Creating collateral security packages

Types of collateral

What types of collateral and security interests are available?

Security packages for international non-recourse financing associated with the development of projects in Mexico normally integrate a series of security interests over the project assets under both Mexican and foreign law (normally New York law). Mexican law allows the creation of security interests over almost all kinds of assets and rights held by project companies, including in rem security interests over real estate properties, contractual rights, licences, concessions and permits, movable property and intellectual property rights. There are exceptions to this general rule. For instance, contractual rights stemming from contracts governed by Mexico’s government procurement laws (ie, most contracts with government entities and agencies, other than Petróleos Mexicanos (Pemex), and Comisión Federal de Electricidad (CFE)) are limited on the type of security interests that may be granted, as only account receivables may be assigned; thus, foreclosure over other contractual rights (such as typical step-in rights) is generally disallowed.

Pledges are normally created over the contractual rights, account receivables, movable property and shares of the project companies. Mortgages are established over real estate properties, including land, buildings and fixtures. Pledges and mortgages grant in rem rights in favour of the pledgee or mortgagee, as well as priority rights in bankruptcy proceedings. All pledges and mortgages are subject to registration for public notice purposes, which is one of the key elements determining the priority among security interests affecting a specific asset.

Security packages that include the creation of security trusts are also common. Under a security trust, a settlor transfers title to a series of assets and rights to a trustee (normally a Mexican bank, as only certain entities may act as trustees under Mexican law), who holds title to the relevant assets and rights (ie, the trust estate) insofar as there are outstanding obligations under the financing arrangements. The settlor retains a beneficial interest to use and benefit from the estate of the trust in the ordinary course of business for as long as no defaults occur; if a default occurs, the trustee is authorised to foreclose on the trust estate through tailor-made foreclosure procedures established in the trust indenture, including out-of-court foreclosure (subject to certain due process requirements). Similar foreclosure benefits are afforded to ‘non-possessory pledges’ (ie, pledges in which the pledgor retains the use and possession of the pledged assets).

Mexican law also provides specific security interests for certain types of assets, such as aircraft and vessels, and lenders providing financing under the avio or refaccionario loans contemplated in the General Law of Negotiable Instruments and Credit Transactions. The purpose of a refaccionario loan (which is similar to a purchase money security interest) is to finance the startup costs of an agricultural or industrial business. The purpose of avio loans is to finance the continued operation of the business; therefore, the proceeds of the loan shall be used, under the supervision of the lender, to finance the acquisition of raw materials, salary payments and direct indispensable business operation costs. Both refaccionario and avio loans are intended to finance production enterprises; therefore, they are not suitable for all types of projects. Avio loan lenders have a statutory non-possessory security interest over the goods purchased by the debtor, as well as the fruits, products and devices obtained with the use of the loan proceeds. Refaccionario loan lenders have a statutory non-possessory purchase money security interest over the business’ real and movable property, including machinery, instruments, and the revenues and products obtained therefrom.

Finally, Mexican banks are allowed to obtain the following:

  • special mortgages, known as ‘industrial mortgages’, covering the real estate property of a certain business being financed by them, as well as its concessions or licences, all personal property utilised by the enterprise in its operations, and the cash and accounts receivable generated; and
  • banking pledges, which are pledges over ‘durable consumer goods’ (ie, goods that are not consumed as a result of their ordinary use) that do not require the delivery of the goods, but only the delivery of the purchase invoice with an annotation evidencing the pledge.

Since the purpose of this chapter is to provide international lenders and professionals with a general overview of the project finance environment in Mexico, we make no further reference to aspects related to avio and refaccionario loans, since the international financing community does not normally resort to these types of loan agreements, or to industrial mortgages and banking pledges, as these mortgages are available only for Mexican banks.

Collateral perfecting

How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

Mortgages and security trusts encompassing real estate property are perfected upon execution of the relevant deed of mortgage or deed of trust, validation by a notary public and its registration at the public registry of property of the location of the property. The priority of security interests over real estate property is determined by the time of filing of the security instrument for registration with the public registry of property.

Regular commercial pledges are perfected by the delivery of the pledged assets to the secured creditor or a third-party depositary, or their registration at the Sole Security Interests Registry (a special section of the Public Registry of Commerce for the registration of security interests over non-real estate property, including tangible and non-tangible assets and rights), if the debtor retains possession of the pledged assets. However, since non-possessory pledges were introduced, it is no longer common to see regular commercial pledges being used in large project financing structures (except for pledges over shares or membership interests, which require registration in the corporate books of the issuing company). Instead, lenders resort to non-possessory pledges, where the pledge is perfected upon registration with the Sole Security Interests Registry.

Security trusts over contractual rights require notice to all counterparties about the transfer of rights to the trust. Security trusts involving personal property generally need to be in writing and registered with the Sole Security Interests Registry to be fully enforceable and obtain priority with respect to other security interests.

The creation of security interests over concessions, licences and similar rights, as well as certain regulated assets (eg, gas pipelines, power plants), normally requires prior approval of the governmental agency that granted such concession or licence (or at least notice). Additionally, special registrations may be required for security interests over specific assets such as aircraft, vessels or mining properties.

