A Q&A guide to structured finance and securitisation law in Mexico.
This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
This Q&A is part of the PLC multi-jurisdictional guide to securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.
How active and/or developed is the market and what notable transactions and new structures have taken place recently?
To what extent have central bank liquidity schemes assisted the securitisation market in your jurisdiction? Were retained securitisations common in the last 12 months?
Is securitisation particularly concentrated in certain industry sectors?
The Mexican securitisation market started evolving in the 1990s and is considered to be one of the most active and innovative in Latin America. Sectors where securitisation transactions have been concentrated include:
Receivables originating in the housing industry (derived from low income house and residential mortgage financing).
Highway toll receivables.
Federal revenue receivables by states and municipalities.
The securitisation market in Mexico is self-sustaining and its maturity is not based on central bank liquidity schemes. The securitisation schemes are used more for receivables.
What are the main laws governing securitisations?
Is there a regulatory authority?
The General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito) provides the regulatory regime for the Mexican trust (fideicomiso), the main special purpose vehicle (SPV) used in securitisations, and the participation certificates (certificado de participación), a type of security issued exclusively by Mexican trusts.
The Securities Market Law (Ley del Mercado de Valores) sets out the legal framework for the fiduciary debt bond (certificado bursátil fiduciaro), a Mexican publicly traded security mostly used in securitisations. The certificado bursátil fiduciario provides a more flexible issuance regime than the participation certificate.
Other legislative and regulatory regimes may apply depending on the type of underlying assets involved (for example, civil legislation on regulating the mortgage, special requirements for the transfer of certain types of receivables, requirements for the transfer of receivables by local or municipal governments).
In addition, the General Provisions Applicable to Issuers and Other Participants of the Securities Market (General Provisions) (Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores) issued by the Mexican Banking and Securities Comission (Comisión Nacional Bancaria y de Valores; CNBV) apply to securitisations. These Provisions are considered the most important secondary rules relating to securities, after the Securities Market Law.
Further regulations enacted by the CNBV and the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) may apply to public offerings related to securitisations. The CNBV acts as the main supervisory and regulatory authority in relation to publicly issued securities.
In September 2009, the Mexican Stock Exchange sponsored the creation of a new type of securities, known as structured equity securities (certificados de capital de desarrollo) (CKDs). CKDs are similar to certificados bursátiles fiduciarios subject to some differences, due to the fact that CKDs are intended to fund one or more projects aiming at facilitating Mexican economic growth and development with the help of public investors' funds. For example, this concerns investments in the following sectors:
Infrastructure.
Mining.
Communications.
Highways.
Ports.
Private real estate projects.
Health.
Tourism.
Industry.
Private equity and venture capital.
It is believed that CKDs are helping to create jobs in Mexico and reduce the effects of the worldwide and European financial crisis.
CKDs are mainly governed by the:
Internal Regulations of the Mexican Stock Market (Reglamento Interior de la Bolsa Mexicana de Valores).
Regulations and provisions issued by the Mexican National Retirement Savings System Commission (Comisión Nacional del Sistema del Ahorro para el Retiro) (CONSAR).
Amendments to the General Provisions applicable to issuers and other participants in the Securities Market.
The CONSAR has amended the investment regime (Circular 15-19) for pension mutual fund management companies (Sociedad de Inversión Especializada en Fondos para el Retiro) (SIEFORES), allowing SIEFORES to invest in CKDs. The participation of this type of institutional investors will result in a more straightforward and developed securitisation market.
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy (such as the Basel International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II Accord) or the Capital Requirements Directive)? What authority in your jurisdiction regulates capital adequacy requirements?
Balance sheet benefits (see Model Guide, Balance sheet benefits) are the main reason for Mexican originators (that is, housing companies and department store companies) to carry out securitisations. Also, local and municipal governments use securitisations as an alternative source of funding.
The application of the IFRS is currently compulsory for all companies listed on the Mexican Stock Exchange.
Mexican regulations applicable to financial institutions include the principles of the Basel II Accord. The authority that regulates capital adequacy requirements is the Mexican Central Bank (Banco de México) with the support of the CNBV.
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How is the SPV usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
The administration trust (fideicomiso de administración) is the most widely used form of SPV in Mexico, although Mexican companies can also be used. The most commonly used are the variable corporate capital business corporations (Sociedades Anónimas de Capital Variable; S.A. de C.V.), or other variations of this type of business entity such as the investment promotion business corporations (Sociedades Anónimas Promotoras de Inversión de Capital Variable; S.A.P.I. de C.V.).
