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Banking and finance legal considerations in Mexico: Cross-border Financing Collateral Mechanisms

Patricia

By: Luis Gerardo Ramírez Villela

Cross-border financing has been frequent in Mexico for a long time and involves the granting of collateral by Mexican companies or subsidiaries in favor of the borrower in order to guarantee the compliance of debtor's payment obligations under the corresponding credit/loan agreements.

All credit/loan agreements must contain specific provisions in connection with the collateral to be granted by Mexican companies to guarantee payment obligations and a legal due diligence would be necessary in order to validate that such companies (i) may act as guarantors under such credit/loan agreement, (ii) have sufficient title to the assets to be granted as collateral, and (iii) are validly existing and in compliance with applicable laws.

The due diligence shall, depending on the business operation of the corresponding company or companies, at least cover the following areas: (1) organization and corporate governance, (2) material contracts, (3) banking and financing documents, (4) assets and (5) litigation.

Depending on the amount of the credit/loan to be granted, the collateral may include any or all of the following documents:

  1. Pledge agreement over the shares/equity interests (contrato de prenda sobre acciones/partes sociales) of the Mexican company or companies, as the case may be;
  2. Non-possessory pledge (contrato de prenda sin transmisión de posesión) over the assets of the Mexican company or companies, as the case may be;
  3. Guarantee agreement (contrato de fianza) to be executed by the Mexican company or companies, as the case may be, acting as joint obligor (s); and /or
  4. To the extent the Mexican company or companies, own a real estate property, a mortgage agreement (contrato de hipoteca) over such property.

It should be noted that collateral comprehending the agreements mentioned above from number 1 to number 3 would need to be ratified before a Notary Public and registered in the Mexican Unique Moveable Assets Registry (Registro Único de Garantías Mobiliarias) held by the Ministry of Economy (Secretaría de Economía) in favor of the borrower.

Regarding the mortgage agreement, this would require a separate due diligence considering as well environmental matters and the agreement would need to be formalized before a Notary Public and the collateral must be registered before the Mexican Public Registry of Property (Registro Público de la Propiedad) corresponding to the location of the real estate property.

Please note that all documents, including the credit/loan agreement must be reviewed to verify that there are no contradictions with respect to the the collateral to be granted as guarantee.

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