Registration fees and notarial fees are the main costs associated with the effectiveness and perfection of security documents, and they vary from state to state. Notarial fees are subject to maximum levels established by the state governments; however, notaries are normally allowed to grant discounts, which are often obtained for large transactions. Likewise, some local laws permit discounts on the applicable registration fees when the transaction is related to a project that proves to be beneficial for the relevant state (eg, infrastructure, creation of jobs, direct investment in the state).

A corporate entity may hold collateral on behalf of the project lenders as the secured party in the capacity of collateral agent, provided its appointment as agent is made in writing and specifically includes the authorisation of the lenders to the agent to hold, in its own name, but for the benefit of the project lenders, the collateral granted in Mexico. Those who become lenders at a subsequent stage should join the applicable agency agreement to obtain the benefit of the security package held by the collateral agent. The parallel debt clause concept is not contemplated under Mexican law.

Assuring absence of liens

How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?

By conducting a search at the public registry of property corresponding to the property’s location, the creditor can obtain a certificate indicating the registered owner of the property and any registered liens over such property.

Additionally, creditors should obtain copies of the registration files of the debtor at the Public Registry of Commerce (which acts as the registrar of companies), the Sole Security Interests Registry and other applicable registries that may contain entries related to pledges and other security interests over the debtor’s assets. Only a very few pledges are exempt from registration.

With respect to liens over the shares or membership interests of a company, creditors should review the company’s shareholders’ or members’ registry books and, in the case of shares, review the actual share certificates to confirm the absence of any endorsements or annotations related to previous liens.

Enforcing collateral rights

Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?

Foreclosure procedures vary depending on the type of collateral. Foreclosure of mortgages requires judicial intervention pursuant to summary proceedings that ultimately result in a public auction of the mortgaged properties, in which the project lenders may participate by requesting that the properties are transferred to them in payment of the guaranteed debt at the price (or a certain percentage of the price, depending on the applicable local laws) applicable at the relevant stage of the auction.

In the case of non-possessory pledges and security trusts, summary judicial foreclosure proceedings are available, with the alternative option of having the relevant assets sold through a non-judicial proceeding if the parties are in agreement about the amount due and the payable status of the defaulted obligations. In addition, in the case of security trusts, the parties are entitled to establish ad hoc foreclosure procedures in the relevant trust indenture under which no judicial intervention is required. Judicial foreclosure procedures allow the secured lenders to receive the pledged assets upon determination of their value or choose to have such assets sold in a public auction procedure.

The sale of assets being foreclosed may be denominated in a foreign currency in the case of non-judicial foreclosure procedures.

Enforcing collateral rights following bankruptcy

How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

Under Mexico’s bankruptcy statute, the Commercial Insolvency Law (the CIL), the issuance of the insolvency resolution entails the acknowledgement and effectiveness of a general retroactive claw-back period of 270 calendar days (or 540 days for transactions with affiliates, the company’s directors or senior officers, or their relatives) from the issuance of such insolvency resolution; the conciliator appointed in the procedure or any creditor acknowledged by the district judge may request the district court to set a longer claw-back period in justified circumstances, which shall not exceed three years. Certain transfers of assets and other acts unjustifiably and adversely affecting the project company’s financial position that occurred during this period may be considered fraudulent and in prejudice of creditors and their rights.

The creditors in a bankruptcy proceeding have a priority position in the credits payment waterfall when they hold in rem security interests over assets that may be foreclosed for collection of the relevant debt. When multiple secured creditors exist, the registration date of the relevant security interests at the applicable registry shall determine the priority of payment among secured creditors. If security interests are not registered, the relevant creditors will be considered as unsecured creditors and will be paid once the secured creditors are paid, to the extent the remaining assets permit the payment of the amounts owed to the unsecured creditors. Creditors that have expressly agreed to be treated as subordinated creditors, affiliates of the debtor not holding a secured debt, the debtor’s officers and board members (and their respective relatives) not holding secured debt, are considered subordinated debtors, with a priority below common unsecured creditors.

Once the existing creditors are recognised, the company’s assets are liquidated to pay debts owed to these recognised creditors at a bankruptcy stage. At the bankruptcy stage, a trustee shall be appointed by the district court to undertake the liquidation stage.

The CIL establishes that, except for Mexican insurance and bonding companies, all commercial entities may be subject to insolvency and bankruptcy proceedings. As to governmental entities, only those commercial companies in which the government participates may be subject to insolvency proceedings. No governmental agencies or public instrumentalities may be subject to bankruptcy proceedings, and none of their assets may be seized or intervened in under the CIL. On the other hand, the feasibility of having state-productive enterprises (eg, Pemex and the CFE) subject to bankruptcy proceedings is questionable.

Mexican law does not allow the seizure of assets outside court proceedings. Any such acts or actions to seize assets of an individual or company shall be undertaken and approved by the courts under applicable procedural rules.

While a procedure is active under the CIL, no seizure of assets is allowed, except as a preventive measure resolved by the court to guarantee payment of credits in limited cases.

Foreign creditors are treated in the same manner as local creditors. The law also allows the acknowledgment in Mexico of procedures undertaken abroad, and requests for assistance by a foreign authority with respect to a procedure being undertaken in Mexico. The CIL procedures are applicable in such a case, unless otherwise provided by international treaties or where there is no international reciprocity.

