The Mexican securities regulatory framework includes federal regulations, general laws and specific rules applicable to all capital markets participants. The National Banking and Securities Commission (CNBV) is the central regulator of the Mexican Stock Exchange, Bolsa Mexicana de Valores (Bolsa) and Bolsa Institucional de Valores (BIVA) (jointly, Stock Exchange) and of all other capital markets participants, such as underwriters, broker dealers, issuers and custodians. The key capital markets statutes include the Securities Market Law, which provides the general operational framework for securities commercial acts, and the general rules and regulations issued by the CNBV (particularly relevant are the General Provisions Applicable to Issuers and Other Participants of the Securities Market (General Provisions) and the General Provisions Applicable to Entities and Issuers Regulated by CNBV that Contract External Audit Services for Basic Financial Statements), Banco de México (the Mexican Central Bank) and the Stock Exchange, which include:
- general regulations applicable to issuers of securities and other market participants;
- the Stock Exchange Internal Regulations;
- BIVA Internal Regulations;
- Indeval (the central securities depository for the Mexican securities market) Internal Regulations;
- general regulations applicable to the Stock Exchange; and
- general regulations applicable to broker-dealers.
The General Law of Negotiable Instruments and Credit Transactions provides the regulatory regime for the special purpose vehicle that is widely used in securitisations transactions: the Mexican trust. It also sets forth the basic rules applicable to trust certificates, which are used in many Mexican structured finance transactions and also regulated by the Securities Market Law as fiduciary stock certificates. A separate legal framework that is important to consider when working on a capital markets transaction are the mutual funds regulations, including the investment regime governing specialised retirement fund investment companies and the general financial provisions of the pension fund system.
Other legislative and regulatory regimes may apply depending on the type of underlying assets involved, for example civil legislation when dealing with mortgages, special requirements and formalities for the transfer of certain types of receivables, and requirements for the transfer of receivables by local or municipal governments.
The General Provisions, which also apply to securitisations transactions, are considered the most important secondary rules relating to securities, after the Securities Market Law.
Further regulations enacted by the CNBV and the Stock Exchange may apply to public offerings related to securitisations. The CNBV acts as the main supervisory and regulatory authority in connection with publicly issued securities.
The main finance regulator in Mexico is the Ministry of Finance and Public Credit (Ministry). The Ministry is responsible for facilitating transactions and promoting the development, expansion and competitiveness of the market. The Ministry acts through the CNBV, which is an independent agency and the main regulator of the Stock Exchange. Some of its most important powers include:
- the supervision and regulation of market participants;
- the authorisation of public and private offerings;
- investigating, requesting information and issuing advice and warnings to market participants;
- approval of the internal operation of the Stock Exchange; and
- managing and overseeing the National Securities Registry.
The Pension Funds System Commission (Consar) is particularly important in the securities market in Mexico as it overviews and authorises (together with the Ministry and Banco de Mexico) the investment regime, levels of liquidity and market risk for pension fund managers, which are institutional investors that typically participate in these types of transactions.
ii THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
Mexican presidential elections
On 1 July 2018, presidential elections took place in Mexico, and the new President, Andrés Manuel López Obrador, took office on 1 December 2018. Mr López was elected on the back of his focus on shaking up the status quo of the country. Some of his first decisions after taking office included cancelling the New Mexico City Airport, the most important infrastructure project of the past few years. Some of President López's decisions have reduced investor confidence in Mexico, de-accelerating capital markets transactions in the country.