The originator should enter into a trust agreement (contrato de fideicomiso) with a trustee (fiduciario). Only Mexican banks and certain other Mexican financial institutions can act as trustees. The main beneficiaries of the trust are the holders of the securities to be issued by the trust (certificados bursátiles fiduciarios), which entitle them to receive the proceeds of the financial assets acquired from the originator.
Under Mexican law, a trust does not have legal personality, and all acts are conducted by the financial institution in its capacity as trustee. The authority of the trustee to carry out the securitisation is set out in the trust agreement along with the main terms and conditions.
To conduct a securitisation, it is common practice to execute both:
A purchase agreement for the assets between the originator and the SPV, which is usually formalised by a notary public.
A service agreement providing for the administration and collection of the receivable portfolio by a third party (who could be the originator, if the trust is a pass-through entity).
A Mexican commercial bank or brokerage firm should be appointed to act as common representative (representante común) of the securities' holders, providing additional protection to the latter. The common representative is allowed to review such matters as interest payable on the issuance and the legal creation of the guarantees (personal or real), if any, and in general, acts as a representative of the securities' holders against the originator. The common representative should also sign the securities certificates, as evidence of the transactions.
Fees of the trustee and the common representative are either paid directly by the originator or considered part of the issuance expenses.
For publicly traded securities the SPV is established in Mexico. It is not common practice to incorporate foreign SPVs. Despite the above, Mexican law recognises the legal existence and validity of offshore SPVs, on the understanding that such SPVs must not breach Mexican public policy.
If the main receivables or assets are located in Mexico, it is strongly advisable to establish the SPV in Mexico.
A Mexican trust provides, in principle, the benefit of bankruptcy remoteness, subject to the actual transfer of title to the assets to the trust. Prior due diligence is required to confirm that the relevant assets are capable of legal assignment to the trust (or that any requirements for such assignment are satisfied) and free from liens or limitations of ownership. In the event that an insolvency procedure (concurso mercantil) is filed with a Mexican court, the assets or goods which are legally held by the trustee could not be affected by the judicial award, unless the transfer of such assets is considered null and void.
See also Question 17.
Although a Mexican trust does not have legal personality, considering the trustee (normally a bank), retains the legal personality, the assets transferred to the trust create a new patrimony (Patrimonio) (that is, a collection of valuable assets and rights of any person or legal entity). If such patrimony complies with the legal formalities for its creation, including the assignment of assets (that is, notice to the debtor in the case of receivables), such assets shall not be part of the originator's insolvency proceedings, because they will be part of the trust's patrimony.
Securities issued by the SPV are usually publicly traded to reach more potential investors and to secure the transparency of the transaction.
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please briefly summarise the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
The securities are listed on the Mexican Stock Exchange, the only stock exchange currently established and regulated in Mexico.
To list securities, the following documents, among others, must be filed with the relevant application with the CNBV and the Mexican Stock Exchange:
Prospectus and supplements, if there are going to be several issuances under a programme.
Legal opinion on the main legal aspects of the securitisation, issued by external Mexican counsel.
Comfort letters from the auditor.
Drafts of the trust, purchase and service agreements (see Question 4, Other agreements), along with a draft of the securities certificate.
Ratings of the security provided by authorised rating agencies in Mexico.
The complete list of the required documents is provided under the General Provisions.
Before the listing, the securities should be recorded in the National Securities Registry (Registro Nacional de Valores).
In addition, unless the security rating is provided by a ratings agency, issuers of CKDs must file the following information at the CNBV (Article 4.033.03, Internal Regulations of the Mexican Stock Market):
Applicable financial, economic, accounting, legal, and administrative information.
An annual report, with details of the financed company(ies) or projects, including detailed information about business plans, advances, and consequences of incomplete or untruthful disclosure of such information.
Relevant events in connection with the issuer and the companies in which the trust invests or purchases stock certificates.
The trust concept is recognised (see Question 4).
Commercial and mortgage-backed securities (MBSs) are the main receivables securitised in Mexico. The housing industry has been very active and has had strong development in recent years, particularly as a result of securitisations of credits granted by housing companies for the acquisition of its houses and the securitisation of bridge loans and mortgage loans (Bonos Respaldado por Hipotecas) (BORHIS) that are bonds supported by mortgages.