Foreign exchange and withholding tax issues

Restrictions, controls, fees and taxes

What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

Under the multiple bilateral investment protection treaties and free trade agreements (FTAs) to which Mexico is a party (eg, USMCA (to be replaced by the United States-Mexico-Canada Agreement once ratified by each of the three governments), the EU-Mexico Treaty), the government has accepted substantial restrictions on its ability to impose exchange control measures or any restrictions on transfers for the repatriation of funds. As a result, Mexican law does not contemplate any restrictions, controls, governmental fees or taxes on foreign currency exchange or transfers of funds to parties abroad. As an exception, entities marketing hydrocarbons produced in Mexico under exploration and production contracts entered into with the Mexican Hydrocarbons Commission (CNH) may be subject to restrictions on the use and sale of the foreign currencies obtained as a result of their marketing activities. It is questionable whether these restrictions are applicable only to those marketing hydrocarbons owned by the Mexican state or if it is also applicable to those marketing the production owned by private contractors, moreover, foreign investors of the countries with whom Mexican has entered the treaties mentioned above (and their Mexican subsidiaries) would be protected under such treaties against excessive foreign exchange controls.

Investment returns

What are the restrictions, controls, fees and taxes on remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

See question 6. It should be noted, however, that remittances of investment returns and interests related to loans granted by foreign residents may be subject to income tax withholdings at rates ranging from zero per cent to 30 per cent, depending on the nature of the remittance and the underlying transaction, the characteristics of the investor or lender, and the applicability of a double taxation treaty.

Foreign earnings

Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

Earnings need not be converted to local currency; there are no specific restrictions over their use or repatriation.

May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Project companies are allowed to establish and maintain foreign currency accounts both in other jurisdictions and locally. It is typical for project finance schemes that dollar-denominated accounts be set up onshore and offshore to receive the revenues of the project, and pay lenders and other parties based on the financing documents’ ‘waterfall’.

Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Although 100 per cent foreign ownership is permitted in most sectors, Mexican law does provide a series of restrictions on foreign investments in projects and related companies involved in certain specific activities. For this purpose, economic activities may be classified as:

  • activities reserved to the state (eg, transmission and distribution of electricity as a public service, nuclear energy, radioactive minerals);
  • activities reserved for Mexican companies with no foreign investment (eg, land transportation, except for courier services and services related to the oil and gas industry);
  • activities with foreign investment limited to a certain percentage (domestic air transportation, insurance);
  • activities requiring approval by the National Commission on Foreign Investment (CNIE) for participation over 49 per cent (eg, ports, private education);
  • activities with no restriction to foreign investment; and
  • acquisitions above a certain monetary threshold requiring approval.

Until 11 June 2013, telecommunications services (except mobile services) were restricted to 49 per cent foreign investment, while broadcasting services were fully reserved for nationals. These foreign restrictions have changed as a result of a recent constitutional amendment related to the telecommunications sector. Consequently, there are no longer any foreign investment restrictions for telecommunication services, while foreign investment of up to 49 per cent is allowed in radio and television broadcasting services, provided that the country of the relevant foreign investor (or its parent company) allows at least the same foreign investment percentage as the amount that will be invested in Mexico. Moreover, as part of the energy reform enacted in 2014, all of the foreign investment restrictions relating to the oil and gas industry were lifted and, thus, foreign investment participation is now fully permitted in gasoline retail sales, liquified petroleum(LP) gas distribution, shipping services for the oil and gas industry and the development and operation of oil and gas exploration and production fields under contracts entered into with the National Hydrocarbons Commission.

Where foreign investment is subject to restrictions, foreign investors may, nevertheless, participate in reserved activities through ‘neutral investment’, with limited corporate rights, with prior approval of the CNIE.

Foreign nationals are not allowed to directly own real estate for residential purposes within 50km of the coastline and 100km from the country’s borders; however, they may hold beneficiary rights through a trust that, nevertheless, provides full control of their investment.

All of these restrictions are equally applicable to foreign investors or creditors in the event of foreclosure in the project and related companies. Mexico is a party to numerous bilateral investment treaties (BITs), many of which contemplate security interests as investments subject to protection; however, their application in the context of a foreclosure on a project or related companies has not been tested, and therefore it is difficult to anticipate the way the courts will enforce the protection afforded under such treaties and the foreign investment restrictions normally applicable, as this situation is not specifically regulated either under the BITs to which Mexico is a party or under Mexico’s statutory law. No special fees or taxes are applicable to foreign investments, except for nominal fees for the mandatory registration of foreign-owned companies with the National Registry of Foreign Investment.

Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

As a general rule, Mexican law prohibits risks in Mexico being insured by foreign insurers. Thus, policies contracted with foreign insurers not authorised to operate in Mexico are not enforceable in Mexico. Reinsurance activities are permitted and are not subject to these restrictions (it is not uncommon to see foreign investors or creditors requiring satisfactory reinsurance, but not the assignment of reinsurance proceeds as those are not normally payable to the insured directly, but to the insurer); however, cut-through clauses are not enforceable under Mexican law. Other exceptions may apply under FTAs to which Mexico is a party.

Insurance policies issued by Mexican insurers may be payable to foreign secured creditors.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Except for directors and general managers, Mexican labour law requires that at least 90 per cent of a company’s employees be Mexican nationals. Technicians or professionals shall always be Mexican, except when there are no Mexican individuals available to take positions of a certain speciality; in such case, employers may hire foreign nationals in a proportion not exceeding 10 per cent, with a joint obligation by the foreign employees and the employer to train Mexican employees in the relevant speciality. All medical doctors shall be Mexican nationals. Foreign expertise needs may, nevertheless, be dealt through company-to-company technical assistance agreements, through which foreign employees may be temporarily seconded to a project in Mexico without establishing employment relationships with the Mexican enterprise.

