the acquisition of its own shares, except that the security would be subject to claw-back provisions if the acquisition was carried out at the detriment of creditors within 270 days prior to a declaration of concurso mercantil.
Security over publicly owned Mexican assets cannot be created in Mexico.
Certain types of regulated assets would be subject to additional perfection requirements, such as concession rights, airplanes or vessels.
The enforcement of security in Mexico would be limited by insolvency, concurso mercantil, bankruptcy, moratorium, labour, tax and other laws of general application generally affecting the obligations of debtors and the rights of creditors.
Additional contractual requirements may apply, depending on the by-laws of the grantor of Mexican security.
Generally, security over Mexican assets or assets located in Mexico can only be created through Mexican law-governed documents.
Security is typically released when the secured obligation is duly paid, discharged or otherwise terminated (whether by mutual consent, novation, set-off, or another method), and normally requires the reversal of the formalities that were used for its creation, provided that the terms agreed in the collateral agreements may dictate whether any additional formalities are necessary.
The priority of credits under Mexican law is regulated by the Ley de Concursos Mercantiles and, generally, is as follows:
In Mexico, the subordination of credits is as provided above. Contractual subordination provisions for credits of secured creditors and unsecured creditors would be recognised in Mexico.
Secured lenders can enforce secured collateral if and when the principal obligor of the secured obligations is subject to a corresponding event of default, as contractually agreed in the relevant financing documents. Such enforcement will involve a judicial proceeding in order for the secured lender to validly foreclose on the collateral. However, under certain circumstances, the parties may agree on an extra-judicial foreclosure procedure which, among other things, entails less time.
As for restrictions, the enforcement of collateral is limited by insolvency, concurso mercantil, bankruptcy, moratorium, and labour, tax and other laws of general application affecting the obligations of debtors and the rights of creditors.
A choice of governing law will be upheld in Mexico as long as the parties to the corresponding financing documents expressly submit to the applicable jurisdiction, and waive any other jurisdiction to which they may be entitled for whatever reason.
A judgment issued by a foreign court would be enforceable in Mexico subject to compliance with the requirements of Article 1347-A and other applicable articles of the Mexican Commerce Code (Código de Comercio) and Articles 569 and 571 of the Mexican Federal Code of Civil Procedure (Código Federal de Procedimientos Civiles).
Generally, these requirements are that:
The enforcement of collateral is limited by insolvency, concurso mercantil, bankruptcy, moratorium, and labour, tax and other laws of general application affecting the obligations of debtors and the rights of creditors.
Also, in the event of a foreclosure procedure, foreign lenders may be restricted from owning certain assets (including stock) because of limitations on foreign investment, or in the case of regulated assets. However, lenders may foreclose on Mexican collateral and sell off the underlying asset to a third party without ever becoming the legal holder (owner) thereof.
Extra-judicial reorganisation procedures are not expressly recognised by Mexican insolvency laws but are available prior to the commencement of insolvency procedures. In these extra-judicial processes, the voting requirements are contractually agreed by the creditors and the company.
Also, in terms of Mexican law, a restructuring plan can be agreed by the company and a simple majority of its creditors, provided that such plan is filed as part of a concurso mercantil procedure.
Bankruptcy and reorganisation proceedings will strongly affect a lender's right to enforce a loan and related collateral; however, the extent thereof will vary significantly depending on the specific collateral structure put in place.
Generally, lenders that have received security such as a pledge or mortgage (if duly filed before the corresponding registry of commerce or property, as applicable) will have priority ranking over other creditors (except for tax and labour credits). Other benefits of being treated as a secured creditor include continued accrual of ordinary interest, loan currency protection, and the ability to participate in the eventual creditor agreement that puts an end to the reorganisation.
Security trusts, as referred to above, are treated as “bankruptcy remote", given that title to the collateralised assets has already been transferred to the trust. Even if security trusts tend to be on the more robust side of collateral structures in Mexico, in recent years some courts have issued preliminary injunctions and temporarily suspended the enforcement and foreclosure of assets collateralised under a security trust on the basis that the company being reorganised might need such assets for its survival.
Generally, the order in which creditors are paid in a company's insolvency is as follows:
The concept of equitable subordination is recognised by Mexican legislation, and the parties related to the insolvent entity will be subordinated as indicated above.
If a lender is treated as a secured creditor, as mentioned before, it will have priority over other general creditors. If no agreement is reached to conclude the reorganisation, such secured creditors will have the right to foreclose on their security. However, the bankruptcy estate (masa concursal) could only be sufficient to cover tax and labour credits in detriment to the rest of the creditors in line.
Mexico has been an attractive destination for project finance for more than a decade, with infrastructure projects spanning several sectors. However, recent structural reforms have had an important boosting effect on the project finance sector, specifically with respect to energy, telecoms and infrastructure. This can be seen in the increasing activity in the construction and operation of infrastructure projects.
For an overview of the legal framework, please refer to the sections below.
Public-private transactions (“APP”) are widely used in Mexico's long-term investment projects, and have the purpose of providing services to the public sector by developing infrastructure built and operated by the private sector.
APP transactions are regulated by both federal and local authorities (depending on the jurisdiction of the entity executing the relevant APP). At a federal level, the main regulations are provided under the Ley de Asociaciones Público Privadas and its regulations; local regulations may be set forth in different laws (which are in most cases consistent with federal regulations). This regulatory scheme seeks the development of infrastructure in Mexico by allowing joint ventures, partnerships and other forms of associations between the public and private sectors, without major restrictions or obstacles.
While the financing component of project finance transactions does not require any sort of governmental approval, the investments themselves could require the authorisation of different government agencies, depending on the scope of the transaction and the specific industry or sector the project falls into. Agencies like the Federal Antitrust Commission (Comisión Federal de Competencia Económica) or the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones) may need to approve the transaction from an antitrust standpoint, or authorities like the Ministry of Energy (Secretaría de Energía), the Energy Regulatory Commission (Comisión Reguladora de Energía), the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos), the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales), the National Water Commission (Comisión Nacional del Agua), the Ministry of Economy (Secretaría de Economía) or the Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes), among others, may need to authorise the investment (through the granting of concessions, licences, and other permits).
Generally, project finance transactions are not subject to taxes, fees or charges, although general tax obligations would apply.
Other than specific formalities to be followed depending on the specific project at hand, project finance transaction documents are subject to the jurisdiction considerations, fees, formalities and registrations outlined above (particularly in 5 Guarantees and Security), specifically with regards to the implementation of financing structures and related collateral.
The main governmental agency responsible for the energy sector (encompassing oil and gas) is the Ministry of Energy (Secretaría de Energía), which sets forth Mexico's public policy regarding energy resources. Two agencies also play a significant role in this sector: the Energy Regulatory Commission (Comisión Reguladora de Energía) is generally in charge of supervising and promoting the efficient performance of the transportation, storage and distribution of oil and gas, refined products and petrochemicals, as well as power generation, supply and transmission activities, and the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) is responsible for supervising the exploration and extraction of hydrocarbons, among other things. Other agencies also come into play in the energy sector, including the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales), the National Water Commission (Comisión Nacional del Agua), etc.
The main authority in charge of supervision in the mining sector, and of granting the necessary authorisations, is the Ministry of Economy (Secretaría de Economía).
The primary laws and regulations range from federal to municipal statutes, and will depen on the specific project or investment. That being said, the general framework applicable to project finance transactions in Mexico includes the Federal Civil Code (Código Civil Federal), the Commerce Code (Código de Comercio), the General Law of Business Organisations (Ley General de Sociedades Mercantiles) and the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito). Specific statues to keep in mind for the energy and mining industries are the Mining Law (Ley Minera), the Hydrocarbons Law (Ley de Hidrocarburos), the Power Industry Law (Ley de la Industria Eléctríca), the Energy Transition Law (Ley de Transición Energética), the Geothermal Energy Law (Ley de Energía Geotermica), the National Waters Law (Ley de Aguas Nacionales) and the General Law on Ecological Equilibrium and Environmental Protection (Ley General de Equilibrio Ecológico y la Protección al Ambiente). Relevant secondary regulations would depend greatly on the specific transaction.
The main issues that need to be considered when structuring a project finance deal arise from the terms and conditions under the project’s main agreements, and the nature of the project assets. These issues mainly have to do with the limitations that they may bring from a financing perspective (social and environmental impact, land matters, risks and collateralisation) and how to overcome them.
The most commonly used legal form for a project company is a corporation (known as sociedad anónima), which shields its shareholders from the liabilities of the project company. These companies are mainly regulated by the General Law of Business Organisations (Ley General de Sociedades Mercantiles). However, limited liability companies (known as sociedades de responsabilidad limitada) are sometimes used as well, mainly due to tax (pass-through) considerations.
Generally, foreigners can participate in Mexican projects without significant restrictions. That said, limitations apply to strategic activities, with foreign investment being restricted or not permitted at all. Such limitations are contained in the Foreign Investment Law (Ley de Inversión Extranjera) and basically entail the following:
Likewise, Mexico is party to several international treaties that protect foreign investment by providing, among other things, alternative dispute resolution mechanisms, protection from expropriation, free transfer of funds, etc.
The typical source of project financing in Mexico is bank financing paired with export credit agency financing – this financing comes from both international banking institutions and Mexican banks (commercial and development). That said, the use of project bonds and other structured securities is on the increase, taking a place in the Mexican project financing market. These have proved to be attractive investments for Mexican pension funds (AFORES), which have taken advantage of relevant tax benefits.
However, financing these types of investments with equity is a useful alternative in some scenarios.
The typical structure for project financing involves a credit agreement, guarantees from third parties, letters of credit (guaranteeing the risk capital), promissory notes, customary conditions precedent, the contracting of relevant insurance, financing models, pledges, and a guarantee, management and source of payment trust to which all the assets of the project are transferred (including collection rights and financing proceeds) to serve as the funding vehicle of the project (subject to work progress), its collateral, and the source of payment of the different financings.
Under Mexican law, title to natural resources belongs to the state, so the exploitation of natural resources typically requires an authorisation from the relevant government agency in the form of a concession or permit, which is usually only granted to Mexican entities. Likewise, and depending on the specific resources, there are restrictions on private players participating in activities across the spectrum (extraction, transportation, distribution, export, etc). In other words, certain activities related to the exploitation of natural resources are reserved exclusively for the state.
The payment of certain fees may also be required, depending on the specific activity or natural resource being exploited. For example, private entities engaged in upstream activities are required to pay/receive a percentage (either in cash or in kind, depending on the specific contract) of the gross value/amount of the hydrocarbons produced.
There is a robust and vast body of laws regulating the environment, as well as health and safety. On the environmental end, these laws seek to protect the ecological balance and address comprehensive waste management, biodiversity preservation and climate change. As for health and safety, the General Health Law (Ley General de Salud) sets forth the primary framework that, together with secondary regulations and official standards, seeks to guarantee workers' health and safety.
Islamic finance instruments have not yet been structured in Mexico. There have recently been discussions about issuing a Shari'a-compliant bond but nothing has ever materialised – this could very well be because of other versatile structures currently emerging in Mexico.
As mentioned above, this is not yet an issue in Mexico.
There are currently no Shari'a-compliant products used in Mexico.
There are currently no Shari'a-compliant products used in Mexico.
There are currently no Shari'a-compliant products used in Mexico.