Trends and regulatory climate
What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?
Mexico’s lending industry has been on a positive trend for years, and 2017 has been no exception. Its traditional and alternate lending markets have continued to expand and diversify, particularly in the growing financial technology (fintech) industry, which has seen a boom in peer-to-peer lending and crowdfunding platforms. Microfinance lenders have significantly expanded their growth in rural areas and 90% of the country now has access to microfinancing.
Mexico’s lending industries are considered largely stable by the International Monetary Fund. From 2014 to 2016 Mexico made structural reforms to the lending industry, reinforcing lending stability. Further, due to the recent growth of the fintech industry, the Federal Congress is discussing legislation to regulate crowdfunding, cryptocurrencies and electronic payment activities.
Is secured lending a regulated activity in your jurisdiction?
Yes, secured lending is regulated under civil and commercial legislation.
Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?
When entering into a loan facility a prospective borrower must consider that the facility may require corporate authorisation and third-party consent. The borrower’s representative should have the appropriate power of attorney (specifically to dispose of the borrower’s property) to enter into the loan facility and observe the documents securing the guarantee.
Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?
Lenders should consider the following issues when entering into a secured loan facility:
- due diligence of the security granted;
- types of security;
- default interests;
- usury; and
- foreign currency.
Due diligence of the security granted
Lenders should perform due diligence on the assets that will be granted by the borrower as security to avoid any possible issues due to liens or encumbrances over the assets.
In case the security is a real estate asset, lenders should review the status of the property at the Public Registry of Property to verify whether the borrower is duly registered as the owner and if there are any types of lien or encumbrance registered. If the security is movable property the lender should review the Sole Registry of Movable Property to verify whether there is any type of encumbrance over the asset.
Types of security
The most common types of security granted in Mexico are mortgages, pledges and guarantee trusts. Beyond whether the assets are free of encumbrances, the lender should carefully analyse:
- the possibility of enforcing the security before or out of court; and
- whether the value is enough to secure all of the borrower’s obligations, including obligations derived from default.
The most suitable type of security will depend on the structure of the loan. The guarantee trust is considered the easiest to enforce.
Copyrights may not be granted as a security interest.
Pursuant to Mexican law, charging interest on the outstanding interests of a loan is prohibited. Nonetheless, placing an interest charge on such outstanding interests, and over the capitalised amount, is permitted.
It is advisable for lenders to consider the judicial criteria regarding the amount of interest that can be agreed with the borrower. This is important to avoid acts of usury that may be challenged by the borrower before the civil courts, which can result in the discretional reduction of the interest rate as ruled by the court.
Lenders can agree that borrowers’ payments will be made in foreign currency. Nonetheless, pursuant to Mexican law, borrowers are not obliged to pay in a foreign currency. Borrowers may pay the disbursements in Mexican currency pursuant to the exchange rate published by Mexican Central Bank on the date of payment.
Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?
A bill to regulate the fintech industry has been presented to Congress. This new legislation intends to promote financial inclusion, competition and protect consumers and financial stability. The legislation imposes certain obligations on fintech companies, including:
- capitalisation requirements and standards to avoid conflicts of interest;
- provisions for consumer protection, such as mechanisms to resolve customer claims and data protection;
- strict government supervision of fintech companies; and
- anti-money laundering regulation.
Further, the legislation regulates peer-to-peer lending and crowdfunding, which must comply as follows:
- Transactions must be made in pesos or an authorised cryptocurrency;
- Securities offered through crowdfunding platforms will be exempt from registration with the Banking and Securities Commission; and
- Fintech companies will be prohibited from guaranteeing investment returns.
The legislation is expected to facilitate fair competition, improve consumer protection and expand the fintech market.
Structuring a lending transaction
Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?
There are several active providers of secured finance in Mexico, the most relevant of which are:
- international and local commercial banks;
- non-bank financial institutions;
- private equity and venture capital funds;
- government development banks;
- financial development entities; and
- financial technology (fintech) companies.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?
