IFLR 1000
The Guide to the World's Leading Financial Law Firms

Mexico's economy grew by 5% in 2010, driven by increased manufacturing and exports, after a 6.9% drop in 2009....

Mexico's economy grew by 5% in 2010, driven by increased manufacturing and exports, after a 6.9% drop in 2009. One attorney says: "It's exciting to see a much higher level of activity in both debt and equity in 2010." Another confirms this view: "The IPO market in Mexico has been busier in the last 12 months than in the last 10 years."

Mexican banks and corporations made large investments abroad last year, selling $21 billion in debt, possibly to hedge against losses related to the peso's 18% drop in 2009. Also, because of lack of liquidity following the 2008 financial crisis, one lawyer says, "United States banks have stopped financings in Mexico, and now Mexican buyers are turning to Mexican banks for loans."

The most interesting development in the capital markets space has been the continuing evolution of CKDs, or certificados de capital de desarrollo. Introduced into the financial system in 2009, the CKD is a new kind of security that was created to allow Mexican pension funds to invest in infrastructure, real estate, and private equity funds, through publicly-issued trusts listed on the Mexican Stock Exchange. CKDs are the only type of security pension funds can invest in, and they can only be used to finance Mexican companies or projects based in Mexico.

The instrument has been enthusiastically taken up so far and as of the spring of 2011, one attorney notes: "$3 billion has been raised through investments by these funds. There should be at least $10 billion out there ready to be invested." However, because this is largely unchartered territory, he adds, "It's no small task to figure out the right way to do this." Another peer says: "The pool of money for private equity deals is not limited to international companies with a Mexican presence any more."

Mexico's national infrastructure fund, Fonadin (Fondo Nacional de Infraestructura), has received mixed reactions. Fonadin was created by President Felipe Calderón in 2008 to drive investment in the country's infrastructure projects, create jobs and bolster the economy. One attorney comments, "This year we're reaping the fruits of the government infrastructure program launched in 2008 after the crisis. More and more non-Mexican banks are coming back to the market, interested in financing infrastructure and energy projects. Commercial banks are taking a more aggressive role." Another lawyer was less enthusiastic: "The infrastructure plan of the Mexican government has not been as successful as they thought. They're not as successful in big highways, toll roads, but have been able to move along on the smaller projects." The reconstruction phase of the Desarrollos Carreteros del Estado de Durango roads project, in the state of Durango, was completed last year, involving ten toll-free stretches of highway.

With Mexico's need for energy growing by between 5 and 6% per year, based on increases in population and development, the Secretary of Energy Georgina Kessel issued the National Energy Strategy in 2010. By 2024, the plan seeks to achieve 100% hydrocarbon reserve replacement, 3.3 million barrels of oil production per day and the use of renewable energy sources for 35% of power generation. Ongoing projects include completing construction on the the La Yesca hydroelectric dam, and beginning construction of the La Venta III and IV wind turbine farms.

In January 2011, the Comisión Federal de Electricidad (Electricity commission) announced that one of the country's largest infrastructure projects, the Manzanillo Liquified Natural Gas (LNG) Terminal in Colima State, would begin operations in September. It will be Mexico's third-largest terminal and will supply power stations in the Western side of the country.

Despite improvements, Mexico's challenges remain substantial, including the need for modernised labour laws and increased competitiveness in the energy sector. Inflation is a concern, though it is currently at 4%, as is unemployment, which is at 5%, and violence associated with the drug cartels in the northeast continues to plague the country. One attorney offers his take: "Until we have substantive reform in the areas of energy and labour, Mexico can't be the flavour of the month for many decades."

Mexico's economy began picking up in the latter half of 2010, following a GDP drop of 6.5% in 2009....

Mexico's economy began picking up in the latter half of 2010, following a GDP drop of 6.5% in 2009. Attorneys offer mixed opinions on the situation. One believes the country is "recuperating well", but another remarks: "The economy still hasn't recovered – a lot of companies are failing". Mexico's economy is deeply tied to the US, on which it depends for 80% of its exports.

Nevertheless the country's M&A market appears to have survived unscathed over the past year and is booming: "Our strong financial system protected the M&A market, allowing companies to grow in a certain way," says one partner. Another practitioner remarks, "M&A has been very active with a variety of deals – the typical consortium, multi-national megadeals, along with strategic Mexican-specific deals."

The biggest transactions include telecom giant América Movil's bid for Telmex and Carso Communications, valued at $29.6 billion in total, and Heineken's $8.1 billion bid for Mexico's largest brewery, Femsa. Active sectors include aviation, mining, pharmaceutical, and auto parts, with real estate just beginning to pick up.

Shutdowns in US and Canadian automotive manufacturing plants bolstered the Mexican auto industry's powerful manufacturing base. GM, Ford and Chrysler all have manufacturing plants in the country and Japanese and German companies are also getting in on the act.

Firms report that real estate M&A activity continues to be slow. "Private funds companies like Prudential buying industrial parks, commercial centres, malls - that activity has stopped or slowed down considerably because the financing wasn't available for those transactions," says one partner. "Now it's starting to flow and is moving cautiously." Investment in tourism and real estate development on the coast is picking up, which has led to more M&A activity related to hotels and resorts.

Although the oil and gas industry is still heavily regulated, some rules are in the process of being relaxed. One of the biggest developments over the past year was legislative reform allowing Mexico's state-owned oil and natural gas company, Pemex, (Petroleos Mexicanos), to enter into contracts with foreign companies. After opposing lawmakers challenged the reform, it was upheld by the Supreme Court in January 2011 and the first round of bids, for three oil fields, went out in March 2011.

In May 2011, President Felipe Calderón signed off on reforms to Mexico's Law on Economic Competition, giving the country's Federal Competition Commission (CFC) more power to impose sanctions against companies that partake in monopolistic practices. "This is a positive change," remarks one Mexican attorney. "We've been working for several years on this. Now it's finally law."