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Doing a Cross-Corporate Guarantee in Mexico

The question of whether creditors could use a cross-corporate guarantee in Mexico recently came up on FCIB’s discussion board. A credit professional raised the question because his company had received a request to extend credit to a new customer in Mexico, and unfortunately, the creditor couldn’t support extending credit based on its qualifications. He also wanted to know whether there were unique requirements as compared with using such an instrument in the United States.

The prospective customer works with an unrelated firm that is an established customer, which would serve as the other guarantor, said Todd Reynolds, CCE, global credit manager with Armstrong World Industries in Lancaster, PA. A cross guarantee typically is an arrangement between two or more related firms such as a subsidiary or joint venture to provide reciprocal guarantees for each other's liabilities, fulfillment of promises or obligations.

Attorney Romelio Hernandez, president of HMH Legal, which specializes in credit and collection services in Mexico, confirmed that these instruments can be used in the country, “but you have to make sure that the language and the provisions therein in general will be the one required under Mexican law so that there will be no problems enforcing it in Mexico, should that be the desired forum or venue to prosecute any claim against the debtor companies.”

Creditors have to determine the best strategy and then move forward from there, Hernandez said. “For instance, if you know that the wealthy company is the USA guarantor company and want to stick to that jurisdiction, you (the creditor) might want to have documentation in place to anticipate legal action there, which both the USA and the Mexican company should sign.” But if the creditor believes legal action would or should take place in Mexico “then all documentation should be drafted anticipating legal actions in Mexico, which means that terms and conditions of sale, promissory notes (pagarés) and all other guarantees and security devices should be drafted according to Mexican law,” he explained.

Creditors, however, should always use key terms and conditions of sale as well as additional security to “level the playing field”—not just when using a cross-corporate or personal guarantee, Hernandez cautioned. “The Mexican court and legal system presents many challenges to creditors because of its inefficiencies and ineffectiveness, so the field is lopsided in favor of the debtor. Thus, creditors have to make use of all available legal tools and remedies to enhance their position and by doing that, they level the playing field.”

One respondent suggested obtaining legal counsel from a large multinational firm in Mexico City to prepare the documents. “The credit manager proposed checking online ratings for lawyers before making any placements. Just as you may need to see both sets of books to determine actual financial conditions of the customers, there are also variances in the definition of lawyers,” he said. “Right now with the currency exchange rate, first class representation is a bargain,” he added.

The FCIB discussion board provides a secure place for credit professionals to discuss current topics, share information and ask questions. FCIB member login is required.


Coping With Eduardo Duterte

Chris Kuehl, Ph.D.

The president of the Philippines, Rodrigo Duterte, is nothing if not controversial. Since the election, he has embarked on programs that have either gained him widespread condemnation or wild enthusiasm. The population of the country apparently loves these moves as his popularity is far higher now than at the time of the vote. The global community is mostly horrified—with the very notable exception of China. In the months since his elevation, he has turned the nation’s alliance structure on its head by declaring that his country will separate from the U.S. and by declaring his allegiance is now toward China. This would be clear enough and would provoke major adjustments if it were not for his habit of contradicting himself in mid-sentence. Now, he is in Japan and trying to assert that nothing has changed. All the alliances are firm while also stating that he doesn’t need alliances with anyone at all.

Many have tried to understand the overall motivation for the Duterte strategy, and it has been vexing to say the least. His domestic policies are rooted in his time as mayor of Davao City. It is here that he earned the nickname of Dirty Harry. His law and order policies resonated with a population that had come to feel victimized by the criminal community and the drug dealers. His hard-line approach was welcomed, although now there are many who assert that the police have gotten carried away with their new-found power. He has taken that approach to the country as a whole by declaring open season on drug dealers and users. It is estimated that some 6,000 people have been killed by police and vigilantes, but the number could be far more. The problem now is that many of those who have been killed are not engaged in drugs, but are people that somebody wants out of the way. It has been noted that lots of troublesome spouses have met their end so that divorces need not be resorted to.

It is the foreign policy remarks that have been of most concern globally. The declaration of a break with the U.S. is thus far only bluster as there has been no formal demand that remaining U.S. troops be withdrawn from Mindanao. There has also been no formal statement ending cooperation in military exercises. Duterte has a great deal of personal animosity toward the U.S.—at least in public. There is a strong streak of anti-American resentment in some parts of the country, but that is balanced against the fact that millions of Filipinos have migrated to the U.S. over the years. The overtures to China have been symbolic as well. It is not clear whether Duterte intends to give up the claims the Philippines have had on the South China Sea, but this is clearly what the Chinese are seeking from their new friend.

Duterte is a “shoot from the hip” populist and says whatever he thinks the masses want to hear. Whether this translates into a real foreign policy decision remains to be seen. He is making the U.S. nervous, but Japan is also wary and that is what prompted his visit to Tokyo. The Japanese and Americans for that matter are far more interested in whether business arrangements will be maintained. The business community in the Philippines has been working overtime to assure investors that all is well.


German Business Optimism Up, Ease of Doing Business Down

Despite Deutsche Bank’s questionable future, the Ifo Business Climate Index showed a one-point rise month-on-month in optimism among the German business community. The index—published monthly—is considered an early indicator of economic developments in the country.