Yes, market-standard facility documentation is used in Mexico for secured lending transactions. Standard documentation to structure a secured lending includes:
- administration and source of payment trusts;
- non-possessory pledges;
- pledge over stock; and
- corporate guarantors.
Are syndicated secured loan facilities typical in your jurisdiction?
Syndicated secured loans are typical for large transactions.
How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?
Syndicated loans are typically made by two or more banks which jointly agree to provide a loan to a borrower. Generally, each syndicate member has a separate claim with the borrower. However, this is not always the case, and a single loan agreement contract can consolidate the debt into one claim.
Even though it is not expressly regulated by Mexican law, it is common practice to appoint a facility agent to represent the interests of the syndicated lenders against the borrowers. These kinds of appointment are recognised by Mexican courts. This also applies to loan securities derived from a public offer. The most efficient way to document this is by having the bank syndicate grant a power of attorney to the facility agent.
In the case of a court procedure in which the syndicated members need to file a joint lawsuit, it is necessary to appoint a representative among them to continue with the procedure.
Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?
Yes, the incorporation of a guarantee trust is one of the most common ways to secure a loan. To do this, a bank syndicate is appointed as beneficiary under the trust and the trustee may commence an out-of-court procedure to execute the collateral if the borrower does not comply with its payment obligations. This out-of-court procedure is agreed on by the parties when setting up the loan facility.
Special purpose vehicle financing
Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?
Yes, SPVs are a common mechanism to hold the assets that are being financed. The typical structure of an SPV is a guarantee and an administration trust in which the lender is appointed as the first beneficiary. Security over the shares of an SPV is more common in project finance transactions when the SPV is structured as a corporation and the direct asset security (under an administration and guarantee trust) is used for the assets being financed.
Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?
The LIBOR rate tends to be the most popular.
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?
Interest rates are subject to usury restrictions. Pursuant to the courts’ criteria, an interest rate is usurious when it is notoriously excessive. To determine whether an interest rate is at risk of being usurious, the courts analyse:
- the interest rates used by the banking institutions in similar transactions;
- the type of relationship between the parties;
- the parties to the transaction and whether the lender is a regulated institution;
- the loan amount;
- the loan term;
- the guarantees granted;
- the inflation rate;
- the market conditions; and
- any other similar conditions.
If the court determines that an interest rate is usurious, it has the authority to decrease the rate to an amount that it considers fair.
These rules apply for banking and non-banking institutions, provided that the interest rates of the bank loans are not deemed usurious. The Mexican Central Bank regulates this rate.
Use and creation of guarantees
Are guarantees used in your jurisdiction?
What is the procedure for their creation?
In general, the creation of guarantees will depend on the type of guarantee and asset that is granted as security. Guarantees may be:
- personal guarantees (eg, corporate guarantors or bondsman); or
- property guarantees (eg, over the borrower’s real estate or movable assets).
Personal guarantees must be made in writing. In a property guarantee in which the asset granted as security is real estate (eg, mortgage or trust-holding real estate) the guarantee must be granted in writing, notarised and registered with the Public Registry of Property of the state in which the real estate is located. Where the security is pledged over movable property (eg, pledges, non-possessory pledges and trusts) it must also be made in writing and registered electronically with the Sole Registry of Movable Guarantees of the Public Registry of Commerce. Pledges over stock do not require notarisation or registration with the Sole Registry of Movable Guarantees.
Additional requirements may be needed regarding the following:
- For pledges on stock and other negotiable instruments, an endorsement of the corresponding certificate and registration within the issuer’s books is required.
- For pledges on publicly traded stock, a pledge agreement must be entered into and an account in a stock deposit institution opened.
- For pledges on IP rights, a pledge agreement must be entered into which must be notarised and registered with the Mexican Industrial Property Institute.
- For mortgages on vessels, the mortgage must be granted before notary public and registered at the Maritime Public Registry.
