Distressed Divestitures in Mexico: Strategies for Unlocking Value in Troubled Assets

Steve Katz  00:17

Hi everybody, and thanks for listening in on our Hilco Global Smarter Perspective podcasts. I’m your host, Steve Katz, and we’re glad you could tune in. Today, we’re going to be discussing insights and best practices for businesses with turnaround needs in the Mexico market once again. And this is part five in a really interesting series we’ve been doing on how to assist companies with the business presence in Mexico. And for those discussions, once again, we have our guest Jan René Aguirre, who’s Director of Business Development and Turnaround Strategy at Hilco Global Mexico. So, Jan, we’re glad to have you back on the podcast.

Jan René Aguirre  00:53

Great to be back here again, Steve, really looking forward to this podcast.

Steve Katz  00:58

Yeah, us as well. And as I said, this is our fifth conversation already designed to help inform companies that are currently nearshoring in Mexico or those who are at least considering doing so. And so far, we’ve covered some of the general pitfalls that companies run into when nearshoring, as well as the intricacies involved in Mergers and Acquisition activities and suggested practices for Asset Management turnarounds, as well as some other select topics. But today we’re going to be talking about something new, and that’s distressed divestitures. So to get us started, Jan, can you first explain what distressed divestitures are and then talk a little bit about the complexities of executing them in Mexico?

Jan René Aguirre  01:40

Thanks, Steve, Sure, I mean, let’s begin by defining what we mean by distressed divestitures. In essence, a distressed divestiture occurs when a company, usually under financial strain, is compelled to sell off their assets or divisions quickly, often at a potential big discount in order to raise liquidity or stop further losses. Now, of course, this is not ideal situations for any company, no? As you can imagine. But the reality, Steve, is that if you’re in business long enough, you may encounter circumstances where this becomes necessary.

Steve Katz  02:19

Absolutely.

Jan René Aguirre  02:19

At the end of the day, what matters most is how swiftly and strategically you address the situation, because that’s how you recover the most value. Now diving into to the process, unlike a standard asset sale, where there is the luxury of time to negotiate terms distressed divestitures are basically driven by two key forces, urgency and complexity. When we talk about urgency, that company is typically under an immense pressure to act fast to prevent deeper financial distress. There is no time to wait for the perfect buyer or the perfect market conditions. Now when we talk about the factor of complexity, these situations are far from straightforward and often involve multiple layers of complication. We can start with, for example, access issues, no? The company may not have immediate control over its own assets, at some point, whether due to legal restrictions or physical barriers. Also, you may face landlord disputes, if the assets are located on the lease property disputes over back or due rents or lease agreements can severely, basically limit what you can sold and if you can get access to your assets. Another factor might be that you know the labor union involvement. Unions, when there’s usually payments due, they may block access or even delay liquidation until outstanding wages and settlements are resolved. So these type of complications can severely affect the value of your assets and can also delay the whole process of your asset sales. So basically, if you or your business is navigating a similar situation, or if you anticipate facing these challenges in the near future, please stick around. This podcast definitely is designed to dive deep into these complexities and help you.

Steve Katz  04:27

That’s why we’re here, exactly. All right, Jan, so let’s, let’s take it to the next level here. When and why would it be in a company’s best interest, based on what you’ve just described, to divest distressed assets? And is there a specific optimal window of opportunity that a company should look for? And lastly, what asset classes would be most typically involved in steps like that?

Jan René Aguirre  04:54

Okay great, great question, Steve. Um, I mean, there are several moments when divesting distressed assets becomes the most logical and beneficial course of action for a company. I don’t want to dive, like very deep into these situations, but let’s just break down some of the most common reasons why we can encounter such situations, right? So the first one would be insolvency. Usually it’s when a company is in the in the brink of bankruptcy. The second one would be operational inefficiencies. Sometimes certain divisions of assets are simply underperforming and are dragging down the the overall profitability of the company. And in these cases, it’s often more strategic to divest those assets, rather than to continue to put resources into these areas that aren’t yielding any returns. Another one would be strategic focus. Often companies go through restructuring or need to concentrate on their core operations and divesting non essential assets, frees up some capital and management resources to focus on what’s truly critical to that business and the business opportunities. And usually this is we’ve we’ve gotten a few cases regarding spin offs and carve outs in Mexico. If you want to dive or get the perspective of of maybe ABL lenders or leasing companies, then we would definitely need to address missed payments or default payments. Usually, these usually arise when when a client defaults on payment schedules or lease agreements. And very particular in these cases, repossessing and sending these assets becomes necessary to recall to basically recover the outstanding balance. Now, when it comes to timing, finding the, as you call it, window of optimal opportunity to basically take action that’ll depend on the degree of the distress. Ideally, what we recommend is that the earlier the company, or in this case, lenders or ABL lenders, the earlier they act, the earlier they can identify the client’s distress, the better position they will be to maximize the value of that divestiture. I don’t know. I don’t know if that makes sense.

