In the evolving Mexican capital markets, traded certificates or Certificados Bursátiles ("CBs") have become the most versatile security existing in the catalog provided under Mexican law.1 CBs may be issued by Mexican or foreign companies, whether private or public. Understood in their pure expression and in their original purpose,2 CBs are debt instruments that represent the individual participation of their holders in a collective credit held by a legal entity or in a trust (fideicomiso).
In this Legal Update, we analyze the main characteristics of CBs used as direct debt instruments (i.e., debt instruments issued by a legal entity and reflected on its balance sheet).
CBs, as debt instruments, may be rated by Securities Rating Institutions (i.e., credit rating agencies) in order to provide potential investors with an independent evaluation of the issuer's creditworthiness and of the risk level of the investment. The terms of the CBs vary according to the issuer, so they may have different payment terms, be subject to fixed or variable interest rates, have a specific guarantee or be unsecured. Once acquired by investors, CBs may be traded in the secondary debt market.
Some of the advantages provided by CBs are:
- They allow the issuer to obtain financing on considerably more favorable and flexible terms than those that a banking institution would be willing to grant (due to the fact that interest rates available in securities markets are generally lower than those accepted by banking institutions in traditional lending).
- They are relatively safe financial instruments for investors since they are debt instruments and do not represent a participation in the issuer's equity.
- They allow investors to obtain an additional source of cash flow, to the extent that the issuer makes the corresponding interest coupon payments.
- They can be denominated in Mexican pesos or in investment units or indexed to the exchange rate.
Disclaimer: This material should not be construed as legal advice and is provided for informational purposes only.
1 Currently, CBs are used to document rights different from the collection of principal plus interest. For example, development or real estate trust certificates (typically issued by CKDs and/or FIBRAs, respectively) are a type of trust certificate that document the equity participation of their holders in the returns generated by the assets underlying the respective issuing trust.
2 Initially, CBs were designed and introduced in Mexican law to meet the financing needs of legal entities to be met through the placement of debt on a collective basis. In other words, initially, CBs were created to document the individual participation of their holders in a collective credit in charge of the respective issuing company.