Proposed amendments to the investment regime of specialised retirement fund investment companies and the general financial provisions of the pension fund system
The past year saw several regulatory changes being proposed by the CNBV, the Ministry and Consar. There is an upcoming overhaul of the investment regime of specialised retirement fund investment companies and the general financial provisions of the pension fund system, and such amendments will impact investments of pension funds in the capital markets. A bill was introduced and approved by Congress, and is subject to approval under the legislative process. Some of the most relevant proposed amendments include the following:
- a new operating model for pension fund managers whereby they will operate through specialised investment funds of retirement funds that replace the specialised retirement fund investment companies;
- specialised investment funds of retirement funds will have access to greater investment opportunities than specialised retirement fund investment companies, including the possibility of investing directly in securities registered in the National Securities Registry not offered through a public offering (subject to certain conditions);
- fees charged by pension fund managers will have an additional component that will be calculated on the basis of the investment returns received by pension holders through their investments in the specialised investment funds of retirement funds; and
- pension holders will be allowed to withdraw their voluntary deposits from their retirement funds at any time.
United States–Mexico–Canada Agreement
The United States–Mexico–Canada Agreement (USMCA) was signed in late 2018 by the President of the United States, the President of Mexico (at that time, Mr Enrique Peña Nieto) and the Canadian Prime Minister. USMCA includes relevant changes to the free trade agreement entered into among the parties in 1994 known as the North America Free Trade Agreement. Some of the most relevant changes include changes for automakers, stricter labour and environmental standards, intellectual property protections and digital trade provisions. USMCA is pending approval from the legislatures of the United States and Canada. USMCA is likely to be ratified in the US Congress this year, which will be viewed favourably by global investors and should be a positive sign for the Mexican economy.
Tax incentives for initial public offerings and interest payments to non-resident holders of corporate bonds
Pursuant to a Presidential Decree issued by Mr Lopez, in 2019, 2020 and 2021 a reduced 10 per cent income tax rate may be applied by Mexican resident individuals, and by non-resident individuals or entities, on the profits obtained by such taxpayers from the sale of shares issued by Mexican companies that qualify as Mexican residents for tax purposes, provided that such sale takes place through an authorised stock exchange and other relevant conditions are complied with. The Decree also provides a new tax incentive applicable to those Mexican residents who are required to apply a withholding tax on interest paid to non-resident holders of publicly traded bonds issued by Mexican-resident companies placed through an authorised stock exchange, consisting of a tax credit equivalent to 100 per cent of said withholding tax (which will be creditable only against such withholding tax). The credit will be available provided that no tax is withheld upon when making the payment to non-residents, who must reside in countries that have entered into a tax treaty or into a broad agreement for the exchange of information with Mexico; it is also established that the credit will not give rise to a refund or offset against other taxes.
Relevant capital markets transactions
Some of the most relevant recent capital markets transactions include:
- Promecap Acquisition Company, SAB de CV, issued a second special purpose acquisition company (SPAC) for 5,577.93 million pesos in a global initial public offering (IPO);
- Sherpa Capital, SAPI de CV, Asesor en Inversiones Independiente and Actinver Casa de Bolsa, SA de CV, Grupo Financiero Actinver, División Fiduciaria issued an exchange traded fund called QVGMEX;
- three new FIBRAs (investment trust vehicles under Mexican law dedicated to the acquisition and development of real estate assets in Mexico intended for leasing) were placed into the market (Fibra Storage, Fibra Educa and Fibra Upsite); and
- Grupo Casa Sabe, SAB de CV and Rassini, SAB de CV delisted their shares from the Stock Exchange.
In addition to the local exchange, the Stock Exchange manages the International Trading System, which is an electronic conduit to trade shares listed on other stock exchanges. Over the past 12 months, 455 new foreign companies were listed on the International Trading System, including Pinterest and Uber. Foreign companies may be listed on both Stock Exchanges together with local companies.
ii Developments affecting derivatives, securitisations and other structured products
New instruments and products have recently arrived to the Mexican capital markets, and existing products have been made more sophisticated by market participants, with over 76 equity development certificates (CKDs); 18 CERPIs (investment project trust certificates that are issued through a trust and placed through the Mexican Securities Market); 16 FIBRAs; three FIBRA Es (investment vehicles intended for energy and infrastructure projects that issue trust certificates (CBFEs) listed on the Stock Exchange; and two special purpose acquisition companies (SPACs) listed on the Stock Exchanges. The Mexican capital markets have entered into a new stage of complexity and regulatory challenge that will create interesting new ventures in the years to come.
