Commercial paper constitutes a new instrument for attracting resources in the short term that comes to fill the existing void in the national capital market with regard to alternatives other than those traditionally offered by the banking system.
With the promulgation of these regulations, public limited companies have access to a source of short-term financing and the investing public the option of placing their available resources in a new savings instrument. Thus, commercial papers have expanded the spectrum of placement alternatives in the market.
On January 30, 1990, the Securities Commission issued the Rules regarding the issuance, Public Offering and negotiation of commercial papers and the instructions for requesting authorization to make a public offer of commercial papers. The aforementioned norms and the instructions were published in Official Gazette No. 34,422 of March 6, 1990.
As of December 15, 1990, the National Securities Commission had authorized twelve (12) commercial paper issues for a total amount of six thousand five hundred two million nine hundred thousand bolivars (Bs. 6,502,900). The interest aroused by commercial papers allows anticipating an increasing use of this instrument and its consolidation as investment and financing alternatives in the national capital market.
2. Justification of the commercial paper
Every company has short-term resource needs to finance its current operations and those items that make up its working capital. While it is true that the company could satisfy its working capital requirements by obtaining long-term funds, it is no less true that this is not always advisable or convenient. This for several reasons:
- The company's need for funds can be seasonal or cyclical. In this case, it is obvious that it will not be advisable for the company to commit to long-term debt to meet its short-term resource needs. Even though many loan contracts include clauses related to the possibility of prepayment of the debt before its maturity date, it is no less true that, many times, the premiums that the company must pay to make use of the prepayment facility are, or they can be extremely expensive. Therefore, it could be onerous for the company to invoke the prepayment clause to cancel its obligations before their respective due dates. In these cases, depending on the destination or the application of the funds,It is more convenient for the company to obtain short-term loans due to the flexibility they provide in terms of maturities, especially if these resources are aimed at financing current operations.In strictly economic terms, the cost of obtaining short-term resources is less than the cost of obtaining long-term resources, especially in the event that the prevailing interest rates in the market adequately reflect the market's segmentation in terms of terms. In other words, generally, the price that must be paid for money obtained in the long term is higher than that that must be paid for obtaining short-term funds.the cost of obtaining resources in the short term is lower than the cost of obtaining resources in the long term, especially when the interest rates prevailing in the market adequately reflect the market segmentation in terms of terms. In other words, generally, the price that must be paid for money obtained in the long term is higher than that that must be paid for obtaining short-term funds.the cost of obtaining resources in the short term is lower than the cost of obtaining resources in the long term, especially in the case that the prevailing interest rates in the market adequately reflect the market segmentation in terms of terms. In other words, generally, the price that must be paid for money obtained in the long term is higher than that that must be paid for obtaining short-term funds.
Now, the company can perfectly obtain these resources through the banking system. Bank credit is a source of obtaining short-term funds for the company. In fact, many companies resort to this route. But, it happens that bank credit is selective and is subject to legal limitations. In other words, the credit activities of banks and other financial institutions are limited in terms of amounts and proportion of the portfolio of these entities.
This may determine that several companies do not have the same access to bank credit or that to access institutional credit, the company has to face different capital costs, or finally, that the resources provided by the banking system are insufficient for the financing needs of the daily operations of the company.
For these reasons, the issuance of what has come to be called in other markets commercial papers, commercial paper or commercial securities, whose negotiation endows them with high liquidity in the market, especially in those markets where institutional investors who operate with large volumes.
- Notions and characteristics of commercial paper
Commercial papers are securities issued en masse by public limited companies, intended for public offering and that have the following characteristics:
- Be issued to the bearer or in nominative form at the option of the issuing company. Have a fixed maturity term of no less than fifteen (15) days nor more than two hundred and seventy (270) days. Be placed at a premium, at a discount or at par value. Be listed on the stock exchange.
Among the most outstanding characteristics of commercial paper are:
- Commercial paper is a security.
Commercial papers participate in nature and have attributes typical of securities. But, like obligations, they are securities that have a very special peculiarity. Indeed, commercial paper is like any security, a necessary document to exercise the literal and autonomous right contained in itself. However, commercial paper is a casual title, that is, it does not enjoy independence or substantivity as the bill of exchange. Commercial paper refers to another document that is precisely the issuance contract. Although the title is negotiated without the consent of the debtor, it does not circulate isolated from the cause to which it owes its origin.