All foreign personnel in Mexico are required to obtain the appropriate immigration visas.

Equipment restrictions

What restrictions exist on the importation of project equipment?

Because of numerous FTAs to which Mexico is a party, the importation of equipment is open, except for regular customs procedures and recordings. There are, however, limitations on the overall volume of importations of specific merchandise and equipment, and licences may be required for highly specialised equipment. Countervailing duties and import taxes may also be applicable.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

Expropriation is permitted only for public use purposes, upon payment of indemnification at market value. In addition, under Mexico’s multiple BITs (including Chapter XI of NAFTA and the treaties with Japan and most EU countries), Mexico has various commitments concerning expropriation and even creeping expropriation, including:

  • fair and non-discriminatory treatment to nationals of other treaty countries (protected investors);
  • refraining from impairing, by arbitrary or discriminatory measures, the management, maintenance, use, enjoyment or disposal of the protected investors’ investments;
  • most favoured nation and national treatment;
  • refraining from nationalising, expropriating or subjecting to measures tantamount to nationalisation or expropriation the investments of protected investors, except for expropriations made in the public interest, on non-discriminatory bases, under due process of law, and upon fair, market-value compensation paid in hard currency; and
  • allowing free repatriation of funds.

In addition, under the US-Mexico Agreement for the Promotion of Investment, US businesses may benefit in Mexico from the investment protection, insurance and financing programmes and services offered by the Overseas Private Investment Corporation. Mexico has not joined the ICSID, but it recently became a member of the Multilateral Investment Guarantee Agency, and has signed more than 26 BITs with its main trading partners.

Fiscal treatment of foreign investment

Incentives

What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

Although there are no tax incentives specifically designed to attract foreign investment, foreign investors do benefit from reduced tax rates and tax credits recognised under multiple double taxation treaties signed by Mexico, as well as reduced tax rates on interest payments generally available to foreign banks to the extent they are residents of countries with whom Mexico has a double taxation or an information exchange treaty. Foreign investors can also take advantage of sector-specific tax incentives in which foreign-owned enterprises have taken the lead, including tax benefits for research and development projects, and special tax incentives for export-oriented assembly plants and renewable energy projects. Foreign creditors may also benefit from reduced tax rates under double taxation treaties.

Registration fees and notarial fees are the main costs associated with the effectiveness and perfection of security documents, and are equally applicable regardless of whether the parties to the transactions are foreign or Mexican.

Government authorities

Relevant authorities

What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

The government agencies and instrumentalities in typical project sectors continue to play a major role in Mexico in some sectors (eg, energy) because of the prevalent role of the state-owned enterprises, and in other infrastructure sectors typically subject to government concessions. Federal environmental and antitrust authorities are also involved: the Federal Competition Commission (CFC) (recently re-characterised as a constitutionally independent agency) and the Ministry of Environment and Natural Resources (SEMARNAT). The CFC is required to provide clearance for participation in certain sectors (eg, telecom, ports, oil and gas exploration and production and gas pipelines) and to oversee market behaviour and economic conditions. SEMARNAT authorises infrastructure projects with regard to any environmental impact and risk factors; lenders typically scrutinise the SEMARNAT approvals to assess the environmental performance characteristics of a project from the standpoint of international lending community standards, including the Equator Principles. The National Agency for Industrial Safety and Environmental Protection for the Hydrocarbons Sector (ASEA) is a newly created federal agency in charge of regulating, authorising and supervising all industrial safety and environmental matters for the entire oil and gas industry, including the upstream, midstream and downstream sectors.

In the energy sector, the state-owned enterprises - Pemex on the oil and gas side and the CFE on the power side - have long played a major role in infrastructure development in Mexico, since most activities in the oil and gas sector, from upstream, midstream and downstream, and in the transmission and distribution of power, are undertaken by the government. Therefore, a considerable portion of project finance deals referred to contracts in which the CFE or Pemex (or its subsidiaries in the exploration and production, gas, refining and petrochemical subsectors) were the anchor tenant or facilities owner. This is expected to change in the coming years, as a result of the 2013 energy reform passed in 2013, whereby the vertically integrated monopolies of the CFE and Pemex over the Mexican energy sector were repealed, and the sector become widely open to private participation, even requiring the reduction of Pemex’s and the CFE’s market share in certain segments of the industry.

On the regulatory side, projects developed by private investors in the natural gas and power sectors (including gas transportation pipelines, LNG terminals and power generation facilities) are regulated by the Energy Regulatory Commission (CRE). Nuclear power is regulated by the National Commission on Nuclear Safety and Safeguards. The Ministry of Energy (SENER) has a limited role in project finance structures as a regulator in the area of LPG terminals and pipelines, but it is expected to play a more active role, as part of the new scope of authority it has gained, to regulate, along with the CNH and the Ministry of Finance and Public Credit, oil and gas exploration and production activities under the new legal framework.

With respect to the communications infrastructure sector, including toll roads, ports and suburban trains, the Ministry of Communications and Transportation regulates the provision of services, including the setting of rates and standards for services, and issues the relevant concessions to the project sponsors. The Federal Telecommunications Institute, on the other hand, regulates the telecommunications sector.