As expectations in the manufacturing sector for the months ahead reached a two-year high, current business assessments also improved. “Demand for capital goods is particularly strong,” the Ifo Institute said.

Wholesalers were a little less optimistic “Both sub-components of the index declined, but nevertheless remain significantly above their long-term average,” the organization said. And retailers slightly scaled back their “very good” assessments of the current business situation.

In construction sector, the business climate indicator continued a record-breaking run in October, as it rose for the seventh consecutive month. Similarly, business expectations hit a new high, but the current business situation index fell slightly.

As the index rose, however, the country’s overall ranking on the World Bank’s 2017 Ease of Doing Business list fell three places, going from 14 to 17. The country’s rankings for enforcing contracts and getting credit also dropped three places each.

The report, which evaluates 190 economies, notes a record 137 of them adopted key reforms to make it easier to start and operate small- and medium-sized businesses. Developing countries were credited with more than 75% of the 283 reforms in the past year. Sub-Saharan Africa alone accounted for more than a quarter of them.

The top 10 placers, respectively, included New Zealand; Singapore; Denmark; Hong Kong SAR, China; Republic of Korea; Norway; United Kingdom; United States; Sweden; and Former Yugoslav Republic of Macedonia.


Global Roundup

European Union trade deal with Canada moves forward. A stalled deal to deepen commercial ties between the European Union and Canada appears to be back on track, after Belgium overcame objections that had threatened to derail the region’s entire trade agenda. The deal, the Comprehensive Economic and Trade Agreement, was held hostage by the French-speaking portion of Belgium, Wallonia, where the rust belt has been hard hit and farmers worry about potential competition. (NY Times)

China’s growth remains steady as services excel. China’s growth remained stable in the third quarter of 2016, with GDP growing at 6.7%, the same level as Q2. This level of growth is in line with most forecasts and leaves China on track to meet its annual growth targets. The most eye-catching figure was the growth of the services sector, which expanded by 7.8%. Compare this with a 2.7% expansion in the natural resources sector, which had been growing, spurred by fluctuations in commodity prices, by 13.3% at the start of the year. (Global Trade Review)

The future of supply chain finance in Latin America. Supply chain finance (SCF) in Latin America could be about to experience a new dawn. While SCF has been widely adopted in Mexico, largely because of the close integration of its economy with the U.S., and, to a lesser extent, Brazil, it has struggled to gain momentum in other major countries in the region, such as Chile, Colombia and Peru. Now, changing economic conditions across Latin America could be poised to give SCF a boost. (Treasury Management Intl.)

Hanjin in troubled waters as global shipping sinks. The strife in the global shipping trade grew on Monday when South Korea’s Hanjin said it would close its European arms. That will mean pulling out of 10 countries, most notably Germany where it has its European headquarters. Hanjin filed for bankruptcy in August under the weight of more than $5 billion of debts. It has been selling off assets in Asia and the U.S. to pay back creditors. Hanjin could now be heading for liquidation, according to industry watchers. (Evening Standard)

Moldova to vote for new president as banking scandal festers. Moldovans go to the polls Sunday in a presidential race that could propel a pro-Russian Socialist candidate to power after disclosure of a billion dollar corruption scandal that has sapped trust in politicians favoring closer ties with the West. The ex-Soviet republic of 3.5 million, squeezed between Ukraine and European Union member Romania, was plunged into turmoil in 2015 following disclosure of the banking scam which triggered street protests and caused the International Monetary Fund and the European Union to freeze aid. (Reuters)

Nigeria's unending FX crisis hurting business. Nigeria's currency scarcity remains a nightmare that won't go away, with even Africa's richest man, Aliko Dangote, feeling the pain. The West African country's economy has been hammered by the global crash in oil prices—worth 70% of its revenue and the bulk of its dollars—and ongoing rebel attacks on oil infrastructure in the southern swamplands. But the response to the naira's slump has made matters worse. (Daily Mail)

Fitch cuts Italy’s outlook based on political uncertainty, weak growth. Ratings agency Fitch cut its outlook for Italy, saying weak growth, high debt and the uncertain outcome of a planned referendum posed risks to the eurozone's third-largest economy. Fitch said political uncertainty ahead of the vote on constitutional reform, which could decide Prime Minister Matteo Renzi's future, had increased since its last review, with polls now suggesting its outcome is too close to call. The agency left unchanged Italy's BBB+ rating, but said downside risks had increased, noting that Renzi has indicated he could resign in the event of a "no" vote. (CNBC)

Political scandal darkens South Korea's growth prospects. The so-called “Choi Soon-sil gate,” a political scandal involving President Park Geun-hye, is adding to the growing fears of a serious crisis in the Korean economy. The scandal is viewed to be impacting not only the financial market, but also the real economy, already trapped in protracted sluggish growth, casting a gloom on the overall economic outlook for next year. This week alone, Kospi, the country’s main stock trading index, shed 33.85 points as of Wednesday in the wake of heightened uncertainties aggravated by the presidential scandal. (Jakarta Post)

 

Week in Review Editorial Team:
Nicholas Stern, Editorial Associate and Diana Mota, Associate Editor