In August 2017, Vista Oil & Gas, SAB de CV launched the first SPAC on the Stock Exchange for 11,689 million pesos, and in March 2018, Promecap Acquisition Company, SAB de CV listed the second SPAC in the Stock Exchange for 4,407 million pesos with the purpose of investing funds in family-owned companies, private equity and public companies engaged in fast-growing sectors over a 24-month period.
SPACs are publicly-traded vehicles that are formed to facilitate a business combination. They are also called 'blank cheque companies'. SPACs issue units that are listed on the Mexican securities markets, which consist of shares and warrants (or portions of warrants). Warrants have the shares of a public company as underlying assets. Each whole warrant entitles the holder to purchase one share of common stock upon a business combination at a preferential price. Warrants act as compensation for investors.
Approval by shareholders is required to execute a business combination. Primarily institutional (including Mexican pension funds) and retail investors participate in these kinds of offerings. A public offer may be carried out globally (Mexican public offer plus Rule 144 A/Reg S). Sponsors acquire founder or insider units, typically resulting in the ownership of a percentage of common stock of the company.
Some of the advantages of SPACs include:
- timing: the time period for listing a SPAC (90 days) is faster than for listing of an IPO (nine to 10 months);
- flexibility: the regulatory requirements for SPACs are more flexible and less restrictive than those of IPOs; therefore, SPAC managers have more flexibility in conducting their business; and
- tax structure: contributions for future capital increases are treated as debt for Mexican tax purposes, which facilitates reimbursement to investors in the event that the SPAC is not successful. Essentially, SPACs provide a sponsor with immediate access to funding to conduct a specific transaction (merger, acquisition or asset sale) within a 12 to 24 month time frame, and once the transaction is completed, a new publicly traded company shall be formed.
CERPIs (just as CKDs do) resemble the model of international private equity funds, with corporate structures that rely heavily on the expertise and track record of the general partner (GP) or fund manager. CERPIs typically invest in real estate, private equity, debt, energy and infrastructure, and potential sponsors may be, among other things, private equity funds, real estate developers, asset managers and energy services providers.
Through CERPIs, GPs or fund managers may access resources from Mexican pension funds to be invested or co-invested in projects outside Mexico. Projects shall remain under the management scope of the sponsor or manager of the CERPI. The foregoing is possible due to the above-mentioned recent amendment to the investment regime for specialised retirement fund investment companies.
CERPIs provide for less stringent corporate requirements and approvals of investors, giving GPs and fund managers more flexibility to manage a fund; however, at least 10 per cent of a fund's maximum authorised amount must be invested in Mexico, and a 2 per cent mandatory co-investment by the sponsor or manager in each sponsored project is required. CERPIs provide flexible corporate governance because different series of CERPIs may be issued, including preferred series.
FIBRAs are similar to real estate investment trusts (REITs) in the United States. This vehicle provides a new investment opportunity for investors.
The current legal structure of a FIBRA stems from a series of reforms enacted over the past several years to:
- various provisions of the Mexican tax laws and regulations;
- securities legislation;
- the investment regime of the Mexican pension fund administrators enabling tax-friendly investment in FIBRAs by Mexican pension funds; and
- annual omnibus tax regulations issued by the Ministry of Finance.
The main benefits of investment in a FIBRA (relative to other investments) are:
- the potential for a high return on investment (on a cash basis) due to the requirements for distribution of net taxable income, and the potential for capital appreciation of real estate trust certificates (CBFIs) commensurate with increases in value of the real properties held by the FIBRA;
- access to the Mexican real estate market as an investment option through a security that may be traded easily and has a readily identifiable market price;
- broader diversification with respect to geographic exposure and property type for investors seeking to invest in the Mexican real estate market or generally for their investment portfolio;
- FIBRAs may serve as a vehicle to attract foreign investment into Mexico; and
- applicable tax benefits. FIBRAs must distribute at least 95 per cent of net taxable income to investors on an annual basis.
