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Mexico

Published on Thursday 13th September 2018

    General

    • Mexico

      Project finance is a common practice in Mexico mainly for large-scale infrastructure projects related to the following industries: (i) energy, including oil, gas and electricity in which construction of pipelines, processing plants and activities related to the exploration and extraction of hydrocarbons are involved; (ii) transport infrastructure, including construction of airports, ports and highways; (iii) in recent years it has also been relevant for projects related to real estate and hospitality business (eg, developing hotel complexes or big housing developments).

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Typically, major financial institutions, including multinational banks, as well as private equity banks which seek to invest in the development of projects that will have revenues in the mid and long term. Additionally, there are some other institutions that have been financing projects in Mexico throughout these past years such as the National Infrastructure Fund (FONADIN), National Bank of Foreign Trade, local development banks, as well as multilateral development organisations such as the Inter-American Development Bank (BID) and the International Financial Corporation (IFC). 

      Due to the recent government change that Mexico experienced (since December 2018) many projects that were expected to be developed under project finance schemes were put on hold since sponsors, lenders and project developers were uncertain how the government change would impact and affect their projects and the expectations of the project itself.

      Certainly, China has increased its presence in Mexico in the last years and has been seeking to invest in Mexico by means of participating and financing big-scale projects. Recently, the president of China’s Industrial Bank in Mexico announced that financing of these types of projects from China is expected to reach US$2 billion within the next five years.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Most of the structures applicable in Mexico relate to BOT, BOO and PPPs schemes depending the specific project to be developed. 

      BOO and BLT schemes are usually applicable for projects related to the electricity sector, mainly in projects related to the electric generation through renewable energies (eg, photovoltaic and wind projects). 

      Likewise, BOT structures are commonly used for waste-water treatment projects.

      PPP schemes began to be regulated in Mexico in 2002 through the Rules for the Development of Service Projects and today are governed by the PPP Law and its Regulations. Projects under PPP schemes in Mexico include mainly highways, roads, ports, airports, as well as projects designed to preserve the environment and biodiversity.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Due to the implications and requirements to develop projects in Mexico (eg, filing and obtaining the corresponding permits and licences, paying taxes, hiring employees, among others) a project company should be organised under the laws of Mexico. Additionally, please note that for some specific projects, bidding guidelines may require the incorporation of company organised under the laws of Mexico as a prior requirement either to participate or to award a specific contract once ruling had been made by the relevant authority. 

      There are different structures that investor’s may use for investment vehicles in Mexico organised with variable capital, which allows the business to alter its capital with a minimum of formalities: (i) limited liability stock corporation, which is the most used and accepted business structure in Mexico that operates under a company name and ownership is in the form of shares in the capital of the company; (ii) limited liability company, which is a company formed by members whose obligations are limited to the payment of their contributions to the capital of the company, but in which ownership interests cannot be represented by negotiable certificates.

      Additionally, business in Mexico may also be carried out by means of a branch structure held by a foreign corporation, which shall be recorded before the Public Commercial Registry of the location where it intends to set up the branch, prior authorisation from the Ministry of Economy.

      A project company’s equity may be held by the foreign shareholders or partners, as the case may be, subject to the fact that for some specific activities or business there could be foreign investment restrictions, as explained in question 5 related to foreign investment.

      Last verified on Tuesday 3rd September 2019

  • Foreign Investment

    • Mexico

      Mexico has become, in recent years, a very important host for foreign investment in most sectors of its economy. Because of this importance, Mexico has been liberalising its foreign investment framework, mainly in matters related to energy and telecommunications, sectors that were left behind in allowing participation of foreign investments. 

      In general terms, foreign investment is regulated by the 1993 Foreign Investment Law and its Regulations (FIL) as amended. 

      FIL provides a description of each business or industry and the restrictions they have regarding foreign participation. As per the referred law and as a rule, in Mexico foreign investments should be reported to the Foreign Investment National Registry, which is a governmental registry that keeps record of the Mexican entities operating in Mexico with foreign shareholders and capital. 

      As per the LIE, foreign investment is defined as: (i) participation, in any proportion, by foreign investors in the corporate capital of Mexican entities; (ii) investments in Mexican companies where the majority interest is composed of foreign capital; and (iii) participation by foreign investors in the activities and sectors contemplated in the FIL.