In many instances, project finance structures in these sectors also interact with the National Infrastructure Fund (FONADIN), a government infrastructure development trust, which provides funding with limited recovery and obtains certain limited rights to participate in proceeds after project lenders have been fully paid.

Waste water treatment plants and other water infrastructure facilities are usually developed by state authorities, and are thus subject to the jurisdiction of state authorities. Most projects are awarded through public tenders subject to state government procurement statutes (including their respective PPP laws).

Mineral extraction is regulated by the General Bureau of Mines of the Ministry of Economy, which issues exploration and exploitation concessions, collects fees payable by mining companies and oversees compliance with development and exploitation plans.

Regulation of natural resources

Titles

Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

Under the Constitution, the Mexican nation has title to real property rights over the land, waters and all subsoil products (including but not limited to minerals) within Mexican territory. Nevertheless, the Constitution and the Mexican nation also grant and acknowledge the right to private property by Mexican or foreign individuals or companies subject to certain limitations as to the type, location and, in some cases (eg, agrarian property), the size of the relevant land.

Rights of private parties over natural resources such as water or minerals (other than radioactive minerals and domestic hydrocarbons) are granted by the state through concessions and permits for their use or exploitation; no property rights are granted. Moreover, no rights over subsoil products or hydrocarbons are granted to private parties. Holders of concessions and permits for use or exploitation of natural resources are limited to the rights provided in the concession title or permit, as well as specific limitations set forth in the applicable statutes under which the concession or permit was granted (eg, the Mining Law and the National Waters Law). No concessions are allowed for the exploration and exploitation of domestic hydrocarbons and radioactive minerals, or for electric transmission or distribution as a utility service. Nevertheless, provided the state’s ownership of hydrocarbons while in situ (in the reservoir) is acknowledged, the entities awarded exploration and production contracts are allowed to report in their books their rights to the resulting revenues or to a percentage of the production once it is already realised.

Royalties and taxes

What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

Royalties payable for the extraction of minerals are determined on the basis of the property surface that forms the subject of the concession multiplied by a factor depending on the year of effectiveness of the concession, with no participation based on volumes of production or net revenues of the concession holder; however, a bill has been submitted to Congress to establish the payment of royalties based on a certain percentage of the income attributable to mining exploitation activities. Fees are payable on equal terms by domestic and foreign parties, and there are no restrictions for foreign investment in mining activities. Regular income taxes apply.

In the case of hydrocarbons, entities that are parties to exploration and production contracts with the CNH are required to pay royalties based on a percentage of the gross value of the hydrocarbons produced, which increases whenever the price of hydrocarbons increases. In addition, exploration and production contractors may be required, depending on the type of contract entered (ie, licence agreement or profit-sharing agreement), to pay a signing bonus, a fee for the exploration phase (based on the size of the area that was awarded), and a consideration based on a certain rate applied to either the operational profit (ie, the value of the production minus the royalties paid, minus permitted costs, expenses and deductions related to the investments required for the performance of the contract) or the contract gross value of the hydrocarbons produced.

For the extraction of water, concessionaires are required to pay governmental fees based on the volumes extracted.

Export restrictions

What restrictions, fees or taxes exist on the export of natural resources?

The government may establish regulatory and restrictive measures on undertaking export of merchandise (including natural resources) in accordance with the Foreign Trade Law and numerous FTAs ratified by Mexico. Such measures would apply, in addition to the applicable provisions set forth in international treaties to which Mexico is a party, mainly if it is necessary to ensure the supply of products for basic consumption by the population the supply of raw materials to national producers and, in addition, to regulate or control Mexico’s non-renewable natural resources.

The taxes applicable in Mexico for export activities are mainly general exports tax and customs fees. These taxes, however, are subject to the applicability of any international treaty (including FTAs and double taxation treaties) to which Mexico is a party.

Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

No specific fees, approvals or licences are required for typical project finance transactions; however, foreign lenders may require certain tax certifications to qualify for reduced income tax rates.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

As a general rule, the financing documents (other than security documents) and other project documents (except for those related to real estate rights) do not need to be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable. However, in the case of financing documents, it is sometimes advisable to have them registered along with the security documents, attaching official Spanish translations. This registration is intended to facilitate their enforcement, as it provides certainty about the terms of the financing documents and the terms of the official translation that is to be used in the event that the documents are to be enforced in a judicial procedure before Mexican courts. Mortgages, non-possessory pledges and certain trusts must be notarised and registered to be valid and enforceable. See question 2.

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

Although not yet a party to the ICSID Convention, Mexico fully recognises arbitration awards and arbitration agreements through its internal laws and other international treaties to which Mexico is a party. Arbitration in Mexico is mainly governed by the Commerce Code (which substantially adopted UNCITRAL’s Model Arbitration Law) and the New York Convention, in addition to a number of other international arbitration treaties such as the Montevideo and the Panama Inter-American Conventions. Moreover, early in 2018, Mexico adhered to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the ICSID Convention), and as a result, foreign investments in Mexico will be vested of additional legal certainty, mainly on the enforcement of awards derived from investment disputes and recourses available for annulment, interpretation and revision of the same. (Despite not being part of the ICSID Convention before, Mexico has been one of the most active countries in investment disputes, with more than a dozen cases conducted according to either the ICSID Additional Facility Rules or the rules of United Nations Commission on International Trade Law, as incorporated by reference in the BITs executed by Mexico thus far.) International treaties are deemed, under the Constitution, as ‘the Supreme Law of the Land’. Courts have a duty to decline jurisdiction and to order that the parties in controversy submit to arbitration, if the controversy is permitted to be resolved through arbitration and there is a written arbitration agreement.

