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The Mexican receivables finance market has grown due to electronic invoicing policies and the RUG. This article examines legal issues in cross-border receivables finance and best practices in Mexico, including risk mitigation strategies.
Mexico is a mature market for financing or discounting of receivables due to the high levels of reported domestic invoices and companies exporting abroad. Receivables financing offers companies established in Mexico an efficient way to address their liquidity needs, while providing the financier with a bankruptcy remote scheme in case of insolvency of the entity or company assigning the receivables (hereinafter referred to as "Seller"). In other words, the main advantage of this scheme is that the financing is based on the risk of the receivables themselves rather than on the risk of the Seller.1 Although cross-border receivables financing has existed in Mexico for several years, best practices around it continue to evolve. As a result, this article aims to provide an analysis of the main legal, structural and due diligence issues regarding cross-border receivables finance in Mexico, as well as the best practices and mechanisms to mitigare certain risks.
The structure for a cross-border receivables financing transaction in Mexico assumes the existence of an underlying transaction consisting of the sale of goods or services by the Seller, as a supplier (manufacturer, exporter, merchant, etc.) to its client (hereinafter, the "Debtor"), generating payment obligations with a determined maturity date. Receivables are typically documented via an invoice (hereinafter referred to as "Receivables”). Receivables are subject to assignment or factoring at a discount between the assignor (Seller) and the acquirer of the Receivables (hereinafter the "Purchaser"). Such assignment is instrumented through a Receivables Purchase Agreement or a Factoring Agreement (the "RPA").
For purposes of this article, I have assumed that the Seller is a company established in Mexico that exports products to the USA, the Purchaser is a non-Mexican financial entity (since from 2006 any person or entity may engage in factoring transactions in Mexico without the authorization of the Ministry of Finance and Public Credit), and the Receivables arise from a service contract or purchase order between the Seller (supplier-exporter) and the Debtor (Seller's client).
The purchase of the Receivables is usually at a discount, "without recourse" against the Seller, and based on a "true sale" from a contractual point of view. These characteristics typically follow New York Bankruptcy Law (or its equivalent in other countries), as well as accounting standards (Generally Accepted Accounting Principles or GAAP, and International Financial Reporting Standards or IFRS) to be able to extract the Receivables as a financial asset from the Seller's balance sheet and to avoid that US courts recharacterize the factoring transaction as a " loan" where the "collateral" are the Receivables, which would make the whole transaction a Seller-risk transaction.
In principle, all credit rights or Receivables may be transferred through a RPA, without the consent of the Debtor, unless the transfer is prohibited by law, not permitted by the nature of the right or the documents whereby the rights are created expressly state that they cannot be the subject of a factoring transaction.
When analyzing the legal effects of the transfer of the Receivables, the following three layers of legal relationships should be considered:
1. Effects between the Seller and the Purchaser, between whom there is a transfer of ownership, 2. Effects between the Purchaser and the Debtor, between who there is a debt relationship, and 3. Effects of the assignment of the Receivables vis-à-vis third parties, including tax authorities and other creditors of the Seller, to whom the Purchaser has an interest in making his ownership over the Receivables opposable. In other words, that no third party has a better title or right over those same Receivables.
Mexico is a mature market for financing or discounting of receivables due to the high levels of reported domestic invoices and companies exporting abroad. Receivables financing offers companies established in Mexico an efficient way to address their liquidity needs, while providing the financier with a bankruptcy remote scheme in case of insolvency of the entity or company assigning the receivables (hereinafter referred to as "Seller"). In other words, the main advantage of this scheme is that the financing is based on the risk of the receivables themselves rather than on the risk of the Seller.1 Although cross-border receivables financing has existed in Mexico for several years, best practices around it continue to evolve. As a result, this article aims to provide an analysis of the main legal, structural and due diligence issues regarding cross-border receivables finance in Mexico, as well as the best practices and mechanisms to mitigare certain risks.
The structure for a cross-border receivables financing transaction in Mexico assumes the existence of an underlying transaction consisting of the sale of goods or services by the Seller, as a supplier (manufacturer, exporter, merchant, etc.) to its client (hereinafter, the "Debtor"), generating payment obligations with a determined maturity date. Receivables are typically documented via an invoice (hereinafter referred to as "Receivables”). Receivables are subject to assignment or factoring at a discount between the assignor (Seller) and the acquirer of the Receivables (hereinafter the "Purchaser"). Such assignment is instrumented through a Receivables Purchase Agreement or a Factoring Agreement (the "RPA").
For purposes of this article, I have assumed that the Seller is a company established in Mexico that exports products to the USA, the Purchaser is a non-Mexican financial entity (since from 2006 any person or entity may engage in factoring transactions in Mexico without the authorization of the Ministry of Finance and Public Credit), and the Receivables arise from a service contract or purchase order between the Seller (supplier-exporter) and the Debtor (Seller's client).
The purchase of the Receivables is usually at a discount, "without recourse" against the Seller, and based on a "true sale" from a contractual point of view. These characteristics typically follow New York Bankruptcy Law (or its equivalent in other countries), as well as accounting standards (Generally Accepted Accounting Principles or GAAP, and International Financial Reporting Standards or IFRS) to be able to extract the Receivables as a financial asset from the Seller's balance sheet and to avoid that US courts recharacterize the factoring transaction as a " loan" where the "collateral" are the Receivables, which would make the whole transaction a Seller-risk transaction.
In principle, all credit rights or Receivables may be transferred through a RPA, without the consent of the Debtor, unless the transfer is prohibited by law, not permitted by the nature of the right or the documents whereby the rights are created expressly state that they cannot be the subject of a factoring transaction.
When analyzing the legal effects of the transfer of the Receivables, the following three layers of legal relationships should be considered:
1. Effects between the Seller and the Purchaser, between whom there is a transfer of ownership, 2. Effects between the Purchaser and the Debtor, between who there is a debt relationship, and 3. Effects of the assignment of the Receivables vis-à-vis third parties, including tax authorities and other creditors of the Seller, to whom the Purchaser has an interest in making his ownership over the Receivables opposable. In other words, that no third party has a better title or right over those same Receivables.
