The Mexican Securities Law (Ley del Mercado de Valores) allows government entities to issue debt-denominated securities known as Certificados Bursátiles. Although the Mexican federal government has in the past issued debt securities, this mechanism has certainly not been a financing option for state governments or for municipalities. So far there has only been two issuances of Certificados Bursátiles of this kind registered with the Mexican Stock Exchange. One was made by the state government of Morelos for about $21 million, and the second by the city of Aguascalientes for about $9 million. Recently, Fitch Ratings has given the city of San Pedro Garza García an AAA rating for the issuance of Certificados Bursátiles up to $20 million. It is expected that these securities will be priced and placed this summer and, if successful, will become the third issuance of these kind of debt instruments in the Mexican securities market.
Historically, states and municipalities in Mexico have never had access to the bond markets and were forced to rely on credit facilities from commercial banks or the international banking community. The main reason why there was no such market is mostly related to the government revenue-raising structure. State governments do not collect income, sales or value-added tax directly from their residents. Instead they have executed a tax coordination agreement with the federal government, by means of which a percentage of the federal taxes raised by the federal government (and usually collected by the state governments) are granted to the state and municipal governments. The amount of the grants given are not in any way related to the amount of taxes that the residents pay in any given state. In addition, municipalities are only allowed to raise a limited number of taxes, and rely heavily on grants from the federal or state governments.
The federal administration is making a visible effort to change the government revenue-raising structure to allow more predictability in the revenue stream of the state and municipal governments. This effort requires serious amendments to the federal tax laws. Although last year's tax reform was not successful, some progress has been made. It is very important to see how these initial offerings are priced and placed under the existing environment. It is expected that they will be for very small amounts (as has been the case previously) because there is still a level of uncertainty related to the revenue stream of these government entities. However, it is worth noting that if the offerings prove to be successful, these entities will reduce significantly the cost of their debt service reserves, and perhaps will boost further offerings for the purposes of debt restructuring.
The provisions in the Mexican Securities Law define a Certificado Bursátil as a negotiable instrument issued in series with the intention of circulating in the securities market. The instrument must contain the following:
- an express reference to being a Certificado Bursátil in bearer form;
- the name of the issuer (in the case of state or municipal governments);
- the amount of the issuance, series and certificate number, and the intended use for the process to be received;
- the interest rate calculation;
- the payment terms for both, principal and interest;
- the terms and conditions for amortization;
- the place of payment;
- the types of default that will cause the acceleration of the principal amount due;
- a reference to any security or collateral;
- the date and place of issuance;
- the signature of a duly authorized representative of the issuer; and
- the signature of a duly authorized representative of the bondholders.
It is clear that the current legal framework is very general and further regulations can be expected shortly. Nonetheless, if these initial placements prove to be successful, there is certainly a real business opportunity in this field for national and international players willing to assist state and municipal governments to restructure their debt facilities with the commercial banking industry.
Alberto J Morales