Due to the COVID-19 pandemic, Mexican courts were closed for the past few months and only received urgent cases.
The COVID-19 pandemic has had a negative impact on the Mexican economy. As a result, Mexican courts have seen a rise in insolvency cases, which are not as common in Mexico compared to other jurisdictions, such as the United States. The rise of insolvency cases imposes new challenges to Mexican courts and Mexico’s laws.
A recent videoconference by the United States-Mexico Chamber of Commerce’s Northeast Chapter examined bankruptcy issues in Mexico as a result of the COVID-19 pandemic. Our summary of the videoconference follows:
COVID-19 Pandemic: New Challenges
As a result of the economic downturn that Mexico has experienced since 2019 and now because of the COVID-19 pandemic, Mexican companies and courts are facing new challenges as many new insolvency-related cases are expected.
Historically, the number of insolvency filings in Mexico has been modest. Since the enactment of Mexico’s Bankruptcy Law in 2000, fewer than 800 insolvency cases have been filed, in comparison to the approximately 11,000 insolvency cases filed in New York state just this year.
The ongoing COVID-19 pandemic can be divided into two different stages. The first stage occurred between March and June as companies saw a drop in demand and experienced supply chain issues. During this stage, companies faced new challenges from the rapidly evolving crisis. Debt dramatically increased as demand dropped by almost 100 percent in some cases, while companies tried to navigate the general uncertainty of the pandemic.
As a result, companies suffered mainly in two ways: (1) business models changed in general and forced companies to adjust their own business models; and (2) companies had to find ways to build liquidity. In order to build liquidity, some companies sought credit lines and others went to their lenders.
Many lenders were flexible during the first stage. In the month of March, bonds were trading at distressed levels. This has now dropped as companies have more visibility of the long term. As time passes, bondholders will have more leverage, and if conflicts are not resolved and the situation becomes more stressful, they will want to see capital restructuring sooner rather than later.
The second stage began in the month of June and continues. During this stage, it is expected that companies will continue to adjust their business models and search for new sources of revenue, addressing their financial needs and capital structure. Indeed, companies are likely to focus on preserving liquidity and the challenges that this implies. As a result, refinancing transactions are expected to follow.
Every industry has been affected by the COVID-19 pandemic. The hardest hit include: (1) the manufacturing industry (automotive in particular); (2) oil and gas; (3) construction; and (4) the retail industry.
Debtor-in-possession (DIP) financing could provide an alternative for companies facing insolvency issues; however, DIP financing is new in Mexico. Therefore, it is an unfamiliar concept and carries several restrictions from the Mexican legislation. Moreover, DIP financing will likely prove to be more difficult now that there is a lack of liquidity and greater uncertainty in the system. Therefore, some companies may use Chapter 11 as an alternative.
The ability for companies to renegotiate contracts will be key for them to avoid or lessen insolvency issues; however, many contracts (such as those executed with unions, which impose many restrictions per Mexican legislation) will be hard to renegotiate.
The general landscape is that investors are willing and prepared to accommodate different options to avoid insolvency. Investors expect that approximately in a year and a half, they will be able to emerge from the crisis and hopefully return to normal operations.
Courts in Mexico and Government Support
Because of the Mexican government’s lack of support for private companies, Mexican courts must focus on protecting private companies in Mexico through insolvency proceedings. This implies yet another challenge, as Mexican courts lack experience with insolvency, have a considerable case overload and are already overwhelmed with constitutional issues. Therefore, Mexican judges will need help to understand key issues and how companies filing for bankruptcy operate, as well as how tax relief will be treated in these kinds of proceedings.
Mexican courts face additional challenges. Due to the COVID-19 pandemic, Mexican courts were closed for the past few months and only received urgent cases. Insolvency proceedings were not considered urgent cases up until approximately two months ago. Moreover, they have only started to implement electronic proceedings recently, which means they lack experience in these kinds of proceedings.
Furthermore, it is also important to note that in Mexico, there are no specialized insolvency courts and it is unclear if such courts will be created. It will likely depend on how many cases are filed in the near future and whether the government is willing to fund their implementation.
As many insolvency procedures have been already filed and with more likely to come between now and the first trimester of 2021, Mexican courts will need to be more expedient with these proceedings.
Bankruptcy Law in Mexico
Mexican legislation on insolvency needs further development and improvement. With many new cases to come soon, the courts and companies in insolvency proceedings will be challenged more than ever. This should be an opportunity to deeply reform the Bankruptcy Law and how insolvency operates in Mexico.
For More Information
If you have any questions about this Alert, please contact Eduardo Ramos-Gómez, Rosa M. Ertze, Miguel de Leon Perez, any of the attorneys in our Mexico Business Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.