- For mortgages on aircraft, the mortgage must be granted before a notary public and registered at the Mexican Aeronautic Registry.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?
Enforceability of security interests regarding third parties requires registration with the Public Registry of Property or of Commerce, as applicable. Registration does not necessarily create a security interest per se, but it does have publicity purposes. Guarantees may not be enforceable if the applicable formalities to create them are not followed or if there is a third party with a better claim over the secured asset before the security interest is registered (eg, if a third party has registered a security interest over the same asset before or a third-party claim, such as a seizure, was filed in the past).
When the security is a mortgage and it is not registered with the Public Registry of Property, it is not enforceable on third parties. Thus, if a borrower transfers the secured asset to a third party, the third party acquires it in good faith. If the transfer is duly registered with the Public Registry, the mortgage will not be enforceable on this third party.
The enforcement of guarantees may be limited by bankruptcy provisions.
Subordination and priority
Describe the most common methods of structuring the priority of debts and security.
The most common methods for structuring subordinations and priorities are through contractual arrangements such as intercreditor arrangements between senior creditors and other creditors.
Documentary taxes and stamp duty
Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?
There are no documentary taxes in Mexico. However, there are:
- registration fees for real estate asset guarantees (the cost of these depends on the state where the asset is located);
- notary fees, which are based on the value of the assets to be granted; and
- fiduciary fees when the security is structured through a guarantee trust.
Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?
New York law is the jurisdiction most commonly elected for cross-border lending. Security documents are (and should be) governed under Mexican law when the secured assets are in Mexico.
Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?
There are no restrictions on the making of loans by foreign lenders. However, lenders should consider that under the Mexican Constitution foreigners are prohibited from holding real estate within the Restricted Zone (a 50 kilometre (km) wide strip along the Mexican coastline and 100 km-wide area along the borders). If a foreign lender intends to take a security interest within the Restricted Zone, appropriate mechanisms should be implemented to address this prohibition.
Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?
There are no exchange controls in Mexico. However, all debts in Mexico may be paid in Mexican pesos, even if another foreign currency is agreed on, in which case the borrower must pay at the exchange rate published in the Official Federal Gazette.
Security – general
Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?
Yes, it is possible to create a security interest over all of an entity’s assets. Whether a single security agreement is sufficient or separate agreements are required will depend on the type of asset and structure of the transaction.
Blanket liens are available only on movable property. For non-possessory pledges, the pledged assets may be designated generically and a non-possessory pledge agreement will suffice.
It is possible to create a security interest over all of an entity’s assets. However, such assets must be individually designated. In this case, a trust agreement is required.
For example, if a borrower grants a security interest on its accounts receivable, a non-possessory pledge is sufficient. Assuming that it is additional collateral, the borrower will grant a security interest over its premises. In such a case, a separate mortgage agreement is required, unless the amount of the loan facility justifies the use of a guarantee trust agreement (trustees’ fees are usually high). A single trust may be used to create a security agreement on the borrower’s accounts receivable and the borrower’s real estate.
Release of security
What are the formalities for releasing security over the most common forms of assets?
The formalities for releasing security over the most common forms of asset will depend on the type of security agreement.
Real estate To release a security over real estate (eg, mortgage and guarantee trusts), the cancellation of the security must be notarised and registered with the Public Registry of Property.
Movable property To release a security over movable property secured with a non-possessory pledge and guarantee trust, the cancellation of the security interest must be notarised and filed electronically with the Sole Registry of Movable Guarantees of the Public Registry of Commerce. Where the intellectual property is included in the secured assets, the release must be further formalised with the Mexican Institute of Industrial Property.
Where the guarantee was granted through a guarantee trust, the lender acting as the beneficiary of the trust must request the trustees to release the assets granted as security.
Asset classes used as collateral for security
Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?
Yes, security can be granted over real estate. The two forms of security granted over real estate are mortgages and guarantee trusts.
Mortgages and trust agreements must be made in writing and formalised by a notary public. Further, both must be registered with the Public Registry of Property of the state in which the real estate is located.
