In the last decade, Mexico has seen significant growth in the
development of infrastructure. This spans from toll roads and water
facilities, to independent power production plants, to facilities
anchored by the Mexican national oil company Petróleos Mexicanos
(Pemex). The road-to-more-roads system has allowed successful financing
of projects by the domestic and international lending community.
The relative boom in infrastructure construction and development of
projects that the Mexican economy has seen in recent years – and which
one can only expect to grow steadily – is influenced by a number of
factors. These include the considerable stability in the macroeconomic
indicators (inflation, currency strength and fluctuations, trade
balance), increased long-term presence of international financial
institutions (thereby bringing more availability and better access to
credit), and impending infrastructure needs. To demonstrate, due to
Mexico's environmental regulations and internal commitments, in the last
five years state and municipal governments with medium and large
population groups have been required to foster and launch the
construction and operation of wastewater treatment plants. These have
been installed throughout major cities such as Guadalajara, Chihuahua or
Hermosillo, and in the Mexico City megalopolis, requiring the
construction of the largest facility of its kind worldwide. Water plants
are built under a BOT (build, operate, transfer) structure, under which
investment in the plant is conducted by a private sponsor and recovered
over the life of the project through the payment of a service rate
(encompassing fixed and variable charges). At the time of going to
press, the Mexico City government was conducting a bid for the
exploitation of the biogas produced by Mexico City landfill though
hundreds of recovery wells, to fuel a 60-70MW power plant that will
supply power for certain needs of the Mexico City Government under a 25
year power purchase agreement. State governments are also actively
seeking to anchor infrastructure development through long-term
concessions and contracts. To this one may add a number of renewable
energy facilities (mainly wind farms but also solar and other sources)
committed to long-term power purchase agreements with wholly private
investors. Needless to say, the successful development of these projects
is dependent, every time, on a successful project financing package.
Structuring a project for its financing
The successful financing of a project requires the relevant project
to be properly structured from the outset to make it bankable. The
structure of a project must contemplate key premises for lenders to fund
a sponsor with the necessary capital resources for the project's
construction and operation. Two elements are key: a proper security or
collateral package, and a proper repayment structure. Regarding this
last element, the anchor tenant/tenants must pay the developer a rate,
fee or charge that can provide the lenders sufficient comfort for the
repayment of the debt principal and service.
In dealing with government-anchored contracts in Mexico – which have
historically been governed by Mexico's stringent government procurement
laws (although this trend is changing as further discussed below) –
implementing standard step-in rights for the lenders to operate or
designate a substitute operator for a project upon a default, or the use
of lenders' standard foreclosure rights, has certain limitations that
need to be overcome. These restrictions range from the largest hurdle,
which is the limitation for assignment or encumbrance of contract or
concession rights, to restrictions on the ability to assign
project-critical governmental permits and authorizations.
So far, project structures have been successfully implemented to
overcome statutory limitations. Security packages 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, moveable property and intellectual property rights. But
exceptions apply for contractual rights stemming from contracts or
concessions governed by Mexico's government procurement laws, where
generally speaking, only accounts receivable may be assigned. To address
this concern, pledges are normally created over contractual rights,
accounts receivable, moveable property, and more importantly, the shares
of the project companies, so that an event of foreclosure or step-in
may take place through a change in control at the project company level.
In some cases, this also requires prior consents from the relevant
governmental bodies, but in some instances the principal project
agreements have anticipated consent for the change in control when
dealing with a substitute operator designated by project lenders.
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. Most pledges and all 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.
It is also common to see security packages that include the creation
of guarantee trusts. Mexican law is very open in terms of how a trust
can be structured, and therefore, trusts have proven to be the ideal
mechanism for the proper distribution of funds to cover payment
waterfalls, protecting naturally the lenders, but also key project
contractors and other parties entitled to receive payments from the
project's repayment source. Such sources could include toll payments in a
toll road, a service fee in a water treatment plant, a fixed capacity
charge or a variable usage charge in a power plant. Parallel to this
function, which handles the source of repayment and makes distributions
that provide lenders the comfort and safety of a secured priority of
payments, the trust is also used to place assets in collateral. Under a
guarantee trust, sponsors transfer title to assets and rights to a
trustee (normally a Mexican bank, as only certain entities may act as
trustees), who holds title to the relevant assets and rights for as long
as there are outstanding obligations under the financing arrangements.