Steve Katz  07:18

Yeah, no, makes makes complete sense. Obviously, the the the earlier in you are in most of most of these distressed situations, the better. So.

Jan René Aguirre  07:26

Perfect, exactly. Now, you also asked about the asset classes or type of assets that we can usually find in these kind of situations. We’re talking about, you know, real estate, machinery equipment, inventory. Now in the context of Mexico, specifically, Steve, distressed divestitures often involve, you know, manufacturing plants, real estate, machinery equipment, inventory, as mentioned. And we regularly see foreign companies, especially U.S. based ones needing to divest these these assets quickly due to either local regulatory issues, labor disputes, or basically, simply on the performing operations that no longer align with their with their corporate strategy. Now, Steve, on the other hand, it’s it’s very important for me to have a clear message to the audience, to these leasing companies, or ABL lenders that somehow ended with a collateral in Mexico. We found some cases where, you know, an ABL lender in the states basically did an agreement with an American company, but the assets per se are located in the American OpCo and manufacturing facility in Mexico. So having their collateral in Mexico, they face a different set of challenges, and specifically the biggest challenge that we have encountered is how these American based companies, which did an agreement with an American holding company and have a Mexican OpCo. How they get access to their assets, and how do they repossess their assets? So this definitely is a challenge, and we should definitely dive into that later in the podcast.

Steve Katz  09:21

Sounds good. Good, good, good clarification point there. You know, as I’m listening to you, I would imagine there must be some pretty significant legal and regulatory hurdles, as well as maybe cross border considerations that come into play with these type of divestitures. Can you talk a little bit about that?

Jan René Aguirre  09:41

Sure. I mean, I just talked to, I mean, one before in my last sentence, and because I was sure that that’s going to be your next question. And I guess the first item would be labor laws. And I might get a little bit technical here, but regarding. the labor law, there have been some important changes in the recent years. Steve And as part of the 2019 labor reform, there’s been a restructuring in how labor unions, or what we call sindicatos, operate, particularly in the manufacturing sector. Now, usually, the union leadership has to be more democratically elected, and this shift has given manufacturing workers more bargaining power. As a result, these changes have added a layer of complexity to dealing with labor related disputes during these distressed divestitures, and especially in highly unionized industries like we mentioned, manufacturing, but specifically we can talk about the automotive, electronics, manufacturing and other manufacturing related niches. No? So this is definitely a very tough cookie to handle. Now we also have lease agreement issues, usually when when the assets are located at facilities that are leased and when a situation is distressed, usually there’s rents due so when assets are located on a list property, the relationship with the landlord becomes critical. It’s not uncommon for companies in distress to owe back rent or to be involved in disputes over the lease itself, and often the landlord may assert or lien over the assets until their claims are settled. So just to, just to drop some situations that can be also involved with with lease agreements, early terminations of leases, associated penalties, property giveback process and further negotiating strategies that require a full, thorough strategy to avoid higher or potential penalties. And then we can also talk about the assets itself, where there’s liens or creditor claims against those assets. So before divesting any assets, it’s crucial to resolve any existing liens or creditor claims that there can be attached to those assets. And this can vary depending on the asset type. To give you two clear examples for real estate, there is what we called the CLG, which in Mexico it’s called Certificado de Libertad de Gravamen, which confirms whether the property is free of encumbrances. Any liens on the property must be declared before the sale or trasfer. You should have access to these kind of certificates.

Steve Katz  12:33

Sure.

