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. 

A post yesterday by Jason Lakin in the Harvard International Review suggests that the economic slowdown in the U.S., which will lead to a drop in remittances to Mexico by migrant workers, falling oil prices, which will put a dent in Pemex’s profits (on which the Mexican Government relies heavily to fund its operations), and the rapid decline in the peso vs. the dollar, which will dramatically increase the cost of Mexican imports, could reduce Mexico’s economic growth in the near term.

A new World Bank report credits Mexico for developing a future flow credit enhancement mechanism for municipal bonds without a federal government (sovereign) guaranty.  The innovation led to a sharp rise in municipal bond issuances in Mexico from 2001-2003.

The credit enhancement adopted by Mexican municipalities was inspired by Citibank’s securitization of Telmex telephone service receivables in 1987, which was the first major future flow securitization in a developing country.  That transaction involved securitizing telephone receivables owed to Telmex that arose when Telmex completed more calls for AT&T customers calling into Mexico than AT&T completed for Telmex customers calling into the United States.  According to the report, “Telmex sold the AT&T receivables to a U.S.-based trust and instructed AT&T to pay its Telmex invoices to that trust.  This arrangement isolated debt service payments to bondholders from any possibility of misdirection by company or government officials and guaranteed the bondholders first access to reliable cash flows.  That allowed Telmex securities to earn a higher credit rating than Mexico’s sovereign debt.”

To adapt the Citibank/Telmex future flows model to the municipal credit context, the municipality created a trust administered by an independent financial manager, which would receive tax-sharing payments (i.e., future flow receivables) to which the municipality was entitled from the federal government.  The financial manager could then make debt service payments to bondholders before any of the tax sharing grant funds were delivered to local officials and the bonds issued by the municipality or the trust itself could receive higher credit ratings that they would absent the credit enhancement.

Controladora Comercial Mexicana (MXK: COMERCIUBC) (frequently called La Comer in Mexico) filed a new petition for bankruptcy protection (concurso mercantil) under Mexican law after the court rejected its first petition, which was filed on October 9, 2008, according to a report in El Economista. 

The company said in the report that it is invoking its rights under the Mexico’s Business Reorganization Law (Ley de Concursos Mercantiles) and has therefore suspended the payment of all of its financial obligations. 

It is not clear why Comercial Mexicana’s original bankruptcy petition was rejected, but it is possible that the rejection was based on a technicality and that the court will accept the company’s new petition.  Article 20 of the Business Reorganization Law contains the specific requirements that a petition for bankruptcy protection must contain under the statute, which include, among other things, the audited financial statements of the petitioner for the three years preceding the filing of the petition, a list of creditors and debtors of the petitioner and their names and addresses, the maturities of all debts of the petitioner, and an inventory of all assets of the petitioner.

Gruma, S.A.B. (NYSE: GMK), the world’s leading flour manufacturer, affirmed today that its MX$2.8 billion (US$168 million) loss during the third quarter of 2008 was linked to losses on exchange rate derivative instruments, according to a report in El Economista. 

Gruma specified that the losses were caused by a 1,805% increase in the company’s cost of financing, which was “the result of unrealized losses on exchange rate derivative instruments representing a virtual fair market value loss of US$291 million.”  This loss sharply contrasts to Gruma’s profit of MX$799 million (US$76 million) for the third quarter of 2007. 

At the close of September 2008, the report said that Gruma’s total debt was US$772 million.  The company’s financial issues could have ripple effects world-wide: Gruma has 19,000 employees, 91 plants, and sells its products in 50 countries, including the U.S. Mexico, Venezuela, and Australia, as well as in Central America, Europe, and Asia.