Update – Circular 25/2020 – Provisional measures taken by Banco de México due to COVID-19 Pandemic.
Updated on June 25, 2020 / COVID-19 / Banking and Finance
Due to the circumstances derived from COVID-19 Pandemic, several provisional measures adopted by Banco de México (hereinafter, “Banxico”) were published in the Federal Official Gazette (FOG) on June 19. These measures are focused on continuing to promote the good development of the Financial System and ensure its stability, as well as to promote the proper functioning of the payment systems and avoid disruptions in them. Therefore, Banxico maintains the provision of liquidity in local currency to credit institutions in order to strengthen credit-granting channels in the economy, and, consequently, improve the functioning of local markets and promote the orderly conduct of the debt and foreign exchange markets of Mexico.
For that purpose, Banxico will contribute to the existence of conditions that make it easier for credit institutions to comply with their priority function of financing the economy. Therefore, Banxico has decided to offer this facility to credit institutions so that them, in turn, directly channel funds through the granting of credit to micro, small, and medium-sized companies, or indirectly through other non-bank financial institutions.
In this sense, we present a summary of the following rules:
Rules applicable to the financings of Banco de México secured with qualified credit assets of the Banking System for its channeling to micro, small, and, medium-sized companies.[1]
- General terms and conditions:
The relevant Institution may obtain financing from Banxico in order to use the relevant funds to directly finance small and medium-sized companies, or indirectly finance them by means of other non-bank financial entities, through the following transactions:
- Simple credit secured with Eligible Assets in a security trust.
- Issuance of stock exchange certificates secured with Eligible Assets in a security trust.
- Issuance of trust stock certificates secured with Eligible Assets in a security trust.
- Repurchase agreements of eligible securities.
- Financing conditions:
The Institution interested in being financied by Banxico must submit an application within the dates and hours indicated in the calls Banxico publishes for these purposes.
The calls will be published on Banxico website in << https://www.banxico.org.mx/ >> or by the electronic, computing, or telecommunication means authorized by Banxico for such purpose, if applicable. The aforementioned calls will be issued, at the latest, on the Banking Day prior to the beginning of each period established for the reception of the relevant applications, during the term, or until the maximum amount determined for such purpose has been paid.
The institutions must submit the aforementioned applications in the model format attached to the relevant call. In the aforementioned calls, the institutions must state their consent to be subject to the terms and conditions and indicate the transactions to be made and the Eligible Assets they offer as collateral for the relevant financings or securities, subject matter of the repurchase agreement. [2]
The submitted application must have the advanced electronic signature of the legal representative of the institution who has the powers to exercise acts of ownership, whose data may be verified by means of the relevant digital certificate in force issued by the Tax Administration Service (SAT).
At the end of the procedural deadline indicated in the relevant call for the reception of the applications, Banxico will analyze such applications and will inform the institutions of the funds allocation.
If the total amount indicated in all the applications surpasses the available amount determined by Banxico, Banxico will make the allocation on a pro-rata basis. In other words, it will make the allocation proportionally to the amounts requested by each institution and, for the requested financing, it will consider the applications that include credit transactions and other characteristics more appropriate for the purposes of such financing.
Once Banxico has notified the aforementioned assignment, the Institution at issue must execute the agreements corresponding to the financing transaction subject matter of such assignment, no later than 10 (ten) Banking Days after the date of such assignment and in accordance with the models provided by Banxico; as well as make the relevant collaterals on the Eligible Assets corresponding with the trust institution indicated by Banxico or, if applicable, to transfer the securities subject matter of the repurchase to the account of Banxico at Indeval or to the custodian account abroad, pursuant to the Rules and Manual.
- Procedural deadline for the execution of the financing transaction.
The Banking Day following the day on which Banxico has verified the perfectioning of the guarantees with the trust institution of the Security Trust, or the Banking Day following the day on which Banxico has notified the relevant assignment, subject to the transfer of the security ownership subject matter of the relevant repurchase.
- Procedural deadlines of the financing transactions.
The procedural deadlines of the financing transactions carried out by the Institutions and Banxico will vary from 18 (eighteen) to 24 (twenty-four) months. Such procedural deadlines may not exceed 730 (seven hundred and thirty) calendar days counted from the immediate Banking Day following the day on which the guarantees are perfected.[3]
- Principal amount and applicable interest rate.
