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The year in review: capital markets in Mexico – Lexology

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The year in review
The devastating effects of the covid-19 pandemic in the Mexican capital markets has decreased, leading to a slow but steady market growth. Despite uncertainty and volatility in the past 24 months, and despite interest rate hikes made by the Federal Reserve in order to tackle inflation, the strength of the Mexican peso has surpassed the global average as well as other emerging economies markets due to multiple factors such as vast international reserve, strong institutional response in order to counter rising inflation and market growth.
In addition, instruments and products in the Mexican capital markets continue to solidify their strength, and existing products have refined their sophistication by market participants, with over 88 equity development trust certificates (CKDs), 32 CERPIs (investment project trust certificates), 19 FIBRAs (the Mexican equivalent of a US REIT) and five FIBRA-Es (investment vehicles intended for energy and infrastructure projects that issue trust certificates (CBFEs)). Mexican capital markets have entered into a new stage of development that should set the path for future ventures in the years to come.
New challenges arise, such as the soaring effects of the recent armed conflict in Ukraine, rising prices in the United States, as well as a general fear of recession, economic impact of impending and upcoming tensions amidst an environment of international conflict and political division, have thoroughly impacted international markets, Mexican markets have shown some resilience in comparison to other markets both regionally and internationally. In spite of impending market volatility, rise in commodities and increase in gas prices, Mexican listed companies have shown strength, rising more than 3 per cent in previous months.2
In an environment in which the covid-19 pandemic has drastically changed our world, and in the wake of monkey pox developments, there have been substantial changes regarding institutional procedures and methods that are here to stay, as it has been the case of the avant-garde electronic issuance introduced by SD Indeval in its Circular No. 19, which informs modifications and additions to its internal regulations, as well as its operating manuals. The aforementioned modifications have established landmark terms, requirements, procedures and actions in order to migrate from physical titles and vault, towards electronic versions of the aforementioned.
During the past year, new securities issuances have included environmental, social and governance (ESG)-oriented pipelines to satisfy institutional investors’ interest and requirements. Similarly, new instruments have begun to include ESG disclosures in their prospectus and offering documents, and it is common to see recent and pre-existing instruments, including such disclosures in their yearly and quarterly reports, even though ESG disclosures are not yet mandatory under applicable Mexican law.
Climate change nowadays stands as an imminent issue, as greenhouse gases are causing temperature to increase and information in relation to its risks, effects and consequences are not yet entirely certain. As such, both investors and issuers reshaping their strategies in order to tackle climate change as well as to adapt their traditional practices towards risk management and the development of projects with such topics in mind.
During the United Nations Climate Change Conference (COP 26) held in Glasgow, Scotland during November 2021, the BMV pledged to reduce CO₂ emissions to zero, in the wake of a serious bet towards the goal of achieving net zero emissions. These commitments have been endorsed by their incorporation into the Net Zero Financial Providers Alliance. According to the BMV, green bonds have outstandingly expanded. Only in 2021, more than 30 per cent of funded debt has incorporated sustainable attributes.
Within this topic, the BIVA has established the first programme of its type in Latin America with its novel chief sustainability officer (CSO) programme. The aforementioned programme targets the increasing market trends to integrate sustainability and to migrate towards investments aligned with ESG criteria, in addition to helping and encouraging market issuers towards the implementation of business models with integrated sustainability factors via the incorporation of a CSO in companies that have the task of leading ESG transition goals within their boards of directors. In February 2022, the BIVA and Chapter Zero (a Mexican climate governance initiative), entered into a strategic alliance in the global economic forum to concentrate efforts towards vouching for climate governance inside technical committees, in a joint push towards generating a more sustainable, safe, trustworthy and transparent financial market.
The rising costs and harrowing effects of climate change have imposed the necessity of finance environmentally-friendly projects such as ones concerning water, agriculture, energy, clean transport and sustainable infrastructure. These conditions have paved the way for the implementation by the BMV of green bond issuances, an instrument designed for financing and refinancing renewable energy projects, sustainable construction, energy efficiency, clean transport, water and water adaptation, forestation, agriculture, bioenergy and food supply chain changes. Green bonds may be issued by either private issuers or governmental entities so long as they meet the requirements in order to have the certification to become a green bond issuer. In addition, green bond issuances may be structured as new bonds or may be integrated into existing projects and refinancing projects.