This is why the obligation derived from this type of paper is linked to the cause that determined its issuance. For this reason, it is subject and subordinate to the discipline of the legal business from which it was born, that is, to the regime contained in the loan agreement or in the credit operation from which the issuance of the securities arises.
This type of role, despite the fact that it is a causal title, is still autonomous. The autonomy of commercial paper prevents the bearer from opposing exceptions based on personal relationships with the previous holder. What happens is that since it is a causal title, the bearer does not escape the exceptions derived from the cause, precisely because the paper is influenced and regulated by the underlying business.
- Commercial papers are mass-issued.
The papers are issued in series or in multiple units, always in generic form. They are equivalent to each other and interchangeable or interchangeable, because they are all of the same content. They have the same characteristics and grant equal rights within their class. They depend on a single operation (mutual or collective loan) Corresponding to the same legal business on which they depend.
Although in order to facilitate placement, the securities are grouped into lots with different denominations, the securities that make up each group have the same initial value, that is, the so-called issue price, even if such value changes later in response to the vicissitudes of the meracado.
Commercial papers, like any serial issued title, are identified by a serial number that allows each title to be individualized with respect to other similar ones.
- Commercial papers are issued by corporations.
Corporations are the only persons authorized by law to issue commercial papers. No other natural or legal person other than the corporation can do so. This is an important precision since in the Capital Market Law in its article No. 1 it establishes that commercial papers must be issued by public limited companies.
4. Commercial papers are intended for public offering.
This is a feature that distinguishes commercial papers from commercial acceptances that are traded primarily through the cash desks. In the latter case, there are no massive issues addressed to the public, the placement is not publicly announced and the volumes traded are undetermined, apart from the fact that the instruments that are traded at the money desks are, generally, securities to the order, which entails special characteristics in relation to the circulation law to which they are subject, since they are normally transferable by endorsement.
- Commercial papers are issued in bearer or registered form.
Commercial papers must be issued to the bearer or in registered form, at the option of the issuing entity since it is not allowed to issue them to order. This affects, basically, although not exclusively, the system of circulation of the title. The normal thing will be that they are issued to the bearer and that their transfer is made by simple delivery.
This form of issuance, that is, to the bearer, is particularly useful for this security in which the personality of the holder is indifferent, since it is an indeterminate collective subject.
However, nothing prevents, as with obligations, that the issuer chooses to issue commercial papers in a nominative way, that is to say, indicating a specific person as the owner, in which case the title will be subject to a more complex transmission regime. Now, as the law does not contemplate a special regime for the transmission of commercial papers, it must adhere to the provisions of article 150 of the commercial code: it will be done as an ordinary assignment and the acceptance of the debtor or the notification of this. This will make the possibility of registered commercial papers being issued very remote, unless they are being issued privately among a very small number of people.
Likewise, the nature of bearer or registered titles will affect the regime applicable to the case of annulment of the title in the event of its destruction, loss or theft.
- Commercial papers are short-term securities issued.
According to the law, the fixed term of expiration of commercial papers cannot be less than fifteen (15) days nor more than two hundred and seventy (270) days.
This characteristic makes commercial paper a very interesting instrument for issuing companies, as it allows them to obtain short-term financing, but in a period longer than that provided by commercial banks, normally for ninety (90) days. Precisely, because the company through commercial papers captures short-term resources, uses them to finance its working capital, that is, short-term assets, such as accounts receivable or to maintain inventories (raw materials or products This type of financing is also used when the company is in the process of moving from one structure to another, for example, in recycling the distribution channels of a product or in the development of new distribution channels. It is therefore,of a source of financing for one of the vital stages of the economic cycle.
This characteristic of being issued in the short term, differentiates commercial papers from other types of obligations.
- Commercial papers are placed at a discounted premium or at par value.
Normally, they are placed at nominal value, that is, the capital paid up by the subscriber is equal to the nominal value of the security.
However, as a means to facilitate the placement, the nominal value is allowed to exceed the paid-in capital (placement at a discount). The difference constitutes a benefit that the holder of the commercial paper will obtain when it is repaid, that is, it is recognized at favor of the subscriber a benefit of being amortized at a price higher than the subscription price.
