China’s Chang’an Automobile Group Co., Ltd. will build a plant in Mexico to manufacture cars for sale in Mexico, the U.S., and Canada, according to an El Economista report. 

The plant, which will initially have a capacity of 50,000 vehicles per year, will be constructed in collaboration with an undisclosed Mexican joint venture partner.  Production is expected to commence by the end of 2009 or beginning of 2010.

Monterrey-based Vitro, S.A.B. de C.V. (NYSE: VTO), starved for cash after reporting losses of approximately US$227 million from derivatives on natural gas, the Mexican peso, and interest rates, has entered into a transaction with Mexican development bank Banco Nacional de Comercio Exterior (Bancomext) in which Vitro transferred the land on which its Monterrey corporate headquarters is located and a building in Tlanepantla to a Mexican trust (fideicomiso) in exchange for an initial payment of US$100 million, according a report in El Financiero. (The trust is probably structured as a fideicomiso de garantia, which is commonly used in secured financing transactions in Mexico.)

The company, which is led by Federico Sada Gonzalez, acknowledged for the first time that it is not in full compliance with its agreements with creditors and that negotiations with creditors are ongoing, a separate El Financiero report said. It also announced that it has contracted private equity firm The Blacksone Group, L.P. (NYSE: BX) to assist with its negotiations with creditors.

Vitro’s director of finance, Enrique Osorio, as quoted in El Financiero, said “with this transaction and the support of The Blackstone Group, and the other measures that we are taking to minimize the effects of the global financial situation, we are demonstrating with facts that the rumors generated by the market in relation to Vitro are not true and we continue working and operating normally to achieve the objectives that we have proposed to acheive for 2008 and the future”.

Mr. Osorio was responding to the comments of certain analysts, who have speculated that Vitro could be forced to file for creditor protection (concurso mercantil) under Mexican law. Whether the US$100 million cash infusion will enable the company to postpone or prevent such an outcome is an open question. Were Vitro to file bankruptcy in Mexico, creditors of Binswanger Glass, a subsidiary of Vitro and the largest glass retailer in the U.S., could be adversely affected.

In late October, Standard & Poor’s Rating Services downgraded Vitro’s long-term credit rating to B- from B on a Global Scale and to MXBB+ from MXBBB- on a National Scale, raising the company’s cost of credit in an already illinquid market.

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.

Jeremy Schwartz wrote an interesting story today in his Uncovering Mexico blog about the wave of Mexican migrant workers in the U.S. expected to return to Mexico because of the U.S. financial crisis.  

For U.S. businesses operating in Mexico, the exodus of migrant workers could result in a greater number of available workers for Mexican plants and projects, perhaps including a greater number of bilingual workers.

My colleague Julian Nihill has written an excellent summary of the implications of the Mexican legislature’s recent approval of reforms to Pemex, which is set forth below in its entirety.

Amid much political jockeying and posturing, particularly by the PRD, the party of the narrowly defeated leftist candidate for the Presidency, Andrés Manuel López Obrador, the Mexican Congress, on Tuesday, October 28, passed a series of bills aimed at reforming how Pemex conducts business.  The bills go to President Calderón for his signature.  Although President Calderón has expressed his approval of this legislation, and is likely to sign it, the reforms that he proposed in his original draft of the law have been significantly watered down, and, for U.S. companies interested in participating in drilling and exploration activities in México, the legislation is a disappointment.

 

The good news is that this law marks a move toward a more nimble, market-responsive and accountable Pemex, which may be able to entice much needed foreign drilling and exploration technology into México.  The bad news is that it does not go nearly far enough, and is still mired in the old politics of national sovereignty  that has dogged Pemex since its foundation.

 

The law authorizes Pemex to:

 

- Raise funds in the world market and to issue so called “citizens bonds”, both of which suggest an increasing transparency and willingness to respond to outside financial market process.  But Pemex is not permitted to issue equity interests, a step that was widely anticipated by investors and commentators alike.