      There are certain activities included in the FIL that continue either to be reserved exclusively to Mexican entities with Mexican shareholders and capital or were participation of foreign shareholders and capital is limited to certain percentages that are included in the referred law.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Mexico recently shifted to a new government regime, which has been reviewing the strategies implemented by the former regime regarding private investment in some strategic projects and areas.

      Notwithstanding the above, the new Mexican government has been announcing during this administration the development of new projects were private participation will be required (eg, Mayan train, which is one of the most relevant projects for this administration, or the new oil refinery in Dos Bocas municipality, state of Tabasco).

      New measures and schemes to attract private investments in specific projects to be developed through Mexico are being analysed by the new Mexican government. Recently, president López Obrador held meetings with the most important business individuals and private sectors in Mexico as to design a plan to increase the levels of private participation in Mexico. This plan includes the promotion of private investment, an increase in employment and economic growth.

      As to make private investment more attractive, Mexican president has committed itself to evaluate and give priority to profitable projects, and to facilitate the execution of such projects. 

      Private sector has demanded from the federal government clear messages and rules, including a strong rule of law, macroeconomic stability and a commitment to solve any obstacles that usually impede the development of such projects.

      Last verified on Tuesday 3rd September 2019

  • Project and financing documents

    • Mexico

      Usually the financing or project agreements that need to be registered are the ones related to the collaterals that are related to the project itself. Authorities with which such collaterals should be registered are included in the collateral section referred below. 

      In some specific cases, projects requiring project finance could also need to be registered within governmental authorities, this is, the main contract giving birth to the project could require a registration (eg, contracts related to exploration and extraction of hydrocarbons projects or contracts for the development of infrastructure under a PPP scheme that should be registered before some specific governmental authorities).

      Last verified on Tuesday 3rd September 2019

    • Mexico

      The main advantage would be that the lenders would be entitled to enforce the promissory note in Mexico before the competent courts and, therefore, the procedure to enforce such note would be more expedite than having lenders trying to enforce a credit agreement in the US and thereafter in Mexico since this would imply the application of certain proceeding rules. In certain circumstances defences from the underlying agreement could be filed by defendant to a lawsuit based on the promissory note.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Finance or project agreements may be governed by the law chosen or agreed by the parties. This is more often seen in agreements entered between private parties and were government entities are not part of.

      Notwithstanding the above, for some specific projects (eg, exploration and extraction of hydrocarbons) the contracts and related agreements applicable to same are required to be governed by Mexican legislation (regardless the fact that the dispute resolution could be either be made by conciliation and/or arbitration, or subject to Mexican courts for specific default cases that could lead to the rescission of the contract).

      Most of the contracts awarded through a tender procedure called by a governmental authority (either federal, local and municipal, including those awarded by the main state-owned productive companies, known as PEMEX and CFE or autonomous entities such as the National Hydrocarbons Commission) are not subject to negotiations and, therefore, if such project agreements state that they must be governed by local law, such clauses will not be subject to modifications.

      There are additional agreements related to specific projects that even though they are entered between private parties, are to be governed by local laws. These agreements are usually related to real estate matters (eg, lease agreements or land purchase agreements) since these types of matters are always subject to local legislation and jurisdiction.

      Last verified on Tuesday 3rd September 2019

  • Collateral security

    • Mexico

      Yes. Under Mexican law, a collateral agent may act as the sole secured party for the benefit of a group of lenders whose composition may change from time to time, in which case the relationship among thee collateral agent and the group of lenders is to be governed by the relevant covenants thereto them. Moreover, in certain instances, if the asset granted in security is indivisible, then a collateral agent is necessary. Generally, this is achieved by means of an intercreditor agreement. 

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Mexican law provides that non-possessory pledges may be granted over all of a company’s movable assets (this is similar to a floating lien in other jurisdictions). Notwithstanding the foregoing, it is important to consider that Mexican law provides for different types of security interests granted for specific assets and, therefore, different procedures to make them enforceable. Each security interest is subject to different rules and, therefore, may be granted to guarantee different assets.

      Security interests are perfected when all applicable steps required by law have been taken and the security agreement has been signed. Registration in the appropriate Public Registry of Commerce and/or Property is required (as applicable) to ensure and preserve the priority of the interest being granted, and to make such security public before third parties.

