MEXICO: An Introduction to Capital Markets

Mexico – Capital Markets Overview

August 2022

By Juan Antonio Martin (Partner) and Carlos Mainero Ruiz (Partner)

The Mexican economy and capital markets have been relatively resilient. The macroeconomic conditions in Mexico have remained relatively stable if compared to other countries in the Latin America region and in the context of the current global geopolitical and macroeconomic landscape, particularly the rising inflation, interest rates and commodity prices, as well as supply chain disruption, the conflicts in Eastern Europe and growing China-US tensions.

In this context, and in line with the US Federal Reserve and central banks in other jurisdictions, Banco de México (Mexico’s Central Bank) has consistently increased the overnight interbank interest rate during 2022, the latest of which was a 75 basis point increase up to 8.50%, effective as of August 12, 2022. The Mexican peso has not suffered major depreciations versus the US dollar during 2022 if compared to other emerging and developed markets currencies, in part due to the conservative fiscal policies maintained by the Mexican government.

Several factors have helped, such as the unique position of Mexico in the “near shoring” process that is taking place due to the supply chain disruptions and geopolitical tensions, as well as the fact that Mexico is a commodity producer, particularly in mining and oil and gas sectors. Pursuant to the Economic Survey of Mexico published by the OECD, as of June 2022 “[…]Mexico’s solid macroeconomic policy framework, underpinned by an innovative debt management, sound monetary policy and a flexible exchange rate, safeguarded macroeconomic stability and comfortable access to international capital markets.”

Notwithstanding the foregoing, some domestic circumstances have not helped, such as proposed reforms to the energy sector by the current administration. The administration wants to focus on strengthening PEMEX and CFE - the Mexican public sector utilities in the oil and gas and electricity industries - and the development of major projects sponsored by the Mexican government, such as the new Felipe Ángeles airport in Mexico City, the new Dos Bocas refinery under construction in Tabasco, and the Tren Maya project in the Yucatán peninsula. There is also uncertainty around the first major dispute between Mexico and its USMCA partners (i.e., the United States and Canada) around public policies governing the energy sector and investments by these countries private companies.

Particularly, Mexican corporates have continued accessing the debt capital markets both through the Bolsa Mexicana de Valores (BMV) and the Bolsa Institutional de Valores (BIVA). The years 2021 and 2022 have seen a surge in “ticketed” debt offerings, that is, offerings whose proceeds are targeted to specific purposes, primarily related to “ESG” (environmental, social and corporate governance) components. Thus, “green bonds” (with environmental purposes) or “pink bonds” (aimed at funding diversity efforts within corporates) have seen a surge, which is also in line with the expectations of institutional investors (such as AFOREs), which investment regimes are increasingly tied to channelling funds to investments that comply with an ESG component. Securitisations and plain-vanilla corporate debt offerings continue to be an important source of funding for Mexican corporates, and general macroeconomic conditions will be the main driver that will determine their continued access to the debt capital markets.

On the equity markets side, Mexico continues facing the challenge of attracting investment to equities in its various forms. Since 2017, only a couple of equity IPOs or follow-ons have seen the market, namely, the Inmobiliaria Vesta (VESTA) follow-on through the BMV and the Cox Energy America (COXA) initial public offering through BIVA, in 2021 and 2020 respectively. Additionally, Sempra Energy listed its shares of common stock on the BMV as part of its exchange offer to delist its subsidiary IEnova, becoming one of the very few foreign equity issuers in the Mexican market.

However, the existing global macroeconomic uncertainty, in addition to a perception that valuations of Mexican issuers in some cases do not accurately reflect their actual value, among other factors, have actually resulted in the delisting of more than ten Mexican issuers from the market, including Rassini, Grupo Lala, Bachoco, Bio Pappel and IEnova, among others. Conversely, those Mexican companies that are exploring opportunities to access the equities capital markets seem to have more appetite to list their stock in other jurisdictions with deeper markets and liquidity with a broader investor base (primarily in the US), or otherwise, through dual-listings that would result in the offering of their equity securities both in Mexico and abroad. It is still to be seen if any of these entities ultimately complete these offerings, but it is a reflection of the Mexican companies’ appetite to continue seeking diverse sources of capital to fund their operations.

Sponsors have also continued to show interest in accessing the capital markets in the last couple of years through equity-like instruments, such as Fibras, Fibras-E, CKDs or CERPIs, either by creating new offering programs (programas de colocación), launching follow-ons or potential initial public offerings of new vehicles, where the securities are offered primarily to AFOREs, and other institutional investors, such as insurance companies or pension funds. The continuous appetite for these types of instruments will largely depend in the development of the Mexican economy as a whole, as these instruments are targeted primarily to finance real estate, infrastructure and energy or oil and gas projects.

In the context of the difficulties for Mexican companies to access the capital markets, Mexican regulators are currently analysing a proposed draft bill that would seek to amend the Mexican Securities Law (Ley del Mercado de Valores) in order to facilitate the regulatory listing process. From publicly available information, it seems that this draft bill will have the purpose of facilitating capital markets access to mid-market companies, a sector that has never really accessed public markets for various reasons (among others, the regulatory complexity and costs associated with a public listing in Mexico), despite various efforts to attract this type of companies. As of the date of this overview, the draft bill has not been made public, but it will be important to monitor its status and how, if enacted, it ultimately affects the Mexican capital markets domain.

Authors:  

Juan Antonio Martin, Partner, Capital Markets
[email protected]
Link BIO: Juan Antonio Martín | Partner | White & Case LLP (whitecase.com)
https://www.whitecase.com/people/juan-antonio-martin

Carlos Mainero, Partner, Capital Markets
[email protected]
Link BIO: Carlos Mainero Ruíz | Partner | White & Case LLP (whitecase.com)
https://www.whitecase.com/people/carlos-mainero-ruiz