The principal amount of the financing transaction or the price of the repurchase carried out by the institution, if applicable, will be the amount indicated by Banxico in the relevant allocation up to an amount that, added to the agreed interests or premiums, may not exceed the sum of the values of the Eligible Assets or securities subject matter of the guarantee.
Similarly, the relevant financing transactions will generate interests on the principal amount or will be subject to bonuses under the charge of the responsible Institutions. Those bonuses will correspond to a rate equivalent to the average of the overnight interbank interest rate determined by the Board of Governors of Banxico s the target rate for monetary policy purposes, which is expressed annually in a percentage rounded off to 2 (two) decimal places and daily published on the website of Banxico during the term of such transactions.
In the case of financing transactions for interest calculation purposes, the referred interest rate will be divided by 360, and the result obtained will be multiplied by the number of calendar days actually elapsed and, in turn, the aforementioned result will be multiplied by the principal amount of the relevant transaction. Regarding the repurchase, the interest rate will be used to determine the relevant bonus according to such number.
- Disposition of the financing transaction amount and the accreditation of the relevant funds.
The institution may dispose of the financing transaction amount at issue on the Banking Day following the day on which the relevant guarantees have been perfected, through the transfer of the Eligible Assets to the relevant Guarantee Trust or if the ownership of the securities subject matter of the repurchase agreement has been transferred to Banxico.
Once the Eligible Assets have been allocated to the Security Trust, subject to confirmation by the trust institution; or the transfer of the ownership of the securities subject matter of the repurchase has been carried out, Banxico will pay the amount equivalent to the principal amount of the financing or the price of the relevant repurchase during the hours established in the Manual.
- Financing payment.
The principal and interest amounts of the financing transactions, as well as the price and premium of the repurchases attributable to the relevant Institution, will be payable upon the maturity of the relevant transactions.
- Advance Payment.
The institution carrying out any financing transaction may pay, prior to the maturity date agreed upon for such transaction, all or part of the payable amounts under such transaction. In of case of financing transactions carried out through the issuance of stock exchange certificates, as applicable, the advance payment must be made for an amount equal to the nominal value of the number of stock exchange certificates subject to cancellation. In this regard, Banxico and the Trust Issuer of the trust stock certificates, as applicable, must be informed of the foregoing through a notice issued for such purposes according to the format established for such purpose in the agreement of the relevant financing transaction, in advance and within the hours indicated for such purpose in the Manual. In such notice, the relevant institution must grant its authorization to charge the relevant amount to the relevant Single Account of the Institution, if applicable.
- Security Trust.
No later than the date on which the Institution may dispose of the principal amount corresponding to any of the contemplated financing transactions, the Institution must transfer the Eligible Assets indicated in the allocation to a security trust (hereinafter, the “Security Trust”). Such Security Trust must be recorded in the Institution indicated by Banxico. Such institution must be different from the Accredited Institution and the one acting as trustee of the Issuer Trust, which is involved in the financing transaction, if applicable.
The trustees of the Security Trust will be, first, Banxico, as the lender of the financing transaction carried out by the Institution at issue; and, second, the accredited Institution. In case of those financing transactions carried out through guaranteed trust stock certificates, the trustees of the Security Trust will be, first, the Trust Issuer; and, second, the accredited Institution.
The accredited Institution must allocate the Security Trust, according to the trust agreement at issue, Eligible Assets which valuation adjusted by the discount factors must always be equal to or greater than the principal amount that such Institution receives under the relevant financing transaction plus the estimated interest for such financing transaction and any other agreed expenses.
- Collateral Eligible Assets.
The credit granted by Banxico or the Trust Issuer to the accredited Institution, according to the financing transaction, will be secured with Eligible Assets that comply, at least, with the following characteristics:
- They must consist of credits granted by the Institution accredited to legal entities residing in Mexico, as well as public trusts (whether financial from other Institutions, or non-financial) which are not Related Parties of the accredited Institution. Regarding the credits granted to multiple banking Institutions, they must have been executed before April 21, 2020;
- The legal entities referred to in the previous item must comply with the National or Global Scale Credit Rating in accordance with the relevant ratings in force granted to such legal entities; or have issued stock debt securities that comply with the National or Global Scale Credit Rating, depending on the security at issue. Regarding the aforementioned securities, they must be in circulation on the date on which the Institution has submitted the relevant application;
- The referred credits must remain effective, without any breach —since their origin— of the payments due on the relevant amortization dates, on the date of their allocation to the Security Trust, and during the entire term of the relevant financing transaction;
- The Accredited Institution must act as lender of the relevant credits and must be the sole and legitimate holder of the rights related to such credits;
- The rights related to such credits must be free of any encumbrance, ownership limitation or any other options or preemptive rights of any nature;
- The debtors of such credits must not be subject to a bankruptcy proceeding or any similar proceedings;
- The rights related to the credits must be freely pledged, assigned, or transferred without any restriction and without requiring the consent or authorization from the relevant debtor or third party;
- The relevant credits must be denominated in local or foreign currency; and
- The allocation of the credits in the Security Trust must not imply any obligation to disburse amounts payable by the Trust.