Additionally, commercial papers are allowed to be issued above par, that is, with a premium, in which case the money needed to acquire commercial papers is higher than their nominal value. In practice, the possibility of issuance of this type will be very remote, since the subscriber will suffer a loss when the reimbursement is made, since he will only receive the nominal value. An issue with a premium could make sense, in the case of very long-term papers (obligations) where amortizations only begin after several years and the interest rate is high, with which the holder, even subscribing above the par, it will be sufficiently compensated, or it could be that the issuing entity, in view of its solvency and liquidity,intends for the subscriber to pay for the commercial paper an amount greater than its face value (premium)
To facilitate the collection of interest, commercial papers can (at the option of the issuer) have coupons attached for the collection of interest which will be bearer, and will also be securities. Once the right to collect interest is born, the coupon acquires its own autonomy, being negotiable and transferable regardless of the commercial paper from which it is separated.
Zero coupon commercial papers can also be issued. Zero coupon commercial paper is an interest-free commercial paper where the issuer only agrees to pay the principal at maturity. It will be placed, initially at a discount equivalent to the present value of the payment of the principal amount of the commercial paper at maturity, discounted at the market interest rate for placements for a similar term. The commercial paper placement price will depend on the discount rate and the days to maturity of the securities that make up the issue.
The yield of the securities will be given by the differential between their issue price and that of their payment. This circumstance, according to the law, must be specified in the prospectus and in the title. In the secondary market, the purchase and sale prices will be freely determined based on the discount rate in force and the days to maturity of the commercial papers.
In other more developed markets, it is customary to issue commercial papers at a discount, but it is becoming more common in the form of paper that earns interest, since in this way initial transactions and calculations are facilitated. A similar instrument, the zero coupon bond, has been used with considerable success by the Central Bank of Venezuela. However, mainly, due to the nature of the issuing entity, the zero coupon bond has special characteristics that differentiate it from commercial paper.
- The commercial papers are registered in the stock exchange.
Likewise, the instructions, when regulating the preliminary version of the prospectus, establishes that in its text the date on which the titles that make up the series will be registered in the stock market must be indicated. Typically, this enrollment will occur after the primary placement is completed. This is intended to provide this instrument with adequate liquidity, giving the holder the possibility of making his investment in the secondary market, when he deems it appropriate. This does not affect the issuer nor does it compromise its cash flow, since it will only have to pay the principal amount of the commercial papers on their respective expiration dates.
Additionally, with the obligation to register commercial paper issues on the stock market, it is intended that the general public is duly informed about the perception that the market assigns to each issue, and to provide the negotiations with adequate transparency.
In the bag. The negotiation prices of the papers will be affected, among other factors, by movements in interest rates, by the image, prestige and strength of the issuer, by the characteristics of commercial paper (yield, life period) and by the issuance guarantees.
4. Bonds and obligations
Bonds are securities that represent a debt contracted by the State or by a company to which, at the time of issuance, characteristics such as value, duration or life of the title, date of issue, expiration date, coupons for the collection of interest and destination that will be given to the money raised with them.
The bonds or obligations may be issued by private companies or by the National Government or its decentralized entities: Central Bank of Venezuela, ministries, governments, municipal councils, autonomous institutes and others, being capable of being negotiated before the expiration date.
Public Bonds
In recent times, the bonds issued most frequently by the State are two:
National Public Debt Bonds (DPN)
The National Public Debt Bonds (DPN) are Titles issued by the National Government, through the Ministry of Finance, and guaranteed by the Republic. These Bonds are issued under the modality of Bearer Securities, the coupons or interest generated being exempt from Income Tax. Through these instruments, the Venezuelan State obtains the necessary capital to finance investment projects or to meet debt commitments.
Treasure letters
They are securities issued by the Ministry of Finance intended to maintain the regularity of payments to the National Treasury. The Government places through the Central Bank of Venezuela (BCV) these fixed income securities that allow their financing and that offer an excellent short-term tax-free performance. In addition, they are highly liquid because they can be traded in a secondary market dedicated to the purchase and sale of Public Debt. Its rate of return is determined through an auction where the rate is set according to the game of supply and demand between the BCV and the participants in it. Treasury bills are generally zero coupon securities with maturities of less than one year.