As previously mentioned, between 2018 and 2019 three FIBRAs were launched in Mexico: Fibra Upsite, Fibra Educa and Fibra Storage.
A particularly positive aspect of FIBRAs (as opposed to CKDs) is that they have regularly been structured both with a national listed tranche on the Stock Exchange and with a foreign tranche issued through Rule 144-A and Reg-S regulations. The foregoing has permitted the diversification of the investor base, which is otherwise dominated by Mexican pension funds (pension fund managers).
Recently, investors have pushed for a change in the management structure of FIBRAs to internalise their external advisers and managers following the United States model of REITs, most of which have an internal management structure.
One of the key features of a FIBRA E is the tax benefits that it provides its investors, as the investment vehicle and the portfolio companies through which investments are held in such infrastructure and energy assets are deemed transparent from a tax perspective. The vehicle is a hybrid that draws on two US financial products: REITs and master limited partnerships. Mexico adopted its own version of REITs in 2001, under the name of FIBRAs, as described above. As provided by the Securities Law, the CBFEs shall grant their holders a pro rata property right with respect to trust assets.
Under a FIBRA E, a corporate sponsor will contribute to the FIBRA E equity interest in certain Mexican legal entities (promoted companies) that own and operate assets for the performance of specific activities, namely infrastructure, electricity (generation, distribution, and transmission) and energy. The sponsor will receive cash or CBFEs in return for its contribution to the FIBRA E. To structure the contribution of the applicable assets and the operation of the business of the FIBRA E, relevant tax, legal and accounting issues must be taken into account. Regulatory and contractual approvals such as licences, permits, public grants and concessions, and debt covenants must also be taken into consideration.
In August 2017, the Mexican securities regulator issued its approval for the first multi-FIBRA E registration programme for a total issuance amount of up to 50,000 million pesos. The programme will allow the sponsor, CKDIM, to create sectoral FIBRA Es for energy and infrastructure projects.
In February 2018, the Federal Electricity Commission placed the first FIBRA E focused on the energy sector. The issuing trust will receive 100 per cent of the collection rights under a certain commercial operation agreement for electric power transmission, and the proceeds from the issuance will be used to modernise and expand the national transmission grid. The public offering was placed in the Stock Exchange and in other international markets. Again in 2018, another FIBRA E was issued for the construction of the new Mexico City International Airport. However, construction of the new airport was cancelled by the Mexican federal government, and an early redemption of the CBFEs was approved by the certificate holders in early 2019.
The most common and highly used structured instruments in Mexico as of today are CKDs, which are trust certificates listed and traded on the Stock Exchange whose purpose is to serve as a means of investment in companies, and in infrastructure, real estate and industrial projects. CKDs grant the right to participate in a portion of the proceeds, assets or rights that comprise the trust assets. The CKD trust shall have the purpose of investing in projects or in equity of target companies.
CKDs do not provide an unconditional payment obligation of principal and interest, as they are equity-like securities. They impose certain corporate governance obligations similar to those of publicly traded companies. If their investment regime allows, Mexican and foreign investors are allowed to invest in CKDs as long as they state in writing to the placement agent or the underwriter that they are aware of the risks associated with these types of notes.
The vast majority of CKD issuances that have come to market in Mexico during the past few years have been aimed towards the infrastructure and real estate industries, although the applicable law allows for the funds raised through CKDs to be invested in other areas. As previously indicated, the success of a CKD heavily relies on the management team in charge of identifying and developing the respective projects.
The first generation of CKDs are about to start their divestment and liquidation processes, moving into exits and asset sales and other divestiture options that will create new opportunities and challenges in the capital markets.
iii Cases and dispute settlement
The CNBV has the main jurisdiction regarding oversight and regulation of the activities of all capital markets participants; its supervisory authority includes powers to sanction in cases of non-compliance and powers to enforce such sanctions. Any resolution entered into by the CNBV may be appealed before federal administrative courts using a writ for amparo proceedings. However, any disputes existing between financial firms and consumers must be first resolved by Condusef, the National Commission for the Defence of Users of Financial Services.