Each of the Eligible Assets pledged as collateral must have, from the time it is contributed to the Security Trust, a maturity term for its unpaid balance of at least 2 (two) Banking Days after the end of the term of the financing transaction at issue.
- Options of financing transactions:
- Simple credit secured with Eligible Assets in a security trust.
- Stock exchange certificates secured with Eligible Assets in a Security Trust.
- Guaranteed trust stock certificates.
- Repurchase transactions.
- Securities subject matter of the repurchase.
The repurchases referred to in the Rules may only be carried out on any of the stock debt securities in local currency, Eligible Currencies, or UDIS deposited in Indeval or in the relevant foreign custodian accounts that meet the National Scale Credit Rating. Regarding those securities in local currency or UDIS, they must comply with Global Scale Credit Rating; and in the case of those securities in Eligible Currencies, they must have been issued by:
- Any of the legal entities or public trusts that comply with the same characteristics indicated in the Rules; or
- Trust institutions of the Security Trust through which the persons indicated in item a) above issue such debt securities in trust stock certificates representing the right of their holders to receive the capital payment and interest, or yield, if applicable, provided that such trusts have been constituted in accordance with the Stock Market Law and comply with the following characteristics:
- Holders of the relevant stock exchange certificates must be placed in the first place of priority for the payment of the relevant certificates and no holder will be subordinated to the payment of other holders.
- Trusts must be irrevocable.
- The trust does not include credit derivative products in its structure or in any other way, nor contemplate the use of such products for the payment of the relevant trust stock certificates.
- The instruments of their issuance include an express clause whereby the persons in charge of whom the collective credit subject matter of such securities has been constituted must pay the amounts of the debts covered by such securities that are not paid by the relevant trust and other parties that have assumed such obligation, if applicable.
- Allocation of funds.
The Institutions must allocate the resources obtained through the financing transaction to grant in a direct or indirect manner, as applicable, only new credits or extend existing credits for small and medium-sized companies, with special attention to the smaller companies. Likewise, the Institutions may carry out restructurings or refinancings of the same credits previously granted, whereby the relevant debtors may have access to additional resources derived from those obtained by the Institutions under the transactions.
The development banking Institutions that obtain resources derived from the financing transactions they carry out, will channel them to grant new credits or extend credits for small and medium-sized companies through other financial intermediaries specified in the relevant applications submitted and in accordance with the related programs established by such Institutions.
The principal amount of credits for small and medium-sized companies, as well as the additional amount granted as part of the restructured or refinanced credit with funds derived from the transactions, must not exceed 50 million pesos per small and medium-sized company.
- Additional conditions.
In case any Institution carries out a financing transaction and does not allocate, during the term of such transaction, all the funds derived therefrom to grant the credits described above, the Institution must return to Banxico the amount not allocated to grant the aforementioned credits.
Banxico may reject new applications from an Institution to carry out financing transactions when such Institution does not comply with the conditions set forth in the relevant financing transaction agreement, as well as other conditions established by Banxico for other transactions carried out and applicable stipulations.
The Rules will become effective on June 19, 2020, and they will expire on September 30, 2020.
[1] https://www.dof.gob.mx/nota_detalle_popup.php?codigo=5595274
[2] Regarding the Eligible Assets that each Institution indicates in its relevant application, such Institution must include an opinion issued by a Self-Employed Appraiser regarding the legal validity of the instruments under which the credit transactions corresponding to such Eligible Assets have been carried out, as well as compliance with the characteristics and conditions set forth in these Rules, Section 3.8 and the relevant appraisal that has been carried out. Additionally, if the Institutions intend to grant the referred credits through non-bank financial entities, they must specify their names, types of entity, and the relevant Registry of Financial Service Providers code administered by the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF).
[3] Exceptionally, subject to authorization from Banxico, this procedural deadline may be extended when it is justified by the characteristics of the credits that the Institution will grant with resources derived from the relevant financing transaction.