Purpose of the issuance of the Dpn and the Treasury bills and who buys them
DPNs and Treasury Bills are issued by the Ministry of Finance to finance specific projects, meet contracted commitments or cover temporary liquidity deficiencies in the Treasury. These instruments are placed by the BCV among the same financial institutions and authorized intermediaries, at predetermined prices and returns. Banks generally purchase them for themselves and brokerage firms distribute and broker them among their clients, albeit on a smaller scale. The investor's interest is to have, at the maturity of the paper, an attractive yield for their money with high security of payment.
The Term Of A DPN Bond
DPNs are bonds with a fixed or variable coupon and with terms that vary between 18 months and 4 years. Its duration may vary as the Venezuelan State deems it. DPNs are called long-term investment instruments because with them the investor will obtain an income from the date of issue until the expiration of the term of the debt, when the State offers to reimburse the holder of the instrument the amount of the nominal capital established. Meanwhile, the bondholder receives a periodic remuneration set in the instrument's issuance Decree.
Time Interest Is Paid For DPNs
During this period, debt bonds typically pay interest every 3 months, 6 months, or every year.
5. The Vebono
"VEBONO" is a name given by the Ministry of Finance to the Fifty-Eleventh issue of National Public Debt Bonds (DPNs), corresponding to internal loans for an amount of 300 billion bolivars, intended to pay liabilities professors, administrative staff and workers of the universities due to the homologation of wages and salaries carried out during the years 1998 and 1999. The Decree of this issue 511 of DPNs was published in the Official Gazette of the Bolivarian Republic of Venezuela Extraordinary No. 5,564, of December 24, 2001. Each beneficiary has received its debt in bonds, the value of which will be adjusted through the periodic setting of interest rates.
The Ministry of Finance, briefly, has defined as follows:
"VEBONOS are electronic negotiable and bearer titles that represent obligations for the Republic, in accordance with the provisions of the Organic Law of Financial Administration of the Public Sector and its Regulations."
Meaning of «electronic titles»
That VEBONOS do not exist on paper but are "dematerialized" and have been converted into electronic book entries in the Caja Venezolana de Valores to give greater transparency to their presence, in order to prevent fraud and make their transfer to other hands when a negotiation has been completed.
Dematerialized
Dematerialisation consists of substituting physical securities for book entries. These book entries have the same nature and contain in themselves all the rights, obligations, conditions and other provisions contained in physical titles. Such dematerialized securities can be recognized as "securities represented by book entries".
Vebbon Registry
VEBONOS are in the custody of Caja Venezolana de Valores SA (CVV). On December 28, 2001, they were deposited there by the Ministry of Finance and as of January 3, 2002, with the publication of a statement in the national press, their beneficiaries were informed that they can proceed to identify and register the ownership in that institution, which will be specified soon.
Duration Of Vebonos
The VEBONOS were issued in two series, the one identified as VEBONO072005 has a duration of three and a half years, and the one called VEBONO022006, of four years duration. The first expires on July 21, 2005 and the second on February 2, 2006. This term means that the university professor, employee or worker must wait a long period of time to exchange it for the face or nominal value established in the title.
Interest These Bonds Accrue
These bonds accrue quarterly interest at a variable rate with the support of the Republic, according to a regular payment schedule, and can be traded on the organized financial market, for example the Caracas Stock Exchange, at a price that can be at a discount, par or cousin.
The Government of Venezuela will pay the elapsed interest every 91 days (three months), counting the lapses as of December 24, 2001, date of issue.
That is, VEBONOS have as many coupons as there are quarters stipulated for the collection of interest. The Ministry of Finance set the initial interest rate. The first coupon of the VEBONO072005 series has a yield of 25.47%, whose cash amount will be deposited in the payroll account on Thursday, January 24. For the VEBONO022006 series it is 22.45% and will appear in your account on Friday, February 10.
Unlike the first coupon, the remaining coupons will be variable and reviewable every 91 days after the expiration date of the first coupon and will be calculated at the beginning of its validity, based on the yield of the 91-day Treasury Bills auctioned in the week that corresponds to the beginning of the validity of the coupon plus a differential of 250 basis points.