Meanwhile, 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 then
authorised to take control of the estate of the trust, and ultimately,
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 were afforded to non-possessory pledges
or floating liens, (ie pledges in which the pledgor retains the use and
possession of the pledged assets), as a result of reforms introduced in
June 2003. These reforms saw a series of federal statutes amended to
expedite commercial foreclosures and improve collection procedures, as a
way to foster Mexico's lending environment.
Securing priority rights for lenders
The proper structuring of a collateral package for successful
financing requires a proper system for perfection and notice of security
created, for third party notice purposes.
Under applicable Mexican commercial laws, mortgages and guarantee
trusts encompassing real estate property are perfected upon execution of
the relevant deed of mortgage or deed of trust, validated by a notary
public, and is registered 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 generally perfected by the delivery of
the pledged assets to either the secured creditor or a third-party
depositary. Prior to 2003, when the transaction required that the debtor
retain possession of the pledged assets, the lenders would typically
designate an agent of debtor to act as depositary. However since
non-possessory pledges were introduced it is no longer common to see
regular commercial pledges being used in large project financing
structures. Instead, lenders resort to pledges without dispossession,
where the pledge is perfected upon registration with the Sole Security
Registry (Registro Unico de Garantías Mobiliarias). The recent
implementation of this Sole Security Registry, following a similar
concept to the US used UCC filing, has made significant progress in
bringing certainty to priority of pledges over movable property.
Regular pledges are also contemplated for security over shares or
membership interests, where the security is perfected upon registration
in the corporate books of the issuer.
Guarantee trusts for contractual rights require notice to all
counterparties about the transfer of rights to the trust, while
guarantee trusts involving personal property generally only require a
written form to be enforceable, and are also subject to registration at
the Sole Security Registry. The creation of security interests over
concessions, licences and similar rights, as well as certain regulated
assets, generally requires prior approval or notice to the regulator or
issuing agency. Certain assets that are governed by specific statutes,
as is the case for mining concessions, aircraft and vessels, require
recording at their specific registries.
Foreclosing on collateral
Closing the circle on an efficient system to foster a healthy project
financing environment, legislation must have efficient foreclosure
proceedings. Recognising this need, in 2003 Mexico completed legal
amendments that allowed expedited foreclosure proceedings in certain
instances, typically used for international project financing
structures.
Foreclosure procedures vary depending on the type of collateral. To
that effect, a financing package which could typically include a
mortgage, pledge and guarantee trust would follow parallel procedures as
required. Foreclosure of mortgages is conducted through judicial
proceedings, although the law contemplates a summary commercial
proceeding to alleviate time and formality issues. The judicial
intervention ultimately includes a public auction of the mortgaged
properties, where the project lenders may participate, requesting that
the properties be transferred to them in payment of the guaranteed debt
at their commercially appraised price or a percentage thereof, which may
vary from state to state and from auction round to auction round (with a
reduction made as rounds occur without a successful adjudication).
In the case of non-possessory pledges and guarantee 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
payable status of the defaulted obligations. In addition, in the case of
guarantee trusts, the parties are entitled to establish in the relevant
trust indenture ad hoc foreclosure procedures where no judicial intervention is required and where the trustee conducts the foreclosure process.
Step-in rights and substitute operator restrictions
In addition to counterparty consents required for change in control
to implement a step-in structure, lenders (and sponsors in structuring a
project) should be mindful of two additional restrictions. One is the
approval of the capabilities of a substitute operator to be designated.
Another is statutory restrictions existing in limited cases for foreign
investment in certain industries and projects, which may affect the
ability for international lenders to directly assume a project ownership
or to seek a third party stepping investor.