      • Pledge. Provides a personal property right over movable assets (including intangible assets, as well as credit instruments and/or shares) to secure: payment of an obligation; preferential right to such payment. In the case of breach by debtor, creditor may sell the pledged assets, after obtaining a favourable court order to do so.
      • Mortgage. Grants in favour of creditor a right over real property, whose possession remains with the mortgagor. It is usually established over real estate but can also be granted over personal property attached to real property and over business.
      • Surety bond. The guarantor agrees to pay the obligation of a debtor if a debtor defaults on payment.
      • Guarantee trust. An agreement whereby a settlor transfers to a trustee ownership of certain property to secure compliance with an obligation owing to the creditor or beneficiary. This figure is similar to a trust under other jurisdictions, and the principal advantage against pledges or mortgages is that a court order is not required .
      • Equipment or operating loan. The debtor is obliged to use the exact amount of the loan to acquire raw materials and equipment. The loan is secured by such raw materials or equipment.
      • Financing loan. These loans are secured, simultaneously and separately, with the assets and the products and proceeds, whether future, pending or already obtained, of the business for which the loan was obtained.

      Notwithstanding the above, there are some assets that may not be subject to a security interest. For the specific case of contracts only the rights and obligations of such contracts. Additionally, permits required for a specific project held by a project company will not be affected by a security interest, rather, in some cases, they may be transferred provided parties follow specific provisions included in the applicable legislations. 

      It is also important to consider that Mexican law requires mortgage agreements and pledge agreements to be granted before a notary public. Mortgages may be created solely by the Mexican guarantor and do not require the signature or consent of the lender. Furthermore, for mortgages and pledges to be valid against third parties and for the lender to have a priority right, the mortgage requires to be recorded with the Public Registry of Property of the domicile where the real property is located, or while the pledges require recording before the Sole Registry of Movable Property, respectively.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Costs vary depending on the type of security. For example, notarial costs for ratifying pledges vary depending on the location of the notary, as well as the amount being secured – it is important to clarify that the registration of pledges before the Sole Registry of Movable Assets does no incur additional expenses. Similarly, notarial expenses related mortgages vary from state to state, and more importantly, registration costs of mortgages depend on the location of the real property – in certain states, the costs are capped, while in others, the costs are determined by the value of the property or the amount secured.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Under Mexican Law, the value of the collateral security in the relevant security documents is not required to be stipulated. However, the obligations in Mexican pesos guaranteed by the collateral security are in fact required to be stipulated.

      If the financing is carried out in a foreign currency, the exchange rate published by the Mexican Central Bank in the Federal Official Gazette is the preferred and most commonly used exchange rate.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Generally, yes except in specific types of security. It is common practice that under Mexican law, each item of collateral must be identified, given that by definition collateral security will provide a guarantee for the lender in cases of default, and as such, it must be identified.

      However, depending on the type of collateral used, such as a non-possessory pledge; defined as a collateral security that cannot be clearly identified, or a security over all movable assets of a guarantor, or has a constant changing value. As such, a more general description of this type of collateral would be sufficient.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      With respect to mortgages, a certificate of non-encumbrance will certify the property is owned by the guarantor, as well as certifying that such property has no other charges or liens. In this regard, the certificate of non-encumbrance is issued by the Public Registry of Property of the corresponding jurisdiction in which the transaction is being carried out. Mexican law allows for mortgages over the same real estate to be granted with different priority, that is, a real property may be granted to secure a loan to two separate creditors, with the first creditor having priority over the second creditor (with respect to the real property) in the case of a default and enforcement.

      With respect to pledges, a search with the Sole Registry of Movable Assets will show if any assets owned by a company have been previously granted in security. As opposed to mortgages, Mexican law does not provide for pledges to be granted with a different priority. 

      Furthermore, mechanic liens currently do not exist in Mexico, and as such, are not regulated under Mexican law.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Steps to foreclose a collateral security interest will vary depending the type of security interest to be enforced since each case has and implies a different procedure. Nevertheless, please consider that otherwise agreed and voluntarily fulfilled, foreclosures must be made by means of a judicial procedure carried out in the competent courts. 

      In some cases, such as mortgages, the foreclosure procedures may also imply the public or private sale of the mortgaged assets or properties.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Consequences in respect to the operation of a project by lenders or their designees will mostly depend on the specific project that is being carried out and the relevant documents that had been signed for the execution of the project. In any case, if lenders assume obligations under the respective agreements, they will have to comply with the terms and conditions of the contracts. If authorisation to transfer permits is obtained, the lender is the one responsible for complying with such terms and would need to answer to the corresponding authorities. 

      Although usually there is no restriction on foreign ownership or operation, as to determine if a restriction of any type exists an analysis would need to be made on the project itself and the type of activity related to the project (eg, to determine whether it falls within those activities where foreign participation is limited or restricted).

