Taking the Road to El Dorado? Nissan, GM, BMW – take your pick!
As of 2014, Mexico ranks eighth among the world’s car making nations—and is likely to be seventh soon according to The Economist. Nissan, the Japanese carmaker, recently opened a $2 billion assembly complex in the burgeoning city of Aguascalientes. Mexico is already number four in car exports, behind Germany, South Korea and Japan, and is looking to surpass Germany in the near future. Low labor costs are a major factor with wages and benefits coming in at an estimated $10 an hour for assembly-line workers. Compared to the $50 an hour estimated for an equivalent worker in the US, combined with its shared border with the world’s largest car market, Mexico is the number one destination for OEM and automotive supply growth in today’s market. If your company is an OEM Tier 1 or 2 in the United States, the main question you’re facing isn’t whether to open shop in Mexico, but how to pay for it.
¿Que Problemo? – What’s the problem?
There are multiple barriers to entry when it comes to opening a facility in Mexico, as well as certain environmental aspects that need to be considered. But the most common problem is obtaining the financing needed to ramp up operations in Mexico. First time operators are faced with three immediate hurdles when procuring equipment financing: VAT taxes, perfecting liens on collateral, and the reality of a less sophisticated infrastructure.
VAT tax is a consumption tax paid on all capital expenditures bought by a foreign entity in Mexico. This extra tax is immediately recognized and needs to be accounted for all capital expenditures brought across the border. Previously, there was a favorable tax arrangement with the United States, where the VAT tax was 11% as opposed to the customary 16% imposed on other countries. In 2011, that legislation was repealed and now ALL countries are required to pay a 16% VAT tax on goods coming over the border.
Perfecting liens in Mexico isn’t a cakewalk, though there have been efforts to streamline the process. In 2010, Mexico adopted a new security registration service (RUG) that, in essence, mirrors the current Unified Commercial Code (UCC) here in the United States. The RUG is a single central registry for the whole country and is fairly easy to file, but you must file it with a “FIEL” or “Advanced Electronic Signature.” These signatures are issued by the Ministry of Economy to institutions, lawyers, and other legal professionals – which creates another hurdle. Businesses must collaborate with a “FIEL” signer to secure a lien in Mexico. It’s important to know whether your lending partner has the legal connections to finalize a transaction.
And while Mexico continues to grow economically, infrastructure and the perception/reality of gang violence are still a pertinent part of the discussion south of the border. This perception makes lender’s weary despite perfecting liens on their assets – repossession is a veritable nightmare. But more on that later.
Unfortunately, due to the challenging nature of lending within our southern neighbor, many large financial institutions have limited exposure in the country, if any. The credit union or large box-bank you use for everyday cash management will most likely be unable to perform any type of lease/loan transaction for you in Mexico. There are really two main options to consider – specialty finance companies and Mexican banks.
Mexican banks seem like the most logical option but there are inherent difficulties in taking that route. The Mexican Peso is a rapidly fluctuating currency and its instability can cause rapid swings in interest rates and inflation in the country. There is also the scourge of drugs and cartel money that invariably makes its way into the Mexican banking world, further decreasing the stability of the lending market. It also restricts the availability of lending in Mexico, due to the huge fines being levied against financial institutions handling dirty money. Remember the HSBC scandal of a few years back?
Specialty finance firms are the most consistent way to execute a lease or loan transaction over the border. Drawing money from private funds and large insurance conglomerates, specialty finance companies can produce the capital needed in this burgeoning market. Of course, increased risk means increased reward, so expect to see higher rates in term sheets delivered for foreign capital expenditures.
So I’m going to get gouged right? Not necessarily
There are ways to mitigate these rate hikes. By leveraging unencumbered assets owned by the American counterparts, businesses can secure near-market rates for Mexican assets by over-collateralizing the transaction. There is also the strategy of matching dollar-for-dollar any investment made in Mexico with an investment in the US, further incentivizing a finance firm with increased originations in the US.
Companies looking to reap the rewards of investing in Mexico need to secure a partner who is familiar with the landscape and flexible enough to provide solutions. Expecting your current revolver to accept foreign capital expenditures is a waste of time and could even trigger a breach in covenants. If you’d like to hear more about financing solutions and execution in Mexico, you can reach out to Patriot Equipment Finance below:
Vice President, Sales & Business Development
Patriot Equipment Finance, LLC
1-844-515-9266 Ext. 1002
“Ian Joyce is the Vice President, Sales & Business Development for Patriot Equipment Finance and has a family history in the automobile business that spans 60 years. He has worked exclusively with auto OEM’s who play a support role to the automobile manufacturing business by providing solid finance expertise in plant expansion and equipment acquisition.”