Negotiation of the Vebonos
As a preliminary step, to sell the VEBON, your first beneficiary or holder must transfer the balances of their VEBONS from the account of the Ministry of Finance to a Brokerage Firm so that it can serve as a financial agent in the sale of the Bond on the Stock Market from Caracas. This transfer of balances within the CVV is free. Read a summary of initial steps by clicking here.
Obligation to sell the Vebono
No. The holder can keep it, either in the account of the Ministry of Finance in the Venezuelan Securities Fund for a time or until maturity. Also, if you wish, you can transfer it to a brokerage house that is a member of the Caracas Stock Exchange.
Activities Carried Out In The Cvv In Relation To Vebonos
The CVV has two main lines of activities: the deposit, custody and administration of VEBONOS, and the transfer, clearing and settlement of the deposited securities.
The Ministry of Finance deposited the total amount of the Bond issue in the Caja Venezolana de Valores and this private entity, in accordance with the provisions of the Securities Fund Law, is responsible for preserving control of the ownership of the holders in prevention of fraudulent acts and carry out the change of ownership, and when the bonds are traded on the Caracas Stock Exchange or in another authorized transactional system, carry out the transfer from one sub-account to another, from a brokerage house or other financial entity, within the same Caja de Valores.
It also corresponds to the box to distribute among the bondholders the respective quarterly interests that the Ministry of Finance will pay globally in the box.
Is it mandatory to go to the Venezuelan securities box? What is the procedure?
According to the scheme established for the negotiation of these electronic titles, VEBONOS holders must update and specify their personal data through the Internet on the page www.cajavenezolana.com through the SITRAD2000 system. There they can indicate their bank account where the Republic will pay the interest and principal payments. If they don't, they won't be able to buy or sell their papers. The Ministry of Finance suggests that holders use the payroll accounts opened by universities.
To access SITRAD2000, you can request information at the addresses [email protected], [email protected] or www.bolsadecaracas.com.
Then, the holders must fill out a registration form from the Caja Venezolana de Valores, to which they will attach a copy of the identity card. The forms are in the brokerage houses and in the Venezuelan Securities Fund. They can be delivered to the CVV through the unions.
The holders must match the list previously sent by each entity to the Ministry of Finance. All BVC Stock Exchange houses are registered in the Caja Venezolana de Valores, so that holders can decide if they want to keep their VEBONOS in the Ministry or in a brokerage house.
Cobra La Caja de Valores
The information access and custody service of the Caja de Valores is free. When the Caja makes deposits of interest every quarter or capital, the CVV will charge the holder of the VEBONO, one bolívar (Bs. 1) for every thousand bolívares (Bs. 1,000), as collection management. If the holder wants to sell partially or totally his VEBONS, he must transfer the balances to a brokerage house. The balance transfer process is free; However, at the time of sale, both the seller and the buyer will be charged a commission of one thousand bolivars (Bs. 1,000), regardless of the amount bought or sold.
The Role Of The Caracas Stock Exchange In The Transactions Of The Vebonos
The Stock Exchange is simply the stage where its member brokers come to, with the respective mandates of the investing public, carry out transactions to buy and sell bonds and shares in its transactional system, the SIBE (Integrated Electronic Stock Market System).
A VEBONO, for the purposes of the stock market, is an additional DPN (National Public Debt Bond) that is traded between the brokers of the Caracas Stock Exchange.
The Stock Exchange does not play a specific role vis-à-vis the beneficiaries of VEBONOS other than the one it has in relation to the general public, but now it has a new obligation, which is to offer daily information on this instrument, to include its statistics in its weekly, monthly and annual publications and include explanatory texts in their Internet services to inform about the characteristics of the instrument.
Modalities of Orders Existing on the Exchange Applicable to Vebonos
There are three types of orders that apply to VEBONS, among the various that exist on the Stock Exchange:
- At agreed price Crossover In regular orders market (multilateral market)
The "at agreed price" mode is one in which a buyer and seller price are previously agreed upon. Then they execute the transaction on the Stock Exchange. Two brokerage houses are involved. The settlement of the operation is bilateral.
The crossover operation on the Stock Exchange is one in which the brokerage house has the two "tips", that is, the selling tip and the buying tip. Once the buyer and the seller agree, the cross is traded.
