MEXICO: An Introduction to Capital Markets

Mexico – Capital Markets Overview 

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

Factors helping the Mexican economy 

Several factors have helped the Mexican economy, including the unique position of Mexico in the “near shoring” process that is taking place due to supply chain disruptions and geopolitical tensions, as well as the fact that Mexico is a commodity producer, particularly in the mining and oil & 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.”

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 2023, the latest of which was a 25 basis-points increase up to 11.25%, effective as of March 2023. However, at a May 18, 2023 meeting, Banco de México resolved not to increase the overnight interbank interest rate and to maintain it at 11.25%.

The Mexican peso has advanced against the US dollar during 2023, from MXN 19.5089 on December 31, 2022 to MXN 17.5872 on May 17, 2023, placing the Mexican peso as one of the strongest currencies against the US dollar this year. This appreciation is generally attributed to the high interest rates maintained by the Banco de México (and the consequent margin versus the current interest rates in the US), the high inflow of US dollars from remittances, low public debt levels when compared to more-developed economies, and conservative fiscal policies maintained by the Mexican government.

Domestic challenges 

Notwithstanding the above, some domestic circumstances have not helped, such as proposed reforms to the energy sector by the current administration. The administration has focused on strengthening Pemex and CFE—the Mexican public sector utilities in the oil & gas and electricity industries. There is also uncertainty around the first major dispute between Mexico and its USMCA partners (ie, the US and Canada) around public policies governing the energy sector and investments in this sector by these countries’ private companies. Additionally, the administration has submitted bills to amend the electoral laws that, in practice, would undermine the authority and strength of the Mexican Electoral Institute (Instituto Federal Electoral), the constitutionally independent agency in charge of organizing and certifying federal elections in Mexico. So far, the Mexican Supreme Court (Suprema Corte de Justicia de la Nación) has determined that the proposed bills are unconstitutional, including other proposed reforms in the energy sector.

Debt capital markets 

Mexican corporates have continued accessing the debt capital markets both through the Bolsa Mexicana de Valores (BMV) and through the Bolsa Institutional de Valores (BIVA). The years 2021, 2022 and 2023 have seen a surge in “ticketed” debt offerings, that is, offerings in which proceeds are allocated 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), in which investment regimes are increasingly tied to channeling funds to investments that comply with an ESG component. Securitizations 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 in the debt capital markets.

Equity markets 

On the equity markets side, Mexico continues to face the challenge of attracting investment into 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 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 resulted in the delisting of more than 10 Mexican issuers from the market, including Rassini, Grupo Lala, Bachoco, Bio Pappel IEnova and Banco Santander México, 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. However, the equity capital markets in the US have also slowed down, considering that in 2022 the total global IPO value represented a decline of 72% year-on-year, and that the first quarter of 2023 was down 53% year-on-year. Therefore, 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 

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), or 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 on the development of the Mexican economy as a whole, as these instruments are targeted primarily to finance real estate, infrastructure and energy or oil & gas projects.

In the context of the difficulties for Mexican companies in accessing the capital markets, on April 28, 2023, the Mexican Senate approved a bill that, if further approved by the Chamber of Deputies and subsequently enacted, would incorporate in the Securities Market Law a concept of “simplified public offerings” (ofertas públicas simplificadas) aimed at small and medium-sized enterprise-issuers, with a less stringent set of regulations to promote the use of the capital markets as a financing source for this type of potential issuer. The bill intends to simplify the listing process for these potential issuers, and provide for a new type of mutual funds that would be authorized to invest in these types of assets. If approved in its terms by the Mexican Chamber of Deputies, this would constitute the most relevant reform to the Securities Market Law since the Financial Reform enacted in 2014. The Mexican Banking and Securities Commission would need to issue amendments to enabling regulations within the 365 days after the enactment of the final bill.

At White & Case Mexico City, we have been a leading firm in the Mexican capital markets space for more than 30 years, active in debt, equities, securitizations, plain vanilla and complex instruments. Our deep knowledge of the Mexican market, legal landscape and experience with regulators, coupled with our international reach as a truly global law firm, allows us to serve a broad range of clients that seek to access capital markets both in Mexico and abroad.