Other new trends include the introduction of the sustainability-linked bond, created in order to finance ESG related objectives in a conjoint effort for investment, but with variable characteristics related to the success of their sustainability objectives.
New efforts and calls regarding equality matters have also gained ground as markets have adopted and renewed policies and actions in their commitment towards promoting gender equality and eradicating gender discrimination in all its forms. Last year, the BIVA’s letter of commitment alongside several investors regarding wage equality created a strong foundation towards this commitment with stakeholders. This year, in the frame of International Women’s Day, the BIVA, alongside several women’s associations, has endorsed and reiterated its commitment towards promoting wage equality. In the same way, the BMV has vied for gender equality and has adhered to the ‘Ring The Bell for Gender Equality’ movement, in order to establish visibility for the empowering of women, as well as equal opportunities in the financial sector, while reinforcing the UN Global Compact and the UN Women Empowerment Principles, to promote diversity as an element for innovation and growth of companies.
Some of the most relevant recent capital market transactions include:
Oaktree, a leading company focusing on alternative investments, has introduced itself to the Mexican capital markets, by issuing its first CERPI on the BMV.
FIRA, a group of four public trusts focused on agriculture, and Banxico have also made efforts to promote inclusion and equality in the Mexican market through the issuance of the first social bonds for financial inclusion on the BMV.
The first and most commonly used contemporary structured instrument in Mexico is the CKD. CKD funds resemble international private equity funds, and they are incorporated through a Mexican trust agreement that issues trust certificates listed and traded on the Stock Exchange to invest in companies, as well as in infrastructure, real estate, private equity and industrial projects. CKDs grant their holders a right to participate in a portion of the proceeds, assets or rights that comprise the trust assets. The CKD trust carries a mandate of investing in projects or in equity of target companies.
CKDs are equity-like securities that do not provide an unconditional payment obligation of principal and interest. Applicable regulation imposes on CKDs certain corporate governance obligations similar to those of publicly traded companies. Provided that it is permitted under their respective investment regime, Mexican and foreign investors are allowed to invest in CKDs.
The majority of CKD issuances that have come to market in Mexico during the past few years have been aimed at the infrastructure and real estate industries, although applicable law allows for the funds raised through CKDs to be invested in other areas. The success of a CKD fund is heavily dependent on the sponsor’s (general partner’s or GP’s) management team in charge of identifying and carrying out the fund’s investments as well as on the business plan set forth by the sponsor.
CERPIs funds (similar to CKDs) 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 funds typically invest in real estate, private equity, debt, energy and infrastructure, and potential sponsors are most commonly private equity funds, real estate developers, asset managers and energy services providers.
One of the key differences between CKDs and CERPIs is that CERPIs funds may invest outside Mexico, so long as at least 10 per cent of the fund’s maximum authorised amount is invested in Mexico. Similarly, CERPIs provide for less stringent corporate requirements and approvals of investors than those of CKDs, thus granting GPs and fund managers more flexibility to manage a fund. However, sponsors are required to make a 2 per cent co-investment in each sponsored project and should have a proven track record.
FIBRAs are established as a Mexican trust agreement (similar to CKDs and CERPIs) and resemble the real estate investment trusts (REITs) of the United States. FIBRAs allow parties to benefit from a specially tailored tax stimulus intended to promote real estate investment in the country.
The purpose of a FIBRA is the acquisition or construction of real estate destined to be leased or the acquisition of rights to receive rental income, as well as to grant mortgage financing, and the trust estate should comprise at least 70 per cent of such assets. Under applicable tax regulations, a FIBRA is required to distribute to its certificate holders at least 95 per cent of its net taxable income on an annual basis.
The current legal structure of a FIBRA stems from a series of reforms enacted over the past several years to the following:
The main benefits of investment in a FIBRA (relative to other investments) are as follows:
A particularly positive aspect of FIBRAs (as opposed to CKDs and CERPIs) is that many of them have been structured with both a national listed tranche on a Stock Exchange and an international tranche offered abroad (usually relying on Rule 144A and Regulation S of the US Securities Act of 1933). The foregoing has allowed the diversification of the investor base, which is otherwise dominated by Mexican pension funds.