The third way to trade VEBONS is the regular market, similar to that of stocks. Buyers and sellers place orders in the Electronic System and when buying and selling orders of the same price are found, the transaction is carried out automatically. The settlement is done unilaterally.
The Role Of The Brokerage Firm
A brokerage firm that is a member of the Caracas Stock Exchange will only act in the negotiation of VEBONOS if one or more of the beneficiaries so decide. In this case, the beneficiary must transfer his VEBONOS from his subaccount in the Ministry of Finance to a subaccount dependent on the brokerage house's account in the Caja Venezolana de Valores and give an order or mandate to the brokerage house so that it go to the market.
The Vebono Transfer
After the purchase-sale operation is carried out in the Caracas Stock Exchange, this institution transmits the information electronically to the Venezuelan Securities Fund, which immediately transfers the title from one subaccount to another.
Transfer Of Funds
The Caracas Stock Exchange, once the transfer of the VEBONO in the Caja de Valores has been verified, orders the bank, through an electronic instruction, to debit and credit the associated accounts of the brokerage houses, the agreed amount (price of the transaction plus accrued interest) that the buying brokerage house pays to the selling brokerage house and this in turn must pay its client the corresponding amount after deducting the administrative expenses that may arise.
Face Value
It is the same nominal value of the title, set by the Ministry of Finance when depositing the Vebono in the Caja. The bonds are negotiated in a percentage of the nominal value, reason why the buyer will only pay this proportion plus the accrued interests of the coupon.
Effective Yield
It is the return actually earned in a year and the product of having invested at the same nominal rate a number of periods in that year. It assumes that at the end of a period the interest earned for the next period is capitalized. It is calculated using a formula.
Legal provision establishes that I do not have to pay taxes for the performance of my vebono or for the sale of it
As contemplated in the Law that authorizes the National Executive for the Contracting and Execution of Public Credit Operations during Fiscal Year 2000, published in the Official Gazette of the Republic of Venezuela No. 37,004 dated August 1, 2000, in its article 10, "the capital, interest and other remuneration received by creditors from operations authorized by this law, are exempt from national taxes, including those established in the Tax Stamp Law." Therefore, this investment is not taxed by Income Tax, for example (Guide of the Ministry of Finance)
The Price Of A Vebono
The price of the Vebono is that offered by investors in the market and will depend on their preferences and expectations and the existing liquidity, as well as the performance.
To determine the price calculation for investors, there are formulas that can be explained in the brokerage houses, based on the expected interest rate for each quarter. The formulas can be found on the Exchange's website.
Accrued Interest (ID)
Portion of interest not collected by the last holder of the title that will be paid by the buyer, who will deposit to the last holder and in cash the portions of interest accrued for the period in question (ID). The formula for calculating said interest (ID) will be the result of multiplying the amount corresponding to Coupon C by the portion resulting from the quotient between the days elapsed since the date of issue or last Coupon (Dt) and the number of days in the period Coupon (Dc).
Stock price
It is the price registered in an exchange when a securities negotiation is carried out. In the Stock Market, the prices of securities have rises and falls as a result of supply and demand.
Even Value, Premium Or Discount
Face value is the one that is registered in the bond (100%).
When the price is less than 100%, the bond is quoted at a Discount.
When the bond is quoted equal to the Face Value, it is Par Value.
When the bond is priced above 100% it is priced at Premium.
The Venezuelan Securities Fund
It is a company that has adopted the modality of an Anonymous Company of Authorized Capital, whose exclusive corporate purpose is the provision of services of deposit, custody, transfer, clearing and settlement of securities subject to public offering. The Caja's operation has been authorized by the National Securities Commission, a supervisory and control entity.
Special Type Obligations
State bonds, are obligations of a special type, by the subject that creates them, of the state Bank bonds and mortgage bonds.- They are obligations of a special type, by the subject that creates them, government bonds, bank bonds and covered bonds. mortgage.