Another important aspect has been the creation of a national development bank in 2001 (Sociedad Hipotecaria Federal) (SHF), whose main responsibilities are:
Developing primary and secondary housing credit markets through granting guarantees on loans and securities connected with the financing of housing.
Promoting the construction and acquisition of (preferably) economical and mid-cost dwellings.
Mexican financial intermediaries participate in different programmes with the SHF, which allows more mortgage loans to be granted and more securitisations to be carried out.
The Mexican market has incorporated new classes of receivables, such as future receivables of credit cards portfolios or local taxes. Civil law provisions allow these kinds of securitisations.
See Question 4. Usually, the transfer takes place under the purchase agreement or an assignment agreement between the originator and the SPV. In other cases the transfer is 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.
Unless a "non-assignment" or "non-negotiable" clause or provision is included in a promissory note or other negotiable instrument, generally no major legal restrictions exist for receivable securitisations. However, a thorough review of the receivables is required to confirm that they are in fact assignable and that any applicable requirements are satisfied. Securitisations of whole businesses (collateralised debt obligations (CDOs) and collateralised debt obligations (CBOs)) with publicly issued securities have not yet occurred in Mexico.
See Question 12.
See Question 13.
There are no such legislative restrictions.
Usually, if the acquisition of the assets by the SPV is effectively paid for and the assignment is legally conducted, there is no re-characterisation risk.
A legal opinion is required for securities listed on the Mexican stock exchange (see Question 9).
The unwinding of a transaction is complicated. Unless a Mexican court considers that the transaction was implemented as fraud on the creditors and/or that any other nullity clauses have been triggered, such risk can be minimised or avoided if the assignment is formalised, as set out in Question 12.
Under Mexican Bankruptcy Law, fraud on creditors refers to any action carried out to the detriment of creditors, and in general, is regarded as null and void. This includes:
Acts carried out before the insolvency declaration knowingly defrauding creditors or creditors' rights.
Gratuitous acts.
Transactions not conforming to market conditions.
Debt releases.
Payment of obligations not yet due and payable.
The acts in which a commercial party pays a notably higher, or receives a notably lower, price in comparison to consideration.
Acts or transactions carried out by the insolvent entity within 270 calendar days before the insolvency declaration are subject to judicial review. This period can be extended on request to the court by any creditor and/or the insolvency officers (síndico).
The Mexican Bankruptcy Law (Ley de Concursos Mercantíles) does not define "market conditions", so a creditor challenging a sale or other transaction on the ground that it was not effected at market conditions must provide sufficient evidence to support its challenge.
Choice of law clauses in contracts are normally recognised and enforced. Usually, Mexican law is chosen to govern the transaction documents.
For MBSs, the corresponding local civil code applies in relation to the assignment rules.
Generally, no additional security is taken, given that SPVs do not have additional assets. However, the trust agreement regulates conditions on handling the different accounts and cash flows that are exclusively controlled by the trustee, as part of its role in the securitisation and for the benefit of the security holders. Similarly, "external security" can be obtained as part of the credit enhancement and liquidity support techniques (see Questions 21 and 22).
For further information on taking security over assets in Mexico, see PLC Cross-border Finance Handbook, Country Q&A, Mexico.
The administration trust (fideicomiso de administración) is the most widely used form of SPV in Mexico (see Question 4).
In cross-border receivables transactions, a guarantee trust (fideicomiso de garantía) can be used. A guarantee trust must be entered into by the settlor of the trust (fideicomitente) and a trustee. The trust agreement must specify a beneficiary of the trust (fideicomisario). Only credit institutions, insurance and bonding institutions, brokerage house firms, multipurpose financial entities, general bonding warehouses and credit unions can act as trustees in guarantee trusts.
In Mexican securitisations, the practice is to use credit enhancement and liquidity support techniques (see Questions 21 and 22).
Despite the fact that foreign trusts can be recognised, in practice, if the intention is for the trust to hold the security, it is advisable to incorporate a Mexican trust because of the different procedural regulations.
There are no material variations to the credit enhancement techniques set out in the Model Guide (see Model Guide, Credit enhancement). The most commonly used techniques are:
Cash reserve funds of the trust.
Loan facilities from a third party bank.