In addressing the technical capabilities concern, it is important for
project agreements and concessions to contemplate transitional periods
for takeover, allowing lenders to identify qualified operating parties
as an interim measure until the potential further sale of the secured
project. As for the second concern, beginning with NAFTA back in 1994
and with subsequent sector liberalisations, there are only very limited
sectors in which a foreigner may be restricted in owning a majority or
full equity interest in a project in Mexico. While generally statutes
governing these types of projects require a Mexican company to be the
asset owner and project operator, no limitations exist on foreign
ownership. That is the case in the electric power industry, the mining
sector, water facilities, roads, and in the vast majority of the oil and
gas industry. This last industry includes upstream facilities, as well
as natural gas pipelines, liquids terminals and others, with the sole
exclusion of oil and gas drilling activities, where a 49% restriction
exists, but which limitation may be lifted with the approval of the
National Commission of Foreign Investment (Comisión Nacional de Inversiones Extranjeras). This authority has historically been lenient on granting authorisations since its inception back in 1993.
Improved Structures: PPPs
As a result of the enactment in January 2012 of Mexico's promising Public-Private Partnership Law (Ley de Asociaciones Público Privadas
or PPP Law), a number of improvements in rules for developing long-term
projects have been brought to the table. Projects that fall under the
umbrella of that statute must involve the existence of a partnership
between the private and the public sector whereby both parties carry out
activities that are mutually complementary. They must also involve the
execution of a long-term services agreement (or similar instrument, such
as a concession), construction of infrastructure, and ultimately be
owned by the public sector once the term of the agreement elapses.
Except for oil and gas projects that were expressly carved out, most
infrastructure projects developed or funded at the federal level have
benefited from these new rules. The PPP Law recognises that in
structuring a project, a major consideration is whether a contract
provides a balanced deal. If a contract for the provision of a long-term
service is not well-balanced, at some point during the life of the
project this will affect the long-term quality of service. From the
ability to agree on structure adjustments due to changes in law, to
agreeing on reciprocal and balanced indemnifications and limitations of
liability, this golden rule recognises that a balanced set of terms will
likely lead to a better service, in better economic conditions. This
fundamental premise necessarily impacts the project risk perception and
analysis, thus the attractiveness to the international lending community
and the access to more competitive financing conditions, to the benefit
of all parties, from the federal government, to the project developer
to the end user.
Apart from a well-balanced structure, domestic and international
lenders can find a number of virtuous features in the PPP Law which make
financing a PPP project in Mexico much more attractive than in the
past. Some of these key features are discussed below.
Risk Allocation
Depending on the nature of the project and its specific
characteristics, the statute recognises that there are circumstances in
which a risk can be better allocated and assumed by the anchoring
governmental agency than by the sponsor. These risks may include, for
example, cases where competing infrastructure is built by or authorised
by the government, thus impacting the projected revenues and requiring
financial model adjustments. Another might be changing circumstances in
the use of the infrastructure due to other political or economic
factors. A third could be governmental force majeure cases. While
considerable progress has been made over the past few years with certain
specific entities and agencies in these issues, the principles
recognised by the PPP Law help to level the playing field and procure an
equitable allocation of the risks that are likely to bring considerable
certainty to the government and the contractor to undertake a balanced
risk allocation.
Making project structures more bankable
Two historical concerns for lenders in projects in Mexico are eased
or lifted with the PPP Law. First is the ability to assign contracts,
which facilitates the use of standard foreclosure procedures with
simpler structures. Second is the termination indemnification in case of
an early termination for convenience, the formula for calculation of
which should necessarily allow project lenders to recover principal and
financing costs.
Step-in rights of lenders
In close connection to the above, the PPP Law contemplates that the
lenders in a project should be allowed full step-in rights to cure or
avoid defaults by the sponsor in the performance of the project. This
could be at the construction or operational stage, and is to prevent any
negative impact on the flow of revenues of the project to pay a
financing package. Traditionally in Mexico, structuring step-in rights
for lenders in a government contract has been complicated and subject to
rigid structures, in many cases requiring the lenders to acquire the
contract or concession holder to be able to enforce step-in rights. New
structures to be implemented under the PPP Law would significantly
facilitate step-in rights and thus decrease the risk factor of the
project.