      Additionally, to determine whether restrictions of any type exist related to the project, a review of the relevant contracts would need to be made (eg, if the project derives from a PPP scheme in which the government is part and a public service is being rendered).

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Project company equity holders’ personal obligations with lenders should be fulfilled and should be enforceable regardless of whether the project company is subject to a reorganisation procedure. The consequences of capitalising a company declared bankrupt shall be analysed on case-by-case basis.

      Last verified on Tuesday 3rd September 2019

  • Dispute resolution

    • Mexico

      Yes, to the extent that the subject matter of the agreement is not exclusive jurisdiction of national courts and, regarding commercial matters, the appointed foreign court is: of the domicile of any of the parties; of the place for fulfilling of any obligation under the agreement; or of the place in which the res is located.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Mexico is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), as well as other conventions such as the Inter-American Convention on International Commercial Arbitration (the 1975 Panama Convention) and the Inter-American Convention on the Extraterritorial Validity of Foreign Judgments and Arbitral Awards (the Montevideo Convention). 

      The Mexican Code of Commerce has a specific chapter applicable to arbitration proceedings, precautionary measures and awards enforcement; such provisions are consistent with the Convention on the Recognition and Enforcement of Foreign Arbitral Amends. In summary, an arbitral award would be recognised as binding to the parties and enforceable except in those limited cases dealing with: incapacity of the parties, invalidity of the arbitration agreement, due process, scope of the arbitration agreement, jurisdiction of the arbitral tribunal (arbitrability and public policy).

      Except as otherwise provided in international treaties to which Mexico is party, foreign judgments are recognised through summarised proceeding before Mexican courts, provided that the following conditions are met:

      • formal requirements established by applicable procedural rules, are fulfilled;
      • the judgment is not an exercise of an action in rem of real estate located in Mexico;
      • the foreign court had jurisdiction to decide the cause;
      • service of process was properly made to provide the defendant eith the benefit of the process of law;
      • the judgment is final (res judicata);
      • claims are not subject matter of a lawsuit pending before any Mexican court; and
      • the decision does not contravene matters of Mexican public policy.

      Last verified on Tuesday 3rd September 2019

  • Miscellaneous

    • Mexico

      Yes, it is recognised and payment to creditors is made according to a priority order: (i) creditors holding a special privilege; (ii) creditors holding a pledge or mortgage; (iii) creditors holding a special privilege, and (iv) general creditors (without security or privilege).

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Members of the board of directors of a company, including its president, are subject to a number of legal and regulatory duties and responsibilities, breach of which may lead to civil or criminal liabilities for directors personally.

      Since the board of directors is usually the internal body in charge of company’s administration, they are responsible precisely for the activities related to such administration, including those related to the operation or activities of all the plants or facilities owned by the company.

      Some liabilities related to the project may also extend to the direct or indirect owners of the project company depending on the specific role they play within the company and the specific activities carried out by them.

      In any case, owners' liabilities would need to be determined on a case-by-case basis depending on the specific obligations or roles or activities of such owners, considering, among other matters, whether or not they have a power of attorney; and the activities carried out by them.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      There could be limitations and incentives depending the type of equipment and materials used in the project since same could be subject to specific programmes or international treaties, therefore it would be important to determine which materials and equipment are intended to be used to verify if they would benefit from any programme. 

      There are programmes such as Inmex that allow Mexican companies, including subsidiaries, to temporarily import into Mexico raw materials, machinery and equipment necessary to manufacture products specified by the foreign company that will be totally or partially exported abroad.

      The Inmex programmes may benefit companies by exempting them from the payment of duties on imported raw materials.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Most of the land issues relate to the following matters: (i) determining that the land owners that will sell or lease specific properties are in fact the owners of such lands; and (ii) determine if the lands are subject to an agrarian regime that, to be acquired or leased, must comply with certain rules included in the Agrarian Law.  

      Regarding restrictions applicable to foreigners in respect of land and natural resources, the Foreign Investment Law does contain some provisions as to avoid foreign companies or individuals to acquire lands over the restricted zone, which, as per the Foreign Investment Law, is defined as an area creating a belt around the country, 100km wide in the border regions and 50km wide along the coast. 