 

- Enter into contracts for drilling and exploration which contain incentives for the contractors.  But the incentives fall far short of what was hoped for.  Contractors may have no rights whatsoever to the reserves, and they may not report any such interest on their balance sheets or for financing purposes.  All payments must be in cash, and such payments may not be calculated by reference to a percentage of production or to the value of the sales of hydrocarbons, their derivatives, or the profitability of the Pemex entity that is contracting for services.  Contractors may not be granted preferential purchase rights nor any other rights that could impact the price at which the hydrocarbons (or derivatives) will be sold to third parties.

 

- Include in their contracts clauses permitting contractual modification as a result of technological advances brought by the contracting party, variations in the cost of equipment used in the project, or by other factors which result in increased efficiencies in the project.  These provisions in Article 60 of the Law of Pemex, are all considered advances in the rules governing Pemex’s contractual flexibility, but even these are restricted.  What Article 60 gives, Article 61 takes away.  Article 61 limits additional compensation to those situations in which (i) Pemex obtains economies resulting from early completion of the project, (ii) Pemex benefits from new technologies brought by the contractor, and (iii) “other circumstances attributable to the contractor which redound to the benefit of Pemex… provided that they are not in the form of a percentage of sales or production of hydrocarbons.”

 

Many potential foreign technology and equipment partners will consider these potential limitations too restrictive to warrant the investment of their time, equipment and human resources into the volatile Mexican hydrocarbon market.  Others may see this as a crack in the doorway, in particular the provisions for cash bonuses for benefits to Pemex.  It is expected that bidding for service contracts will begin as early as January 2009, and it may well be that those contractors who are willing to bid a relatively conservative price with the possibility of a contractual bonus, may be the real winners under this legislation.

The twelvth annual Expo Internacional Naturista natural products trade show will be held February 13-15, 2009 at the World Trade Center Mexico City.  The event is organized by Mexico’s National Association for the Natural Products Industry (ANIPRON).  More information is available from the U.S. Commercial Service and in its recent report on the industry.

The U.S. Commercial Service has issued a new report on Mexico’s digital media sector, which sets forth possible opportunities for U.S. companies in triple-play, mobile and wireless, pay-TV, consumer electronics and video games, and internet and broadband services sectors.  The report also includes an informative section on obstacles to market entry, including Mexican import requirements for hardware and software products.

Coca-Cola FEMSA, S.A.B. de C.V. (NYSE: KOF) will invest US$400 million to build two plants in Meoqui, Chihuahua (located a few hundred miles southwest of Big Bend Ranch State Park, Texas), according to a U.S. Commercial Service report.  US$275 million will be used to fund a brewery and US$117 million will be used to fund a glass bottle manufacturing facility.  The report said that the construction of the plants could provide opportunities for foreign companies providing brewing and/or bottling equipment, supplies, and parts as well as construction equipment and supplies.

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.

Macario Schettino, an author, journalist, and Professor of Humanities at Mexico’s highy regarded ITESM (Instituto Tecnologico y de Estudios Superiores de Monterrey), wrote a keen op-ed on the recent energy reforms in the October 27, 2008 edition of El Universal, excerpts of which were aptly translated and posted by Patrick Corcoran on his Gancho Blog and follow below:

Today Pemex is reformed. Not energy nor oil, just the company. That is to say that to resolve a problem its cause is strengthened. Suffice it to say that it is an absurd solution. The believers in the myth will insist that only this way can the nation of the Revolution continue existing. The optimists will see in the reform the success of negotiation, a show of the reliable politicians’ capacity. From outside of the myth of self-satisfaction, the size of the error is evident. We have been caricature of a country for so long, like so many Latin American nations. Once again, only Argentina exceeds our self-destructive enthusiasm: its government has plundered for the second time the savings of its country. And part of the population celebrates it, as here part of the political class celebrates the reform.

Mexico has never been an oil-producing power, but rather only because of Cantarell, which is running out irremissibly. We never managed to construct a national oil industry, despite our production and our being neighbors of the country that has produced the most oil in history. Pemex is an inefficient company that occupies at least three times more staff than required, a sinkhole of corruption, and that now will reduce its payments to the government, appropriating more oil-based profits. But even if it kept all the profits, it wouldn’t be enough to explore deep water, which is the type of investment that must be made. Where did Mexico come out ahead?