Jan René Aguirre  12:34

And when we talk about machinery and equipment or inventory, there is the RUG certificate, which is Registro Único de Garantías Mobiliarias Register. So this type of knowledge and claims attached to these assets for sure need to be attended before you design a strategy to divest these assets.

Steve Katz  12:55

Okay, great, great info. With kind of taking what you just said to the next step, what other types of challenges do U.S. financial entities and these companies that are in situation where they have to undergo these direct divestitures face in Mexico? What are the what are the toughest challenges?

Jan René Aguirre  13:15

I mean again, and I want to emphasize in this the first one would be, Steve, the access rights. Even if a U.S. entity technically owns the assets, they may not have physical access to them. And this is especially problematic when assets are located on a lease property, as mentioned before, where the landlord is owed back rent. And in some more complex cases, employees or labor unions may be physically blocking access, no?, because of unpaid wages or severance. And essentially, it can result in a stalemate where the assets are locked down and nothing can move forward until those issues are resolved. That takes us to the second point that I was that I have on a priority list, which is unresolved employee claims. As mentioned priorly, Mexico, labor laws are highly protective of employees, particularly in the cases of plant closures or layoffs, and employees and unions often refuse to cooperate until every last bit of severance, pay, back pay, back wages, and benefits are accounted for. This can make it nearly impossible to liquidate or transfer assets before settling these claims. And, of course, the longer this drags on, the more the assets themselves depreciate, and sometimes to the point that they become unusable. Third, again, a little bit connected to the to the two prior points, lease agreements. Unresolved lease agreements can be a major sticking point, Steve. Often or very, quite often, U.S. entities owe back rent or face penalties for early termination and until those disputes are resolved, they can’t access or sell the assets. Additionally, to this point, the property may be in need of substantial repairs or restorations to comply with giveback terms, which adds even more cost and more delay to the to the situation. And finally, there’s a peculiarity with the status of the assets, particularly when it comes to import or importations. So it’s very important to to identify the condition of these assets. Assets can be imported under temporary or permanent import importation regimes, and these status carries significant tax implications, no? So it’s important to highlight this situation and just be very careful with with how you go through the strategy of divesting these assets, because the implications of of tax could be relevant. In all of these cases, Steve, what I can tell you is, at least from from, from our point of view, is Hilco doesn’t just manage the process or the processes. We often take full ownership of the assets through sale or liquidation agreements, completely removing the burden from the original owner. We like to call ourselves like the one stop solutions for these kind of divestitures. We handle the negotiations, resolve the underlying issues, and make sure that the U.S. entity basically can focus on its core business without being bogged down by these distressed assets in Mexico. I can assure you that from the last couple of years of experience it’s not an easy process, but this is what we this is basically what we do. No? We simplify it, we unlock value, and take the weight off our clients’ shoulders.

Steve Katz  16:54

I think that’s what companies are looking for, and financial institutions are looking for when they find themselves in these types of situations, is you know, local expert who understands that landscaping and really, you know, take control for them. So that that leads me to my next point or question that I would have for you, which is now based on all the things you just touched on there, maybe you could talk specifically about the best practices that you know an expert such as yourself would recommend to help ensure a successful distress divestiture in the face of those types of challenges.

Jan René Aguirre  17:32

Sure, Steve. I mean, we promised an entertaining podcast. There’s a lot of information.

Steve Katz  17:39

There is a lot, but it’s good. I think it’s you know, I think it’s interesting.

Jan René Aguirre  17:41

Regarding this topic, and for the benefit of our audience, your audience, we might do an article on this so you can dive into more specifics and dive in deeper detail. But let me break down the key steps that we found crucial in order to have a successful diverstiture, and the first one would be understanding stakeholders and their leverage. This is really the foundation of untangling a situation on the most efficient manner. The most crucial or critical step is identifying and understanding all the stakeholders involved, both directly and indirectly. Sometimes you’re not just dealing with a seller and a buyer in these situations. There are creditors who might have liens on the assets, landlords holding leverage through lease agreements, employees or unions with legal claims, and even local or federal tax authorities. Each of these parties has its own leverage, and the key to a smooth process is understanding who holds the cards at any given moment.

Steve Katz  18:50

Yeah.

