As discussed in November 12, 2008 Mexico Law Blog post, JP Morgan Chase and several other banks have filed lawsuits against Mexican supermarket operator Controladora Comercial Mexicana (CCM) (MXK: COMERCIUBC) alleging breach by CCM of its exchange-rate derivative contracts.
We have not yet had the opportunity to review the court filings, but based on our own research, as of November 14, 2008, the claims against CCM in New York state courts appear to consist of the following:
Electronic payment facilitator PayPal, a subsidiary of eBay, has launched its website in Mexico, according to a Sentido Comun report. The website enables consumers and businesses to make secure payments in Mexican currency with credit cards or through bank accounts (via ACH), as well as deposit and transfer funds. PayPal’s Mexican website is www.paypal.com.mx.
Mexican billionaire Carlos Slim offered his views to reporters regarding U.S. auto industry, health care, and other issues in an interview in San Antonio on November 18, 2008, summarized a Houston Chronicle report.
With respect to the auto industry, Slim suggested that struggling companies should file for Chapter 11 bankruptcy protection and renegotiate uncompetitive labor union contracts in exchange for giving workers company shares. This is a suggestion lawmakers on Capitol Hill may wish to bear in mind today as they listen to pleas from auto industry executives for a US$25 billion slice of the US$700 billion Troubled Asset Relief Program (TARP).
Cemex, S.A.B. (NYSE: CX), the world’s third largest cement maker, has hired five international financial institutions to help it obtain new credit lines and negotiate amendments to its existing credit facilities, according to a Sentido Comun report.
The banks retained are Banco Bilbao Vizcaya Argentaria (BBVA), HSBC, RBD and Banco Santander.
The announcment forms part of the company’s efforts to extend the maturity dates on its credit lines and buy time to restructure its operations as revenues decrease amid a possible global recession. Cemex is also hoping to exchange approximately US$429 million in peso denominated bonds that mature in the next few months for bonds that mature in September 2011.
Mexican tortilla and cornflour maker Gruma, S.A.B. (NYSE: GMK) said that the mark-to-market value of its exchange rate derivatives positions was a negative US$684 million as of Oct. 8, according to a Dow Jones report.
Responding to a request by the Mexican stock exchange for information on its financial position, Gruma said most of the maturities on its derivatives are in 2009, 2010 and 2011.
With respect to Gruma’s exchange rate derivative liabilities in 2008, a November 13, 2008 Sentido Comun report said that the company had obtained a credit line from an undisclosed lender that it will use to close out its derivative positions requiring payments this year. It appears that the company’s 2008 derivative liabilities are the result of margin calls made by the contracting counterparty following the sharp depreciation of the peso in recent months. Without the credit line, the report said Gruma would have been required to pay US$276 million on November 25, 2008 to the counterparty. Gruma did not reveal the name of the counterparty or the financial institution that had brokered its purchase of exchange rate derivative contracts; it may be speculated, however, that they are major Wall Street firms.
The peso’s depreciation has caused a number of major Mexican companies to generate mark-to-market losses in their derivatives positions and engendered extraordinary demand for dollars that sent the peso to record lows and prompted Mexico’s central bank to sell $8.9 billion in the exchange market.
Gruma owns a 9% interest in Grupo Financiero Banorte, the fifth largest bank in Mexico. Gruma said it was exploring financing alternatives to settle its obligations relating to its derivatives with maturities in 2009, 2010, and 2011, which are not currently subject to margin calls.
Fitch Ratings has removed the municipality of Xalapa, state of Veracruz, from its local ratings system, according to a Sentido Comun report that cited a Fitch press release. Fitch, which had given the municipality its sixth-highest rating of “A” on the local ratings scale prior to the removal, did not disclose the reason for its decision. Xalapa is the second largest city in the Veracruz state after Veracruz, Veracruz.
Pemex’s so-called “citizen bonds”, which Mexico’s Congress allowed state oil monopoly to publicly issue to as part of its October 28, 2008 Pemex reform package, are unlikely to be a significant source of financing for the company in 2009, according to Luis Flores, an economist at Ixe Banco who was quoted in report by The News. Mr. Flores said that the citizen bonds would probably represent no more than 3 to 5 percent of Pemex’s total debt, meaning no more than US$300 million.
Mexico Law Blog included a detailed summary of the Pemex reforms in a November 3, 2008 post.
The citizen bonds appear to be something of a hybrid security: returns to bondholders are based on Pemex earnings but the bonds do not grant owners voting rights and do not pay a fixed coupon. The October 28 reforms did not allow Pemex to issue equity interests to the public, contrary to the expectations of most investors and analysts.
The Mexican government announced that it will require Mexican companies whose shares are traded on the Mexican stock exchange (bolsa de valores) to adopt International Financial Reporting Standards (IFRS) over the next four years, according to SentidoComun.com report. Canada, Chile, and Brazil, have also recently announced their intent to adopt IFRS standards for publicly-traded companies in their jurisdictions.
The governments of France, Spain, and the United Kingdom currently require that publicly-traded companies adopt IFRS. The U.S. recognizes the validity of IFRS and permits foreign companies that are publicly-traded in the U.S. to use such standards without having to reconcile them with U.S. accounting standards.
The adoption of IFRS in Mexico should provide greater transparency and clarity for foreign and local investors in Mexican publicly-traded companies. Hopefully it also leads to increased liquidity in the relatively illiquid Mexican securities markets.
JP Morgan Chase has sued iconic Mexican supermarket operator Controladora Comercial Mexicana (CCM) (MXK: COMERCIUBC) in a New York state court alleging breach of its obligation to maintain collateral in its exchange-rate derivative transactions, according to a Sentidocomun.com report, which cited a Bloomberg report.
The lawsuit seeks US$477.5 million from CCM. CCM said that it had been notified of the lawsuit and that it expected to be the subject of similar actions in the next few days in the wake of its October 9, 2008 petition filed with a Mexico City bankruptcy court seeking creditor protection (concurso mercantil). The report said that Barclays, Goldman Sachs Group, and Merrill Lynch had filed similar lawsuits against CCM.
As Mexico Law Blog reported on October 27 and 29, 2008, CCM’s October 9, 2008 bankruptcy filing was rejected by the Mexican bankruptcy court for undisclosed reasons; following the rejection, the company announced plans to immediately file a new petition, which it did on October 28 or 29, 2008. No news has been issued confirming the acceptance or rejection by the Mexican bankruptcy court of the company’s new petition.
In October 2008, CCM’s debt inflated to US$2 billion following huge losses on exchange-rate derivative bets against the dollar, according to a Reuters report. CCM said in late October that it had obtained loans worth up to MX$3.327 billion to continue paying suppliers. One of the loans, for up to MX$3 billion, is guaranteed by Mexican development bank Nacional Financiera (NAFIN).
A new company named Tax Back, which began operations in June 2008, offers visitors to Mexico refunds on value added tax (VAT) paid to Mexican businesses on purchases in Mexico that are exported. Tax Back has offices in Mexico City, Cancun, and Los Cabos, with plans to open offices in Monterrey, Cozumel, Merida, Loreto, Acapulco, Ixtapa, and La Paz by the end of 2009.
In July 2006, the Mexican government first published regulations authorizing private companies to obtain government concessions for operation of VAT refund businesses, according to the International Tax Review.
Copyright © 2008 by John Dorsey
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