- State bonus. The bonds and obligations of the State lose the character of executive titles, because against such a subject execution cannot be dispatched. For the rest, in terms of the fund they are not different from other obligations: financial bonds, mortgage bonds and savings bonds. These three classes of bonds are created by the institutions that their names indicate (financial bonds, by financial companies; mortgage bonds by mortgage credit companies, and savings bonds, by banks authorized to operate in deposit. saving); They are regulated in their specific aspect, in the General Law of Credit Institutions and Auxiliary Organizations, and are especially distinguished, in addition to the creator, by their specific guarantees. Financial companies,says article 26 of the General Law of Credit Institutions and Auxiliary Organizations, they will be authorized, among other things, to «issue (create) financial bonds with specific guarantee. This guarantee, called coverage, will be constituted by certain assets and credits, in a game of proportions, depending on the assets that make up the guarantee fund. In the case of pledge credits on merchandise, authorization credit or avio or refactionaries, state securities and securities created by prosperous companies (that is, those that have obtained profits in the last three years) the coverage may be up to 100% of the total amount of the bonds; if the coverage consists of securities created by companies that have not obtained profits in the last three years, provided they have been approved by the National Securities Commission,the guarantee may be up to 50% of the total value of the bonds; and in the case of credits granted directly to newly developed companies, or that do not meet the three-year prosperity requirement, the amount of coverage may be up to 30% of the total amount of the bonds. The securities that constitute the hedge must be kept separate by the debtor institution, and will form a special guarantee fund in favor of the bondholders. It is not a pledge guarantee, but a privilege of a special kind, in favor of the indicated holders. Mortgage bonds are obligations in charge of a mortgage credit company, which it creates by unilateral declaration of will; may have a maximum term of twenty years,and its coverage will consist of assets of the company consisting of mortgage loans in favor of the company, or in certificates and bonds created or guaranteed by other institutions of the same kind (art. 35 LGICOA). What has been said in relation to the nature of the coverage should be considered repeated. Mortgage bonds are perhaps the oldest securities in Mexican business life. The first mortgage bank was founded under a concession on March 21, 1882, and was authorized to create mortgage bonds. The bonds were «an instrument by means of which the bank seizes the capitals that seek definitive investment and delivers them to the entrepreneurs who need to use them for purposes that they only achieve in long terms. The mortgage bond had wide application in practice, and has been replaced by the mortgage certificate.Savings bonds must have as a specific guarantee a set of asset assets of the originating bank, distributed in a similar way to that established for financial bonds, in a complicated game of proportions (art. 19 LGICOA). Also for the hedging of savings bonds, what was said regarding the nature of the hedging of financial bonds should be considered applicable.
c) The mortgage bonds. Mortgage titles (bonds and cédulas) under Mexican law have their antecedents in German institutions and French practices. But you can be sure that the Mexican mortgage certificate has its own characteristics. Article 34 of the General Law of Credit Institutions and Auxiliary Organizations says that Mortgage Credit companies will be authorized to "guarantee the issuance of representative mortgage certificates." The creation mechanism is as follows: a person who has the disposition of a real estate, constitutes, by unilateral declaration of will that must be recorded in a notarial act, a mortgage loan at their expense, with a mortgage guarantee of the property.It is established in the minutes that the mortgage loan will be divided into as many portions as there are mortgage bonds created, and the respective portion of the mortgage loan will be incorporated in each of the bonds. In this way, mortgage credit, real estate by its nature, is atomized and incorporated into movable mercantile things, such as the titles of the cédulas. Thus, mortgage credit is highly mobile, which makes large capitals easily mobilizable, and which has given great application to the ID, which is considered the best investment value.The mortgage company or bank will intervene in the creation act, to to certify the existence and value of the guarantees and to provide its endorsement in each one of the certificates. Consequently, the bank has the quality of guarantor;but its situation as an intermediary between the mortgage debtor who created the certificates and the policyholder, has special profiles. It is constituted as an obligated common representative of the set of holders, and must watch over their interests. For greater security of the presumed policyholders, the National Banking Commission intervenes in each creation act, which monitors the existence and the due proportion of the value of the mortgage guarantee. The bondholders do not constitute an assembly, because the bank, as I have already said, is their obligated representative, and they have a collection action against it, due to the quality of the bank's guarantor. By paying the bank to the holders, it subrogates its rights to collect from the mortgage debtor. The actions derived from a mortgage certificate are of two natures:mortgage against the principal debtor, and direct exchange against the guarantor bank. This is clarified by the project for the new Commercial Code (art. 