Machinery and equipment
Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over machinery and equipment. There are three forms of security interests over movable assets:
- non-possessory pledges; and
The most common forms of security granted over machinery and equipment are non-possessory pledges, in which the borrower retains possession of the assets. Guarantee trusts are also used to create a security interest over machinery and equipment, but in this case possession of the assets must be expressly transferred to the borrower. Both the non-possessory pledge and the guarantee trust must be notarised and registered electronically with the Sole Registry of Movable Property of the Public Registry of Commerce. Finally, a pledge agreement may also be used, but is less common.
Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, a security can be granted over receivables. There are two forms of security interest over movable assets:
- non-possessory pledges; and
The most common forms of security granted over receivables are non-possessory pledges. Guarantee trusts can also be used to create a security interest over receivables. In this case, as property of the receivables is transferred to the trustee, the trustee must enter into an agency agreement with a servicer (typically the borrower) to service the receivables. Both the non-possessory pledge and the guarantee trust must be notarised and registered electronically with the Sole Registry of Movable Property of the Public Registry of Commerce. With no contractual provisions to the contrary, approval of the borrower under the accounts receivable is not required to create the security interest. Nevertheless, under the Commercial Code, in order to be effective against the borrower, it must be notified of the assignment. Likewise, to be effective against third parties, it must be registered with the Sole Registry of Movable Property.
Financial instruments and cash
Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over financial instruments. The most common form of security granted over financial instruments is a pledge. According to the Securities Law, there is a specific pledge over securities, through which the lender must open an account with a warehouse of securities and deposit the securities in it. This agreement must be in writing and there is no need to register the pledge. Moreover, it is unnecessary to make the endorsement, delivery of the securities or the registration within the issuer’s registries.
Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over cash, although it is uncommon. The typical approach to secure cash flows is lock-box mechanisms (eg, administration trusts). Escrow agreements are also used. The administration trust also serves as a cash-flow payment for the lender, due to the fact that a special trust’s bank account is created for these purposes, where all cash deposits must be made to this account and the account remains property of the trust in the lender’s benefit (trustee). An escrow account is similar in functionality, where a third party receives cash deposits for the benefit of the transaction parties and disburses the cash over certain conditions agreed on by the transaction parties.
Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over intellectual property. The most common form of security is a pledge, which must be notarised and registered with the Sole Registry of Movable Property, as well as with the Mexican Industrial Property Institute. A trust can also serve as security over intellectual property.
Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The event of default, as defined in the applicable financing documents.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
There are different procedures for enforcement, depending on the kind of security created. For instance, a mortgage enforcement procedure is different from a guarantee trust procedure. There are also judicial procedures before the courts and extrajudicial procedures where the courts are minimally involved; notwithstanding this, the most common procedures for enforcement are extrajudicial procedures that are agreed on by the parties. This is the case because the law provides minimum requirements to meet in order to agree to these procedures. For example, an extrajudicial procedure in connection with a guarantee trust must be agreed in a special section and fulfilled by the following:
- The creditor must instruct the trustee in order to commence the extrajudicial procedure and specify the debtor’s default.
- The trustee must notify the debtor and the debtor must have the opportunity to prove its compliance or interpose permitted objections (novation or extension).
- If the debtor does not prove its compliance or objections, the trustee must proceed to foreclose the secured assets in the terms and conditions previously agreed between the parties.
These steps must have compliance deadlines. If the parties do not agree to the extrajudicial procedure, the law provides a judicial foreclosure procedure for the secured assets.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
Creditors are ranked in the following order:
- creditors against the estate (eg, labour claims regarding unpaid salary for the past two years);
- singularly privileged creditors (eg, illness and burial expenses);
- secured creditors (eg, pledged and mortgage);
- labour creditors and tax creditors;
- creditors with special privileges (eg, right of retention);
- unsecured creditors (ie, not subject to any guarantee or collateral security); and
- subordinated creditors.