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.
FIBRA-Es are akin to US master limited partnerships. Under a FIBRA-E, a corporate sponsor securitises mature productive assets by contributing to the FIBRA-E equity interest in certain Mexican legal entities (promoted companies) that own and operate such assets for a specific set of activities, namely infrastructure, electricity (generation, distribution and transmission) and energy. The sponsor will receive cash or trust certificates (CBFEs) in return for its contribution to the FIBRA-E.
One of the key features of a FIBRA-E is the tax benefits that it provides to 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.
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.
SPACs are publicly traded vehicles that are formed to facilitate a business combination. SPACs – also called ‘blank cheque companies’ or ‘public shells’ – provide a sponsor with immediate access to funding to conduct a specific transaction (merger, acquisition or asset sale that requires shareholder approval) typically within a 12–24-month time frame, resulting in a new publicly traded company.
SPACs issue units that are listed on a Stock Exchange, which consist of shares and warrants (or portions of warrants). Warrants have the shares of a public company as underlying assets. Each 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.
Primarily institutional (including Mexican pension funds) and retail investors participate in these kinds of offerings. A SPAC public offering may be carried out globally (Mexican public offering plus an international tranche, usually under Rule 144 A/Regulation S of the US Securities Act of 1933). 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:
From a statutory standpoint, the Ministry of Finance has final authority over securities markets, interpretation of the Securities Market Law and international treaties. In practice, the CNBV has the main direct jurisdiction regarding oversight and regulation of the activities of all capital market participants. Its supervisory authority includes powers to carry out investigations and to impose penalties and fines in cases of non-compliance, as well as powers to enforce them. Any resolution entered into by the CNBV may be appealed before federal administrative courts using a writ for amparo proceedings. However, any disputes that arise between financial firms and consumers must be first resolved by CONDUSEF, the National Commission for the Defence of Users of Financial Services, Mexico’s financial ombudsman.
As a result of relatively recent reforms to the antitrust law, COFECE, the Mexican Antitrust Commission, has enhanced powers, and has increased its oversight and investigative activity, with a number of investigations that have concluded with record fines.
To date, COFECE has initiated market studies regarding digital financial services and fintech companies, with the purpose of analysing the structure, operation and regulatory framework, along with recommendations towards authorities in the financial sector. Regarding this subject, antitrust and fintech companies may well see some relevant changes in the future, depending on the findings and reports of the Mexican Antitrust Commission arising from its ongoing investigation.3
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.
Any stock exchange operating in Mexico requires approval by the Ministry of Finance and the favourable opinion of the Central Bank and the CNBV. To date, two stock exchanges and one derivatives’ exchange system operate in Mexico: the traditional BMV and the relatively new BIVA (the stock exchanges) and MexDer (the Mexican OTC derivatives exchange), all based in Mexico City.
As mentioned above, both stock exchanges are 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 prior 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.
In addition to the local exchange, the BMV operates the international quotation system (SIC), which is an electronic conduit to trade shares listed on certain foreign stock exchanges recognised by the CNBV. The SIC, which allows foreign companies to be listed alongside local issuers in both Stock Exchanges, has been hugely successful with a threefold increase in the last five years, driven mainly by ETFs.
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 the Central Bank and the CNBV are required. Only securities exchanges, securities depositories, broker-dealers and credit institutions (commercial and development banks) may be shareholders of a CCP.
Only two concessions by the federal government have been granted to operate CCPs in Mexico; Contraparte Central de Valores, which clears transactions on the BMV and the BIVA, and Asigna, Compensación y Liquidación, which is the CCP for the Mexican Derivatives Exchange (MexDer), for derivatives transactions. The Central Bank has exclusive powers to supervise all CCPs in Mexico, as well as approving the operations of any CCP.
Rating agencies in Mexico must be incorporated as Mexican companies and 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 are subject to relevant provisions of the Securities Market Law and the applicable general rules issued by the CNBV applicable to rating agencies.
According to public information from the CNBV, seven rating agencies operate in Mexico, most of which are local branches of international rating agencies.4
There are no other strategic considerations of note.
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Author

Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.