      In respect to natural resources, article 27 of the Mexican Constitution provides that the Mexican nation will at all times have direct domain over all natural resources, including minerals and waters. Additionally, regarding hydrocarbons, as per Mexican legislation the same will be owned at all times by the Mexican nation while they are in the subsoil. Once extracted they may be granted to national or international companies depending the scheme under which the respective contract was granted.

      Granting rights of way is, in some cases and depending the location in which the project is to be developed, one of the biggest inhibitors of the construction of infrastructure in Mexico, as in many cases it requires long-term negotiations with the owners of many properties that are required for the project. Additionally, when the project requires lands subject to the agrarian regime, negotiations can be more complex since this could require the approval of an entire agrarian community.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      For some specific regions within the Mexican territory there is a lack of confidence regarding the economical, political and social environment. Some major projects have been in some cases delayed or even suspended due to political and social factors were social activists take advantage of certain circumstances to blackmail companies and give them the social licence to develop their projects in exchange for monetary sums. This uncertainty in some cases may impact on the ability of obtaining project finance due precisely to the lack of certainty in the viability of the project. 

      Additionally, in many cases, prior to getting project finance authorisation, an exhaustive diligence review is made for the whole project, which includes checking that all permits and licences are in place for the execution and construction of the project, whether federal, local or municipal. 

      Regarding this last point, a relevant consideration is that in Mexico there is an excessive regulatory load and bureaucracy for companies seeking to develop a project that may lead to relevant delays in the project itself. 

      Last verified on Tuesday 3rd September 2019

  • Public–private partnership (PPP)

    • Mexico

      As mentioned in previous questions, PPP began in 2002 and now such projects are governed and carried out under the Public-Private Partnership Act. This act was passed at a federal level and applies for federal projects to which federal budget or resources are committed. Additionally, at a local level, most of the local jurisdictions have passed and approved PPP laws to execute projects under such scheme at a local and municipal level. 

      PPP applies to a variety of sectors but in Mexico, at a federal and local level, it has generally been used for projects related to health (hospitals and clinics), transport infrastructure (roads and highways), as well as major projects (such as airports and railways). 

      Contracting structures vary as PPP schemes' main purpose is hiring services for a long period of time. For these services to be provided, the contracts include several actions such as financing, design, building, implementation, maintenance and operation of the basic infrastructure, as well as provision of auxiliary services.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      As a general principle, schemes involving the development of a PPP project are of optional application and may be used for activities whose specific legislation provides free participation of the private sector or by means of permits, authorisations or concessions. In any case, PPP projects must always have a justification. 

      As per the PPP Act Regulations, state-owned production companies (eg, PEMEX and CFE) may not enter into PPP agreements to execute activities related to the exploration and extraction of hydrocarbons.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      There have been some projects under PPP schemes already approved, which are:

      • construction, rehabilitation, equipment of the federal penitentiary located in Papantla, Veracruz;
      • Highways located in different Mexican states (eg, Querétaro – San Luis Potosí, Coatzacoalcos – Villahermosa, Saltillo – Monterrey – Nuevo León);
      • modernisation of the National Meteorological Centre;
      • new aquarium in Mazatlán, Sinaloa; and
      • construction of hospitals in different Mexican states.

      The federal budget has been approved for these projects, which were closed under the existing legislation.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      The PPP Act provides and specifies all the procedures and requirements that need to be complied with for the execution of a PPP project. All projects are based on a prior resolution that must be issued by the governmental entity interested in calling for a PPP project, which shall include, among other information, (i) a detail description of the project and its technical and legal viability; (ii) the social profitability expected; (iii) economic and financial viability. 

      Entities that intend to develop a project under a PPP scheme must call for a public tender.

      Last verified on Tuesday 3rd September 2019

    • Mexico

      Although PPP in Mexico have been used to structure and execute some infrastructure projects, it has not yet had a relevant impact for the development of more infrastructure projects.

      One of the reasons for not having more PPP projects could be the lack of a special entity or agency in charge of tendering the project, supervising its execution and subsequent operation or working hand in hand with government entities to execute projects under this scheme. Not having specialised officials handling PPP projects derives in the lack of knowledge of these schemes, including the applicable legislation and the experience obtained from projects already in operation.

      Since most of the PPP projects involve long-term relationships and multi-year commitments, any calling entity should guarantee that it has prepared officials well to follow up and attend any circumstance that could derive from such projects, including the fact that the multi-year commitments (eg, public funds or budget to complete or continue the operation of the project) will be guaranteed. Not having this certainty could hamper promoting PPP projects.  

      Last verified on Tuesday 3rd September 2019

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