881). The cédulas will have a maximum maturity of twenty years (art. 38 LGICOA) and the incorporated rights will prescribe like those of the obligations: in three years the interest coupons, and in five the principal. The problem of the effects of the prescription arises, which is aggravated when, as usually happens, the mortgage debtor has delivered the value of the bonds to the bank, and said value has not been claimed by the holders. The prescription takes advantage of the mortgage debtor who created the certificate, even in the event that the bank has delivered the amount of the certificates, in which case, when the prescription occurs, the bank must return such amount to the debtor.The bank does not take advantage of the prescription because its role is that of an intermediary between the mortgage debtor and the holders of the bonds, and when it receives the amount of these, it does not receive it in payment for itself but to pay on behalf of the debtor to the holder of the bond. Title. Consequently, it works on behalf of the debtor and must be equated with the agent for the purposes of prescription. And like the agent, he cannot prescribe for himself, nor appropriate the monies he has received to make the payment of the bonds to third parties on behalf of the mortgage debtor. The foregoing must be understood in accordance with current law. But it is appropriate to note that, due to the nature of the securities (market securities, for obtaining and mobilizing capital) the prescription of the certificates should have a longer term,and it should not benefit either the debtor or the intermediary bank, which have already obtained their benefit with the creation and placement of the securities, but rather the Public Assistance. This idea, coming from the French system, has been embraced by the project for the New Commercial Code: Obligations convertible into shares. Some countries such as Germany (1937 Law), France (1953 Decree), and Spain (1951 Public Limited Companies Law) have regulated the special type of obligations that entitle their holders to convert their titles into shares and convert them, therefore, in shareholders of the company. By decree published on December 29, 1962, article 210 bis was added to the General Law of Credit Securities and Operations (LGTODC), by means of which the creation of Convertible Bonds into Action is regulated.The new article says: «ARTICLE 210 bis.-Limited companies that intend to issue bonds convertible into shares will be subject to the following requirements:
- They must take the pertinent measures to have treasury shares for the amount required by the concession. For the purposes of the previous point, the provisions of article 132 of the General Law of Commercial Companies shall not be applicable.
- The issuance agreement will establish the term within which, from the date on which the obligations are placed, the conversion right must be exercised.
- Convertible bonds may not be placed below par. The issuance and placement expenses of the bonds will be amortized during the term of the bonds. The conversion of the bonds into shares will always be made by request submitted by the bondholders, within the term indicated in the issuance agreement. issuance of convertible bonds, the issuer may not take any agreement that damages the rights of the bondholders derived from the bases established for the conversion.
- Whenever use is made of the designation: authorized capital, it must be accompanied by the words' for conversion of obligations into shares.
There are times when Corporations need to raise capital to increase their operations. The most widely used means in practice are capital increases, with the creation of new shares, or the creation of obligations in charge of the company, as we have already studied.
The creation of obligations means a charge for the company, in the sense that it will have to pay, whatever the results of the corporate business, the interests to the holders of the obligations. For this reason, it is often the case, when the company finds itself in a difficult situation, to propose to its bondholders the conversion of their credits into capital. This conversion is operated by exchanging obligations for shares, and in this way the capital is increased, and the liabilities of the company are reduced. And the bondholders are converted into partners.
This operation does not actually have any difficulty: it is an agreement between bondholders and a company and a capital increase that is covered with the credit incorporated into the bonds, but it may be the case that in another situation of the public limited companies, they are developing their business profitably, and offer the holders of the obligations the right to agree these into shares. Bondholders will know when, given the course of business, it is more convenient for them, due to the higher productivity offered by the shares, to convert their credits into equity. It will be a problem of speculation. This is the assumption that the article 210 bis that we have transcribed confronts.
The company in question will create, by unilateral declaration of will, obligations that it will offer to the public. The bondholder will have, in addition to the assurance that the fixed income of his obligation will be covered, the assurance that if the company does good business and it is convenient for him to become a partner, he will be able to do so by exchanging his obligation.
It is clear that, in these cases of capital increase, the old shareholders will not be entitled to the same, because the capital increase is intended to be covered with the credit incorporated in the obligations.
In accordance with article 220 bis, third and fifth sections, the right of conversion will always be a right that corresponds to the bondholder, who may not be obliged by the company to carry out the conversion.
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