Increased antitrust oversight
As a result of recent reforms to the antitrust law, Cofece, the Mexican Antitrust Commission, now has enhanced powers, and has increased its oversight and investigative activity, with a number of investigations that have concluded with record fines. In 2017, Cofece launched an investigation against banks and other financial intermediaries for potential collusion and manipulation of the primary and secondary markets. The investigation prompted the CNBV to commence a similar investigation. The Cofece and CNBV investigation is expected to conclude in the second semester of 2019.
iv Relevant tax and insolvency law
There are very specific rules that apply to Mexican trusts that should be carefully analysed when implementing a securitisation or a structured finance transaction. In the case of securitisations, it is generally intended that the transfer of assets into a trust is treated as a sale for legal but not for tax purposes, inasmuch as the settlor of the assets retains a right to reacquire the transferred assets once payment of the corresponding securities has been made. The trust should not be classified as a separate entity for tax purposes. Intermediaries and brokers must determine and withhold the income tax applicable on income earned by securities holders.
In general, the tax regime applicable to securitisations and structured finance transactions is defined by the terms and nature of the securities being issued, and tends to be the same as or similar to the regime applicable to the assets underlying the securities or type of structure.
v Role of exchanges, central counterparties and rating agencies
Role of exchanges
Any stock exchange operating in Mexico requires an approval by the Ministry of Finance and the favourable opinion of Banco de México and the CNBV. Any concession granted to create and operate a stock exchange must be provided considering the better development of the market. To date, two exchanges operate in Mexico: Bolsa and BIVA, both located in Mexico City. They are both supervised by the CNBV and their own independent committees, and they each have the ability to sanction their members and even delist certain securities, subject to first obtaining the opinion of the CNBV.
The two exchanges have issued their own internal regulations that establish their internal procedures for listings of all kinds of instruments, along with terms and conditions for trading, record-keeping, information publishing, and listing and maintenance fees.
Providing the service of central counterparty (CCP) is considered a public service under Mexican regulations; therefore, a public concession granted by the Ministry of Finance and the favourable opinion of Banco de México and the CNBV are required.
Only two concessions by the federal government have been granted to operate CCPs in Mexico; Contraparte Central de Valores, which clears transactions on Bolsa and BIVA, and Asigna, Compensación y Liquidación, which is the CCP for the Mexican Derivatives Exchange (MexDer), for derivatives transactions. Banco de México has exclusive powers to supervise all CCPs in Mexico, as well as approving the operations of any CCP.
Rating agencies in Mexico require authorisation from the CNBV to operate as such. Their main purpose is the habitual and professional rendering of services consisting of the analysis, opinion, evaluation and reporting of the credit quality of securities. The authorisation granted by the CNBV is non-transferable under any circumstances.
Rating agencies are supervised by the CNBV and must follow the processes and methods established by the CNBV through the issuance of general provisions.
iii OUTLOOK AND CONCLUSIONS
The Mexican capital markets have developed exponentially over the past decade, particularly in terms of regulations and new instruments designed to attract investment to projects and additional value for both companies and investors. Pension fund managers remain the main investors in the sort of transactions described in this chapter. Although the sophistication of the Mexican capital markets is reaching the top of its game and continues to improve, heightened policy uncertainty has slowed (and in some cases stopped) new issuances in the Mexican Stock Exchange. While tax, infrastructure and economic reforms over the past several years have helped stabilise the country, international and local investors face uncertainty from some of the new presidential administration's policies. Most recently, policy uncertainty increased after the cancellation of the New Mexico City Airport, which was meant to be financed by a FIBRA E issuance in 2017. The USMCA has aided the economy; however, it is yet to be ratified by the legislatures of the United States and Canada.
1 Julián Garza and Gunter A Schwandt are partners and Jenny Ferrón C is an associate at Nader, Hayaux & Goebel.