Almost all commercial matters may be subject to arbitration; thus, most project agreements involved in a financing package can be subject to arbitration. Controversies arising under industrial property law, antitrust, labour and criminal laws, tax and administrative laws and bankruptcy law are generally not arbitrable. With respect to government procurement contracts, the government procurement laws contemplate certain restrictions for cases in which a controversy can be subject to arbitration, the rules of which have not yet been issued; however, the government procurement laws already contemplate that the administrative rescission of a government procurement contract (ie, rescission by the relevant government agency or instrumentality based on a default by the contractor or supplier, pursuant to the rescission procedure contemplated in such laws) may not be subject to arbitration. The same rule is contemplated by the Hydrocarbons Law with respect to the administrative rescission of exploration and production contracts. Pemex and CFE contracts are exceptional where their own organisational statutes authorise submission of commercial disputes to international arbitration and even foreign law when required.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

Irrespective of Mexican conflict of laws rules, project agreements and financing agreements may be governed by the law indicated in the corresponding choice of law clauses (either Mexican or foreign). Unlike other jurisdictions, there is no need to have a substantial relationship between the law contractually chosen and the parties or subject matter of the relevant contract. Likewise, Mexican law follows the principle of iura novit curia; therefore, foreign law is given full faith and credit, and is binding and enforceable in Mexican courts to the extent it does not contradict Mexico’s public policy or was selected to wilfully defraud Mexico’s public policy (fraus legis).

While Mexican law generally allows the parties to choose the applicable law, project agreements are usually subject to Mexican law because, for infrastructure development, contracts usually address a number of regulatory and local issues, and interface with permits and concessions, and substantial performance of the contracts plays a major role in Mexico. The international lending community is usually comfortable with the choice of Mexican law for project agreements. Project agreements that stem from a federal government procurement process are governed by domestic federal laws.

On the other hand, pursuant to Mexico’s conflict of laws rule (lex rei sitae), real estate property rights cannot be subject to a choice of law other than the law of the realty’s location. Therefore, real estate property and rights (including security interests) in Mexico shall always be governed by Mexican federal or local laws.

Regarding the documents comprising the financing package, the loan documents, including certain offshore collateral, are usually subject to New York law (and occasionally to other laws of choice of the lenders), while security documents (mortgages, share pledges and security trusts related to property in Mexico) are subject to Mexican law.

Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Submission to a foreign jurisdiction is effective and enforceable under Mexican law if its enforcement is reciprocal (ie, its enforcement is not left to the discretion of one of the parties), the jurisdiction and venue contractually selected is where performance of the contract occurs or the court selected has personal jurisdiction over one of the parties or the relevant contract, or the subject matter of the contract is not subject to the exclusive jurisdiction of Mexican courts (eg, real estate matters, natural resources), and the parties have unequivocally waived their corresponding jurisdiction. Federal rules of civil procedure, and those of most Mexican states, contain an entire chapter governing recognition and enforcement of foreign money judgments.

Unlike other jurisdictions, no sovereign immunity is recognised under Mexican law; there is, however, certain immunity against attachments, attachments in aid of execution, garnishments or foreclosures of certain assets that are government property or used in services under the exclusive control of the government.

Environmental, health and safety laws

Applicable regulations

What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

Mexico’s environmental, health and safety (EHS) legal framework comprises federal, local and municipal laws, regulations and norms that are applicable to the different sectors, including:

  • the General Law of Ecological Equilibrium and Environment Protection, the General Law for Prevention and Integral Management of Wastes, the General Law of Wildlife, the National Water Law, the General Law of Sustainable Forest Development and their respective implementing regulations;
  • the Federal Labour Law;
  • the General Health Law;
  • the Social Security Law; and
  • official Mexican norms applicable in EHS matters.

Recent legal developments include the enactment of the General Law on Climate Change in 2012, which created the Climate Change Fund to raise and channel public, private, national and international funds into the development of projects related to energy efficiency, renewable energies and sustainable transportation systems, and other projects to reduce greenhouse gas emissions. The Federal Law on Environmental Liability was issued in 2013 and establishes environmental restoration or compensation obligations, or both, as well as the imposition of economic penalties, to parties that cause environmental damages.

The regulatory bodies administering Mexico’s EHS legal framework are:

  • at the federal level, SEMARNAT, the Ministry of Labour and Social Welfare, the Ministry of Health and the General Bureau of Norms; and
  • at the local and municipal level, the respective local or municipal environment protection agencies.

Finally, in 2014, ASEA was created as a federal agency specialising in the regulation, authorisation and supervision of industrial safety and environmental matters concerning the oil and gas industry.

Project companies

Principal business structures

What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

Business structures of project companies greatly depend on the type of activity or project to be developed. However, owing to regulatory concerns and because of corporate, tax and other considerations, usually developers resort to Mexican companies, which may have considerable management flexibility and provide the necessary corporate shield to make a project non-recourse (generally, there is no piercing the corporate veil under Mexican law). While there are other alternatives, the most typically used vehicles for project companies are stock companies and limited liability companies. The latter form has been more widely used in the past few years, as it provides a number of benefits from the corporate governance perspective, in addition to other benefits from the tax perspective (particularly for US developers), since limited liability companies qualify as flow-through vehicles under US ‘check the box’ rules. However, legal amendments introduced in 2014 now provide further flexibility to structure stock corporations and accommodate special requirements from either sponsors or lenders, such as limitations or requirements related to the transfer of shares and shares with different economic or voting rights, among other matters.