Dispute resolution
Litigating a dispute regarding a government-anchored contract or
government-issued concession in a domestic court, be it federal or
local, has always been a concern in any given country for international
and foreign project sponsors, but also for domestic developers. The PPP
Law recognises the need to resolve disputes concerning these instruments
and the projects developed in a commercial arbitration. Dispute
resolution clauses are always a major concern not only to the sponsor or
developer, but also to the project lenders who may find themselves
stepping into the shoes of the sponsor if a dispute, as is often the
case, leads to a financing package default.
Eligibility for subordinated debt or other federal fund
Mexico's federal government has provided strong support and growth to the National Infrastructure Fund (Fondo Nacional de Infraestructura,
known as FONADIN). The FONADIN provides quasi-equity or subordinated
debt to infrastructure projects the business models of which show an
increased risk in the absence of government support, thus making the
projects financially viable. FONADIN's contribution can reach up to 40%
or 50% and greatly enhances the risk and feasibility assessments of a
project. A project developed under the PPP Law is a step towards this
beneficial funding.
Investment protection
As a result of recent events, the lending community can be expected
to turn its attention to the effects of expropriations. Project
investors in Mexico enjoy a series of benefits stemming from bilateral
investment treaties (including chapter XI of NAFTA) for investor-state
arbitration in the case of violation of investor rights. They also have a
right to commercial-value indemnification in the event of
expropriation, in hard currency, which would provide lenders further
certainty in structuring a long-term project for a public service.
| Rogelio López Velarde
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Rogelio López-Velarde is a counselor-at-law admitted in Mexico in
1988 and in the State of New York in 1991. He received his J.D. Degree, summa cum laude,
from the Universidad Iberoamericana Law School in 1988, and earned his
LL.M. degree from University of Houston Law Center in 1989.
He held various positions at Pemex during 1988-1993and was honoured with the "Most Distinguished Attorney Award"
of Pemex for the period 1990-1991. Mr López-Velarde was a Professor of
Private International Law at the Universidad Iberoamericana Law School
from 1992-2000, and director of the Energy Law Seminar organised between
the Universidad Iberoamericana and the Mexican Bar Association. He is
the Mexican representative of the Editorial Board of the Oil & Gas Law and Taxation Review, the Oil & Gas Committee of the International Bar Association, and the Editorial Board of the Journal of Energy & Natural Resources Law of the International Bar Association.
Mr. López-Velarde has been recognised by Euromoney, Who is Who and Latin Lawyer as the top energy lawyer in Mexico, and one of the top energy lawyers in the world.
López Velarde Heftye y Soria
Guillermo González Camarena No. 1600, Piso 6-B
Col. Santa Fe, Centro de Ciudad
C.P. 01210 Mexico D.F
T: +52 55 3685 3334
E: rlopezv@lvha.com.mx
W: www.lvhsmexico.com
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| Jorge Jiménez
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Jorge Jiménez is an attorney admitted in Mexico in 1997 and in the State of New York in 2000. He received his J.D. Degree, summa cum laude,
from the Universidad Iberoamericana Law School, and earned his LL.M.
degree from the University of Texas at Austin in 1999. Mr Jiménez has
been selected by Latin Lawyer Magazine as one of the top 40 young
lawyers in Mexico and is featured in Euromoney´s Guide to the World's
Leading Energy and Natural Resources Lawyers.
Mr Jiménez writes and is an active speaker the topics of foreign
investment and legal aspects affecting international business in Mexico.
Mr Jiménez has been published in energy and antitrust in law reviews in
Mexico and Europe. He is a member of the Mexican Bar, the American Bar
Association, the Fullbright Scholars Association and the Texas-Mexico
Bar Association.
He is a certified English translator by the Federal Judiciary.
López Velarde, Heftye y Soria
Guillermo González Camarena No. 1600-6B
Col. Centro de Cd. Santa Fe
01210, México, D.F.
T: +52 55 36853333
E: jjimenez@lvhs.com.mx
W: www.lvhs.com.mx
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