These methods are also applicable for risk management and liquidity support.
See Question 21. No material variations apply to the provision of liquidity support set out in the Model Guide (see Model Guide, Risk management and Liquidity support).
There are no material variations to the cash flow index (see Model Guide, Diagram 9 and box, Cash flow index ).
The most important methods are the administration of receivables contracts and the holding of senior or special bonds by the originator (see Model Guide, Profit extraction).
The sovereign ratings of Mexico are:
Fitch Ratings: BBB.
Moody's: Baa1.
Standard & Poor's:
A-/Stable/A-2 Global Scale (Local Currency);
BBB/Stable/A-3 Global Scale (Foreign Currency);
mxAAA/Stable/- National Scale.
Factors that may affect Mexico's sovereign rating include certain risks and disadvantages related to the institutional effectiveness and political risk, economic structure and growth prospects, external liquidity and external investment position, performance and fiscal flexibility, and debt level and monetary flexibility.
Aside from considering the risks outlined in the prospectus and/or its supplement when determining the rating of the securities, every Mexican rating agency (instituciones calificadoras de valores) must consider the relevant economic, political, social and environmental viability of the issuance and any other factors which may affect the securities. Usually, the inherent and contingent risks derived from the issue are managed by stating a lower rate, or by collective acts of the affected entities.
As general practice, certain rating agencies instruct a lawyer to review the partial guarantees and/or review and give a legal comfort letter concerning the main legal aspects of the securitisation, in addition to the legal opinion of the external counsel of the originator.
What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
In general, the tax regime applicable to securitisations is defined by the terms and nature of the securities being issued, and tends to be the same or similar to the regime applicable to the assets underlying the securities.
Originators commonly use fiscally transparent vehicles in securitisations. In this respect, trusts (fideicomisos) are the vehicles most frequently used.
In general trusts are disregarded for tax purposes, and therefore income or loss obtained through a trust is attributed to its beneficiaries. In general, interest arising from securities is subject to the same rules as those applicable to interest payable on ordinary loans. Interest is computed as it accrues and is subject to the income tax rate of 30% (the rate will be reduced to 29% in 2013 and to 28% in 2014).
Interest gained by non-Mexican residents from securities traded on the Mexican Stock Exchange or through a bank or brokers in a country that has entered into a double taxation treaty with Mexico, may be:
Subject to a preferential 4.9% withholding rate, if securities are registered on the national register of securities and intermediaries. Otherwise, the rate is 10%.
Tax exempt, provided the actual beneficiaries, either directly or indirectly, individually or together with related persons, receive more than 5% of the interest payable on the securities in question and are:
shareholders holding more than 10% of voting shares in the issuer; or
legal entities in which more than 20% of shares are held by the issuer.
Tax exempt, if the effective beneficiary is a foreign pension or retirement fund that complies with certain requirements.
Intermediaries and brokers must determine and withhold the income tax applicable on income earned by securities holders.
Synthetic securitisations are possible in Mexico. Despite this, no synthetic securitisations have been conducted to date.
In the Mexican securitisations market, master trusts and multiple issues are the most commonly used structures (see Model Guide, Single or multiple issue structures and Master trusts).
The need for an integral tax reform has been a matter of discussion in Mexico over the last decade. However, due to the political conformity of Congress, this reform has not been passed.
International organisations such as the Organization for Economic Co-operation and Development (OECD) and International Monetary Fund (IMF) have stated that Mexico needs a tax reform to increase its non-oil based revenues. Other reforms which, according to the experts, are required, concern the following:
End of personal income tax privileges.
Simplification of tax compliance.
Broadening of taxpayers' base.
Broadening the scope of value added tax (VAT) by abolishing exemptions and certain 0% rated activities.
Ending the corporate flat tax regime.
Nevertheless, none of the above reforms are expected to have a direct impact on the taxation of securitisations.
T +5255 5279 5439
F +5255 5281 3955
E schagoya@s-s.mx
W www.s-s.mx
Qualified. 1998, Mexico
Areas of practice. Corporate law (including M&A); banking and financial transactions (including public offerings, securities market transactions, securitisations and legal advice to financial intermediaries); anti-trust law; privatisations; public procurement and regulated sectors.
Recent transactions
Mr Chagoya is a Partner at Santamarina y Steta. S.C. who acted as Mexican external counsel:
