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Poring over the fine print of Mexico’s economic reforms has kept lawyers and their often international clients busy of late. But two of the country’s standout deals in the past year prove that small can be beautiful.
Setting up Mexico’s first reinsurance fund in the agriculture sector for a financially savvy but largely closed community may sound niche. But the work by Nader, Hayaux & Goebel (NHG) with Mennonites in the northern state of Chihuahua has proved a template that can help other producers elsewhere manage their risk and boost their savings. It was also hard work.
“Sometimes, the $1bn acquisitions in which we work for listed companies represent fewer challenges than working on smaller, equally sophisticated projects, where those you are dealing with are the owners and operators of the business,” says Yves Hayaux-du-Tilly L, a partner at NHG.
Forget presentations and roadshows – NHG found itself working with hundreds of families, speaking a form of German and only partially integrated into modern Mexico, where each family pays into an existing insurance fund. NHG’s job was to see whether a reinsurance company could be set up to take them beyond the savings and loan company they already used to finance operations, in order to improve risk management and retain some capital.
“We really had to innovate in the way we explained this and worked with them. Despite this being a very regulated industry, legal advice had to be given in a very simple, bespoke way without legal or insurance jargon,” says Mr Hayaux-du-Tilly.
Helping artists find non-bank financing was the similarly specialist brief for Hogan Lovells BSTL, a practice formed through the merger this year of the international firm and Mexico’s Barrera, Siqueiros y Torres Landa.
The solution found for Arquetopia, Mexico’s first non-profit foundation for development through the arts, resulted in loans secured by the only thing the borrower had to leverage – his or her output. Bypassing regular banks and using a commercial financing vehicle for the art-backed loans proved cheaper for the artists and allowed them to gain access to micro loans to buy materials and finance expenses without having to compromise their art.
Hogan Lovells partner Federico de Noriega Olea says the deal, for a segment that had no access to financing, was “probably more challenging because of the novelty”.
But bigger deals have proved innovative too, especially in the area of real estate investment trusts (Reits), known in Mexico as Fibras, or structured equity securities known as CKDs.
The firm Creel, García-Cúellar, Aiza y Enriquez advised FIBRA Prologis in the market’s first initial public offering of the year, which raised $541m. Though this was Mexico’s eighth Fibra listing, it proved to be one that needed the lawyers to think on their feet.
“Launching the transaction required a particularly innovative approach to adapt an already novel investment vehicle to a new body of regulations that was being designed as the IPO filing progressed,” says Carlos Aiza, a partner at the firm.
Lawyers had to work with corporate governance, leverage limitations and liquidity requirement rules that had come into force just days earlier. At the same time, they had to divide 177 industrial properties across three Prologis funds with diverse investors and tax conditions. They also set up the second-ever revolving facility extended by a bank to a Fibra and submitted a complex antitrust filing under a revamped competition statute.
The Mexican firm Galicia Abogados also had to contend with a changing legal framework when it advised Cinemex on its acquisition of rival movie-house chain Cinemark. Antitrust regulators challenged the deal on competition grounds, but the position was unclear as regulations had changed. Galicia won after arguing that the merged entity “would be in a better position to effectively constrain the dominant player”, says partner Christian Lippert.
Though there was a CKD component of the Prologis deal, the first CKD capital call in Mexico, for asset management firm Axis, was handled by NHG. Lawyers made it possible for the company to issue a security with a feature that had been never used in the market. The total value of the transaction was about $500m.
The deal has already been replicated and is expected it to lead to a significant transformation in the way the industry does business.
The reinsurance fund that NHG worked on – Mexico’s third such fund ever – has also spread beyond its initial target. The Mennonites are inviting avocado producers in the western state of Michoacán and apple producers in Chihuahua to become involved, and have plans to operate in Paraguay, which also has a large Mennonite community.