Debt finance

Lending

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the National Banking and Securities Commission to conduct such business. The main provisions regulating these activities aim at protecting financial services users, strengthening competition in banking services, and giving the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) powers to supervise and impose sanctions.

There are no additional restrictions that apply to foreign lenders making loans to Mexican borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Lending in Mexico can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).

Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific objectives, eg term loans, working capital loans, equity bridge facilities and project or letter of credit facilities.

Loan durations

The duration of a loan can vary between:

• a term loan, provided for an agreed final period of time but with a short availability period;
• a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
• an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
• a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.

Loan security

A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security. 

Loan commitment

A loan can be:

• committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
• uncommitted, meaning that the lender has discretion whether or not to provide the loan.

Loan repayment

A loan can be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).

Lending to institutional/professional borrowers is subject to less regulatory oversight and so less burdensome from a compliance perspective.

By contrast, lending in the context of mortgages and to consumers is a regulated activity supervised by the National Banking and Securities Commission (CNBV) and the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF).

For more information, see Lending and borrowing – restrictions.

It is common to appoint an agent to act on behalf of other parties (as in syndicated loan transactions) and a trustee to hold rights and other assets on trust for the lenders or secured parties. Thus, the common-law principles of agency and trust are recognized in the Mexican legal framework.

Generally

Loan agreements and other finance documents are subject to general contractual principles. There are no specific limitations on interest rates or the ability of lenders to charge default interest under loan agreements, however, there may be general or practical limitations stemming from usury statutes, judicial precedents and market conditions that may limit the amount of the rate as well as from tax considerations, particularly in the case of transactions among related parties.

In the event of proceedings in Mexico seeking performance of obligations of a Mexican borrower, pursuant to 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 rate of exchange prevailing in Mexico and fixed and published by Banco de México (BANXICO) in the Official Gazette of the Federation of Mexico on the date preceding the date of payment.

Specific types of lending

In mortgage and consumer lending, the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) is granted authority to provide for a list of ‘abusive clauses’ which institutions will not be able to include in their adhesion contracts, as well as the regime for its supervision and removal. Financial adhesion contracts are non-negotiable financial contracts which are offered by financial institutions and accepted ‘as is’ by financial services users seeking the corresponding financial service.

Standard form documentation

There are no recommended forms of lending documentation provided by market participants or regulators. Most finance transactions are documented on bank standard form documentation prepared in-house or by external legal counsel.

In cross-border lending, borrowers are required to consider the identity of the beneficial owner of interest payments, given that tax gross-up clauses are a common feature in loan agreements and withholding tax rates range from 4.9% to 40%, depending on the beneficial owner of the interest. Lower withholding tax rates may be available to tax residents in countries with which Mexico has entered into a tax treaty to avoid double taxation. Interest payments carried out to export-import banks may not be subject to any withholding, provided that the conditions set out by the relevant tax treaty are complied with.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the signatories’ powers that would prevent them from executing such documents.

Insolvency

Guarantees and security may be at risk of being set aside under Mexican insolvency laws if the guarantee or security was granted by a company with a certain period of time prior to the onset of insolvency (fraudulent conveyance). This would be the case if the company giving the guarantee or security received considerably less consideration, and as such, the transaction was at an undervalue. For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within 270 calendar days prior to the declaration of insolvency of the affected party (or 540 calendar days for inter-company claims). Guarantees and security may also be challenged on other grounds relating to insolvency.

Financial assistance

The concept of unlawful financial assistance is not recognized in Mexico. However, fair consideration, corporate benefit, arms-length transactions and related concepts are relevant, particularly in insolvency situations.

Corporate benefit rules

The granting of downstream guarantees and security interests by a parent company to secure a loan to its subsidiary would generally be valid.

Common forms of guarantees

Guarantees to secure compliance with obligations are commonly used in Mexico in all types of transactions. The most common types of guarantees are as follows.

Civil guarantee (Fianza Civil)

The Federal Civil Code establishes that the civil guarantee is an agreement by means of which a third party undertakes to pay the creditor if the debtor does not meet its obligations.