Project companies may be structured under a Mexican sub-holding company that in turn may also have other operating subsidiaries, including a personnel services company that provides specialised staffing services to the project.

In recent years, as a result of the macroeconomic stability of the Mexican economy, infrastructure developers (both domestic and foreign) have had full access to domestic and international financing sources. Sources of financing include US, European and Japanese commercial banks, as well as Mexican commercial and development banks (including Nafin, Bancomext and Banobras). Multilateral banks such as the International Finance Corporation (IFC) and the Inter-American Development Bank (IDB) are also active.

Along with traditional limited-recourse project finance deals, structured finance deals using schemes that are less burdensome to developers are being implemented, in addition to a wide range of securities being put in place both by local and municipal governments and private investors, including project bonds; participation certificates issued by real estate trusts (the Mexican version of REITs); and development capital certificates (known as CKDs) issued by trusts formed to finance one or more projects, or otherwise structured as private equity funds to hold participations in the companies developing projects.

Public-private partnership legislation

Applicable legislation

Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

PPP-enabling legislation has been enacted in Mexico both at the federal and state level, although a few states are still lagging behind in this regard. PPPs have been developed both under industry-specific programmes or regimes (eg, toll roads) or under the general framework created, at the federal level, by the rules for the implementation of Projects for the Provision of Services (issued in 2003 and based on the UK Private Finance Initiative (PFI) model), and at the state level, by the local PPP-enabling rules or legislation, which are not industry-specific.

In 2012, the federal Public-Private Associations Law (the PPPs Law) was enacted to regulate long-term PPPs for the provision of public services with private infrastructure. The PPPs Law enables federal, local and municipal governments (using federal funds), as well as any agency or instrumentality of the federal public administration, to participate within this contractual scheme, but excludes activities reserved to the state. On the other hand, the Electricity Industry Law (enacted in 2014) formed the basis for allowing PPP schemes (although not necessarily governed by the PPPs Law) to finance, develop, maintain, operate or expand power transmission and distribution infrastructure, despite the fact that power transmission and distribution activities remain reserved for the state.

PPP - limitations

Legal limitations

What, if any, are the practical and legal limitations on PPP transactions?

As a general rule, PPP projects are awarded through public bidding processes, and are subject to stringent budgetary authorisations based on cost-benefit analysis intended to prove that a PPP project is the most efficient solution to develop the relevant project. In the case of projects for the provision of public services that cannot be subject to concessions, the contracting entity shall remain responsible for the provision of the relevant public service, while private parties are responsible only for the design, construction and operation of the required facilities and the provision of administrative services. Until 2014, PPPs were not permitted for any of the activities related to the oil and gas industry that used to be reserved for the Mexican state through Pemex. As part of the energy reform of 2013 and 2014, this restriction has been eliminated and a no limitations policy on undertaking PPPs related to the oil and gas industry is now applicable.

PPP - transactions

Significant transactions

What have been the most significant PPP transactions completed to date in your jurisdiction?

A wide range of PPPs have been successfully implemented in Mexico under a variety of schemes, even prior to the enactment of the PPPs Law. PPP projects in Mexico have primarily focused on toll roads, suburban trains, waste water treatment, healthcare and education centres. PPP projects for toll roads have been implemented through industry-specific programmes and regimes, where the federal government (and in some instances, local governments) provide recoverable and non-recoverable resources to the project, while the concessionaire assumes the obligation to finance the remainder through risk capital and third-party financings. Similar schemes have been used for water treatment facilities through long-term service contracts (as opposed to concessions) where a portion of the required resources is also contributed by the federal, state or municipal governments. Bids for these PPPs have involved considerable competition, and developers have been able to finance their projects through a wide variety of combinations, including financing provided by local and foreign banks, as well as multilateral agencies, and secured bonds.

In the case of healthcare, prisons and educational centres, PPPs have been developed under the federal rules for the implementation of Projects for the Provision of Services or the local PPP-enabling rules or legislation. In these projects, private investors enter into long-term services contracts to design, finance, construct and operate the required facilities, and provide administrative services, as required to enable the relevant public entity to provide public services. In these cases, government funds are also made available to the project up to a certain level of the required investment.

UPDATE & TRENDS

Recent developments

In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Key developments of the past year30 In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Mexico’s public expenditure proposed for 2019 is US$307,266.3 million (6.0 per cent higher than 2018), in accordance with the Federal Expenditure Budget for the Fiscal Year 2019 published in the Federal Register on 28 December 2018.

The Mexican Government, under the leadership of President Andres Manuel López Obrador, has stated that it designed and structured the public expenditure plan based on austerity and savings policies to provide more public resources to social needs and infrastructure expenditure. The current administration has instructed to finance seven priority projects in Mexico, namely:

  • the Mayan Train (US$315.8 million);
  • the Transisthmian Commercial Corridor (US$47.3 million);
  • the development of approximately 300 rural roads in the states of Oaxaca and Guerrero (US$132.80 million);
  • the modernisation and rehabilitation of airport infrastructure and connectivity (USD$947.4 million);
  • free internet access for all (US$32.7 million);
  • the rehabilitation of marginal neighborhoods in border and tourist cities; and
  • the reconstruction plan derived from earthquake damages.

As a result of such instruction and focus in the sectors involved in each of the aforementioned priority projects, sectors such as agriculture, environment, personal services and operating expenses reflect important budgetary cuts, and the discretional allocation of resources to the states and certain governmental entities such as CRE and CNH also face significant reductions.

Public expenditure on energy-related matters in 2019 will prioritise the hydrocarbons sector, specifically production and refining. The electric sector, despite receiving more resources through CFE, will be allocated less capital for generation through clean energies (including nuclear and hydroelectric) and transmission and distribution. In this vein, SENER is expected to prioritise hydrocarbons policy over others and, in line with this, on 25 January 2019, CFE cancelled the Ixtepec-Yautepec Transmission Line public tender (a high-voltage DC transmission designed to have the capacity to transport up to 3,000 MW).

In respect of the hydrocarbons sector, Pemex will be allocated US$24.5 billion of Mexico’s 2019 federal budget, a 14.1 per cent increase with respect to the amount approved in the 2018 budget, and has been granted a number of tax incentives in an effort to improve its financial condition. These allocation and tax incentives are considered necessary to meet the demand for petroleum and petrochemical products; to drill for and complete new wells and repair existing ones; and enhance hydrocarbons, petroleum and petrochemical logistics services. Mexico’s new administration has three main priorities for its 2019 investment in Pemex: first, to stabilise the production of crude oil, reversing the downward trend in the short term and increasing production in the future; second, to upgrade the current six refineries that comprise the National Refining System, assuring the reliability of the crude process, which will allow increased production of refined products (mainly gasoline and diesel), and thereby reduce Mexico’s dependence on imported gasoline and diesel; and third, to start construction of a new refinery in Dos Bocas, Tabasco. Likewise, the government intends to channel direct resources toward the maintenance of gas processing plants, pipelines and ethylene and fertiliser facilities.

Regarding the electric sector, CFE will be allocated US$3.2 billion of the 2019 federal budget, a 36 per cent increase with respect to the amount approved in the 2018 budget. Through the 2019 programme to maintain, rehabilitate and modernise the power generation infrastructure, resources will be used to ensure the availability and reliability of the power generation equipment, which will make approximately 5 per cent more energy available to the market and increase thermal efficiency by 1.08 per cent.

President López Obrador’s administration has the following four main priorities for its 2019 investment in CFE:

  • to consolidate and strengthen its new operating model and develop a productive business culture with effective talent management;
  • to achieve the objectives of productivity and cost control, accomplishing better performance results and becoming more cost-competitive;
  • to continue to improve its business portfolio to reach greater profitability and financial strength; and
  • to start the marketing and transportation of gas to maximise the value of the pipeline network (renegotiation of existing gas transportation agreements is expected to occur during 2019, as publicly stated by the Director General of CFE).

In light of the foregoing, it is clear that President López Obrador and the new administration under his wing intend to strengthen both Pemex and CFE. CFE has made public, prior to approval from the Ministry of Finance and Public Credit, that it intends to finance projects in the electric sector through the formerly used Investment Projects with Deferred Impact in the Expenditure Registry (PIDIREGAS) scheme to generate profitability and help CFE to recover and improve its power generation capacity. PIDIREGAS are to be implemented by CFE for long-term investment projects to compensate the scarcity of public resources for investment and provide major security to investors.

Investment in private projects not anchored by either Pemex or CFE, including E&P operations and power generation facilities, is expected to decline, due to the absence of new bid rounds for the award of blocks for the development of oil and gas E&P activities, as well as the suspension of auctions for the award of long-term PPAs in the context of the wholesale electricity market. We shall wait to see if Pemex follows CFE’s lead regarding the use of PIDIREGAS for the projects it intends to finance during this administration, especially during 2019. In any case, financing providers are closely following the measures taken by the current administration to stabilise the financial conditions of Pemex and CFE, as projects requiring financing are expected to focus on infrastructure and service contracts anchored by these two government productive enterprises.

Another notable development in the context of project finance transactions in Mexico is the upcoming replacement of NAFTA by USMCA, and more particularly, the substantial changes that USMCA brings to the ability of US and Canadian investors to resort to investor-state dispute settlement arbitration against Mexico. On one hand, USMCA does not contemplate ISDS provisions for disputes among Canadian investors and Mexico, so Canadian investors will need to rely on the ISDS provisions available under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, to which Canada and Mexico are parties. On the other hand, while USMCA does contemplate ISDS mechanisms for disputes between US investors and Mexico and disputes between Mexican investors and the US, its scope is narrower than what NAFTA contemplated. For example, a potential concern is the limitation on the ability to submit claims for indirect expropriation, which are expressly carved out from the protections that can be subject to an ISDS arbitration procedure. Chapter 14 of USMCA also alters the scope of certain protections - for example, national treatment or minimum standard of treatment - attempting to establish different standards for proving violations to these protections when compared with the decisions rendered under NAFTA. Notwithstanding the foregoing, there is yet another scheme of protections for rights granted in government contracts in a ‘covered sector’, which includes the oil and gas industry, infrastructure projects, power generation, transportation and telecommunications.