A Mexican approach to Latin American investment opportunities
October 2016 | EXPERT BRIEFING | FINANCE & INVESTMENT
The commercial exchange between Latin American countries and the United States and Europe is dominated by exporting raw materials and importing finished products. This and other weaknesses translate into volatility. The subprime mortgage crisis, low oil prices, distress in the European Union and other issues have not allowed Mexican structural reforms and sound reserves to being on the strength the country seems to deserve.
Further, local adversities – coming from retailers speculating on derivatives, a complicated political picture and historical social pressures – confirm Mexico as an emerging market; one undergoing process and not having achieved stability over time, at least not to the desired level. This combines with a legal system still moving toward fair, effective and expeditious law enforcement.
The key is the ability of investors to continuously adjust to opportunities at each stage of market and legal evolution. The critical situation in Mexico’s housing industry, as well as the infrastructure sector, combined with the unexpected outcome of the energy reform, have made creditors and investors think differently. More than ever, they are participating in restructurings, joint ventures and co-investments with local partners, and working with the government at all levels through public-private partnerships, among other structures.
The local legal framework continues to develop in a parallel with different crises, and affords strong protections to investors. The lack of consistently effective law enforcement can be overcome with sometimes aggressive, but often reasonable, legal structures built using creative legal analysis.
To take advantage of Latin American assets, it is prudent to be patient and actually understand, in depth, the historical, institutional and cultural aspects of the region, as opposed to prejudging and framing transactions under the same standards of other legal systems and backgrounds. Investors could be tempted to oversimplify country risk assumptions. While ratings tend not to lie, cautious, open minded investors can earn great returns from Latin American assets with measured risk using safe structures. Latin America can take investors from a less than perfect standard to high yield.
Factual and legal roadblocks can be worked out, including title to real estate and possession, social aspects, safety, public order processes and provisions, and enforceability under conflicts of law.
More than anywhere else, possession is actually nine-tenths of the law for real estate in Mexico, but understanding original versus derived possession, language delimitating derived possession purposes and timeframes, provisions on automatic repossession, penalties, landlord access to premises, shared possession and clear and confirmed registration of rights, can be effective enough. It is difficult to achieve full due diligence in real estate projects, but a federal, state and municipal review, checking on development plans, detailed permits for projects, reviews of possessory rights of original possessors, agrarian public order protections and environmental legal examinations, as opposed to a simple reliance on international standard procedure title insurance, could bring strong assurance to investors in projects involving real estate in Mexico.
Investors can feel safe by relying on due diligence to accurately assess risks. Further, they can be protected through carefully drafted representations and indemnity clauses, price instalment hold back, lock boxes, escrows, directed payments, ring fenced projects, the flexibility of trusts, pledges, extrajudicial foreclosure and the simpler security registration system.
Close to the Mexican energy reform in 2013 and 2014, a 2014 financial reform provided lenders with new benefits and protections in security and insolvency, and served as the impetus for development banks to become stronger and more open to different forms of lending in backing projects and corporations. Other amendments had already set better terms for Mexican security enforcement by then. However, a significant tax reform, which had a negative impact, was put in place in 2014 by Mexico’s current president’s office. Telecommunications and antitrust reforms were also part of this reform sequence.
In this environment, and despite the significant effect that global and local crises had on Mexico, joint ventures and public private partnerships for hydrocarbons upstream, midstream and downstream, and for power projects including a number of bidding processes, created new opportunities for investors, and continue to do so. Authorities have been sensitive to the needs of the country’s strategic supply and infrastructure, in terms of what investors can afford. Also, even with infrastructure experiencing difficulties, new large infrastructure projects like Mexico City’s international airport and related bidding processes, are notable investment opportunities based on a strong legal framework.
Further, Mexican law provides new ways of allowing investors to participate in the outcome of projects following the energy reform, affording tax benefits. The FIBRA E (Fibra de Energía) which works as an investment vehicle, providing the same or very similar benefits as the original FIBRA, only based on energy assets. These vehicles mirror in many senses master limited partnerships (MLPs).
FIBRA E predecessors are based on Mexican trusts, allowing large numbers of investors to participate in the outcome of projects. The Certificados de Capital de Desarrollo (CKDs) have been used as private equity umbrellas, similarly to special purpose acquisition companies (SPACs), although originally designed for infrastructure projects. The Fideicomisos de Inversión en Bienes Raices FIBRA securitize real estate assets similar to a real estate investment trust (REIT).
In view of the above, Latin America, despite its conditions and crises, presents opportunities to investors of all types. Specifically in Mexico, an evolution from traditional forms of investment has taken place, resulting in creative investment structures sometimes fostered by the government. This demonstrates that there is not a ‘one size fits all’ type of investment, but rather diverse structures in which to participate when there is a desire to attract investors. A closer look at Latin America is warranted; after all the pitfalls, the only way is up, offering savvy investors a high yield.
Juan Manuel Sancho Rodrigo is a partner at Gonzalez Calvillo, S.C. He can be contacted on +52 55 5202 7622 or by email: email@example.com.
© Financier Worldwide
Juan Manuel Sancho Rodrigo
Gonzalez Calvillo, S.C.