Surety bond (Fianza Mercantil)

Under Mexican law, a bond is a guarantee issued by an authorized entity which grants bonds on a customary basis. The bond is an agreement between a guarantor and the creditor of the original debtor under which the guarantor undertakes to pay or otherwise comply with the debtor’s obligations in case the debtor defaults. The bond can be granted only if a valid underlying obligation exists. A guarantor may validly agree to pay a certain amount of money which is owed and not paid by the debtor, or if the debtor does not comply with a payment obligation.

Surety bonds can be of various types, including administrative, judicial, credit and fidelity bonds.

Unconditional endorsement (Aval)

According to the General Law of Negotiable Instruments and Credit Operations, a person may guarantee total or partial payment of amounts described in a negotiable instrument (eg promissory note) by means of an unconditional endorsement. The guarantor is jointly liable with the principal obligor and its obligations are valid notwithstanding that the principal obligation is null for any reason whatsoever.

Common forms of security

The most common forms of security are as follows.

Mortgage

A mortgage is a security interest granted over real estate assets that are not delivered to the creditor, and that give the creditor the right (in case of default of the secured obligation) to be paid from the value of the asset.

Guarantee trust

This is a contract under which a person transfers to a trustee the ownership or title of one or more tangible and/or intangible assets in order to secure the obligations of a settlor in favor of a third party.

Traditional pledge (prenda mercantil)

The pledgor (a debtor or a third party) transfers possession of the movable asset to the lender (or a third party for the benefit of the lender) to hold as security for compliance with an obligation. This pledge is commonly used to pledge stock of a private company, for instance, where the lender takes actual possession of endorsed stock certificates.

Non-possessory pledge (prenda sin transmisión de posesión)

Possession and operation of the assets remain with the pledgor. This type of pledge includes the possibility of creating a floating or generic pledge over all present and future movable assets of a business.

Securities pledge (prenda bursátil)

This is a pledge over securities traded in the Mexican stock exchange. Securities are deposited in an account at the S.D. Indeval, S.A. de C.V., Institución para el Depósito de Valores (clearing agency).

Giving or taking guarantees

A civil guarantee cannot exist without a valid principal obligation. Guarantors are granted certain benefits under Mexican law, known as the benefits of orden, división and excusión. The benefit of orden requires the creditor to proceed against the debtor before proceeding against the guarantor. The benefit of excusión requires the creditor to ensure the assets of the debtor are first exhausted in payment of its obligations before any amounts are claimed from or paid by the guarantor. The benefit of división exists when there are multiple guarantors: it allows one of the guarantors which has been called to trial to have the other guarantors appear at the same trial in order to defend themselves jointly, with each guarantor being liable for its proportionate share of the principal obligation. These benefits may be waived by the guarantor.

Giving or taking security

A mortgage securing a debt above a minimum threshold value (which is determined by local law and varies from state to state) must be in writing and executed before a Mexican notary public. The mortgage instrument, which should precisely describe the property being encumbered and the term of the mortgage, must be registered in the appropriate real property public registry office to be effective against third parties. Other registrations are required depending on the type of property being encumbered. For example, registration in the aircraft registry, the maritime registry and the railroad registry.

Guarantee trusts must be executed in writing. A guarantee trust over immovable property must be executed before a Mexican notary public and the trust instrument must be registered in the appropriate real property public registry office to be effective against third parties. Guarantee trusts over movable property securing a debt above a minimum threshold value must also be executed before a Mexican notary public and the trust instrument should be registered in the federal personal property collateral registry (Registro Único de Garantías Mobiliarias). Other registrations, authorizations and additional actions can also be required depending on the assets being placed in trust.

A traditional pledge must be executed in writing. Special perfection requirements apply depending on the type of asset, such as delivery of bearer instruments to the lender or a third party, delivery and endorsement of registered instruments and registration in the special registry ledger (for example, in the case of shares of a private stock corporation), and delivery of non-negotiable instruments and notices to the underlying debtor, if applicable.

A non-possessory pledge must be executed in writing. A non-possessory pledge securing a debt above a minimum threshold value must be ratified before a Mexican notary public and the resulting instrument registered in the the federal personal property collateral registry (Registro Único de Garantías Mobiliarias) to be effective against third parties.

A securities pledge must be executed in writing and involves a foreclosure agent (ejecutor) and the transfer of the securities to an account at the clearing agency. A Mexican bank or brokerage firm (other than the lender) may be appointed as foreclosure agent and is responsible for selling the securities at market value if a default occurs.