This article analyzes, from a legal standpoint, the obstacles faced by those seeking to finance Mexican companies undergoing commercial bankruptcy, considering current legislation.
Access to sources of financing is a fundamental tool for companies to optimize their operations, innovate, and develop to their greatest potential, generating jobs and channeling resources towards productive investments that promote economic development for the benefit of society. However, in Mexico, only a small percentage of companies have access to credit for development, which can help explain why from the 200 thousand companies that are created every year in Mexico, almost half of them close within their first year, and nearly 30 percent by their second.
The deficient operation of credit markets represents one of the most important obstacles for economic growth. Indeed, only 43% of companies have reported using credit from financial intermediaries. This factor is concerning, even when comparing Mexico’s situation vis-à-vis the rest of Latin America, as only 29% of the registered companies with 100 employees or less have any sort of bank financing, while the average in Latin America is 45%, and there is a similar lag for companies with more than 100 employees.
Lack of liquidity for companies not only considerably limits their development, but it also leads them to default on their payment obligations. This situation, if it becomes generalized, puts them in a condition that may trigger cause to initiate a commercial reorganization proceeding. The need to have access to sources of financing is enhanced in the case of companies that undertake a commercial reorganization process, as without adequate cash flow, they are incapable of reorganization and to be able to successfully come out of it.
Considering the foregoing, and in response to the recommendations of international organizations, one of the main purposes of the 2014 amendmen to the Commercial Bankruptcy Law (Ley de Concursos Mercantiles— “Bankruptcy Law”) consisted of generating conditions that facilitate access to companies nearing a commercial reorganization, or already in it, to sources of financing that allow them to obtain the liquidity they require during the commercial reorganization process, and thus successfully conduct their debt restructuring plan.
The approved amendments to the Bankruptcy Law within the framework of the 2014 financial reform include the express possibility that the financially distressed company may obtain loans during the processing of its commercial reorganization, or prior to the declaration of commercial reorganization (a concept known in common law as DIP financing5), which must be indispensable to maintain the operation of the company, and the required liquidity during the commercial reorganization process (“DIP Financing”). The intent with this is not only to grant legal certainty to financially distressed companies and to lenders that wish to provide this type of “emergency loans,” but to generate conditions that allow them to preserve the value of the company, seeking its survival.
However, in spite of the progressive stance that the inclusion of this new regulation in the Bankruptcy Law represents, authorizing companies to obtain DIP Financing (even from the time of filing for commercial reorganization), we consider that, from a legal standpoint, there are still several obstacles in the Bankruptcy Law that make such a possibility unfeasible and even unmanageable for companies.
Access to sources of financing is a fundamental tool for companies to optimize their operations, innovate, and develop to their greatest potential, generating jobs and channeling resources towards productive investments that promote economic development for the benefit of society. However, in Mexico, only a small percentage of companies have access to credit for development, which can help explain why from the 200 thousand companies that are created every year in Mexico, almost half of them close within their first year, and nearly 30 percent by their second.
The deficient operation of credit markets represents one of the most important obstacles for economic growth. Indeed, only 43% of companies have reported using credit from financial intermediaries. This factor is concerning, even when comparing Mexico’s situation vis-à-vis the rest of Latin America, as only 29% of the registered companies with 100 employees or less have any sort of bank financing, while the average in Latin America is 45%, and there is a similar lag for companies with more than 100 employees.
Lack of liquidity for companies not only considerably limits their development, but it also leads them to default on their payment obligations. This situation, if it becomes generalized, puts them in a condition that may trigger cause to initiate a commercial reorganization proceeding. The need to have access to sources of financing is enhanced in the case of companies that undertake a commercial reorganization process, as without adequate cash flow, they are incapable of reorganization and to be able to successfully come out of it.
Considering the foregoing, and in response to the recommendations of international organizations, one of the main purposes of the 2014 amendmen to the Commercial Bankruptcy Law (Ley de Concursos Mercantiles— “Bankruptcy Law”) consisted of generating conditions that facilitate access to companies nearing a commercial reorganization, or already in it, to sources of financing that allow them to obtain the liquidity they require during the commercial reorganization process, and thus successfully conduct their debt restructuring plan.
The approved amendments to the Bankruptcy Law within the framework of the 2014 financial reform include the express possibility that the financially distressed company may obtain loans during the processing of its commercial reorganization, or prior to the declaration of commercial reorganization (a concept known in common law as DIP financing5), which must be indispensable to maintain the operation of the company, and the required liquidity during the commercial reorganization process (“DIP Financing”). The intent with this is not only to grant legal certainty to financially distressed companies and to lenders that wish to provide this type of “emergency loans,” but to generate conditions that allow them to preserve the value of the company, seeking its survival.
However, in spite of the progressive stance that the inclusion of this new regulation in the Bankruptcy Law represents, authorizing companies to obtain DIP Financing (even from the time of filing for commercial reorganization), we consider that, from a legal standpoint, there are still several obstacles in the Bankruptcy Law that make such a possibility unfeasible and even unmanageable for companies.