Jan René Aguirre  18:50

So, I mean, I strongly recommend mapping out all these stakeholders and their leverage. The second would be doing an holistic asset approach, asset valuation approach. I mean, we talked about this in another of your podcast, but valuation isn’t just about putting a market price on an equipment or real estate. It’s about factoring in all the complications, like outstanding liens, operational condition of the business, and even the cost of living with labor disputes or tax liabilities. So make sure that you have an holistic approach to the value of these assets. The third one would be, just make sure that you navigate all legal and compliance complexities. We have recommended in the past that you find a local partner to help you out with labor laws, tax obligations, lease agreements. If you are not aware or you don’t have an expert, a local expert, this can create significant roadblocks.

Steve Katz  19:55

Yeah, that’s understandable. Yeah.

Jan René Aguirre  19:58

And finally, just make sure, Steve, that you’re very strategic on your negotiation strategy. Distress doesn’t have to mean desperate. There are always multiple levers to pull during a negotiation. The goal is to create value for all parties involved. Buyers at the end of the day need to feel that they’re getting value. But that doesn’t mean that the seller has to give its assets away for free. I found that creative deal structures like deferred payments, earn out models, or even alternative financing arrangements such as leasebacks can help maximize value for both sides, and sometimes it’s just about giving the buyer confidence that they’re just not inheriting non resolve liabilities. So, in summary, a successful distress divestiture isn’t just about liquidating assets. It’s about understanding and managing the interest of all stakeholders.

Steve Katz  20:51

Yeah, I think that’s very, very helpful information. All right, we’re getting, we’re getting towards the end here I just, I’m hoping to wrap us up you can discuss, in some detail, what are the consequences of delaying action in a distressed divestiture. So if someone doesn’t do what we said at the outset, doesn’t get in there early, if you, take your time, or you’re not sure, what’s the potential downside of that?

Jan René Aguirre  21:20

I’m very glad that you brought that up as your last question, Steve, and I’ll make sure that I try to address it as swiftly and as quickly as possible. But that’s a crucial point, and it’s one that often gets overlooked. The reality is that in distressed situations time becomes your biggest enemy. When companies who are in financial entities delay taking action, they face a number of escalating risks, and the longer they wait, the more those risks compound. But let me try to break it down to you and summarize it. So I guess the first problem would be asset depreciation and devaluation. So the longer the distressed assets sit aside and sit idle, the more they lose value. No? Whether it’s machinery rusting away, real estate falling into despair, or inventory becoming obsolete. The second would be escalating costs. Inaction always comes with a cost. For example, unresolved lease agreements lead to accumulating penalties. Unpaid wages can turn into lawsuits or strikes and tax liabilities grow with interest and fines. The third one would be stakeholder aggravation. Delays often make things worse with key stakeholders, like labor unions, creditors, landlords. Landlords grow increasingly adversial as issues drag on. Their patience wears thin and their willingness to negotiate diminishes. You can also have lost market opportunities. I’ve seen many, many situations where, where these opportunities are lost given the fact that they acted 2,3,4 months later. Timing, I would say that timing isn’t just about the asset condition. It’s also about market dynamics. And every industry has its windows of opportunity, and distressed sales are no different. So if you miss that window, whether due to market shift, buyer fatigue, or broader economic changes, you’re likely to see reduced interest and lower offers. And finally, I mean, at the end of the day, you have reputational damage. One of the most or more subtle but often overlooked consequences of delay is reputational damage. When a company or a financial entity delays action, it signals to to the market, to the buyer, that basically, there may be deeper problems that they’re willing to admit. So I mean, what I would really emphasize at the end of the day, Steve is one of my key takeaways here is simple. Speed matters. The faster you act, the more options you have, the stronger your negotiation position becomes, and the more value you can recover. Delaying action can only compound the problems and diminish value, turning manageable solutions into potential disasters. So thank you, Steve, again, for this opportunity to address your audience regarding these complications. And I just want to wrap up by saying that at Hilco Global Mexico, our focus is on acting decisively. We step in quickly, we assess the full situation and work to unlock value before time and circumstances erode any further to our clients. So I hope, I really hope, this podcast gave a little bit of light to your audience regarding this topic, and hopefully we get to help them out at some point.

Steve Katz  24:58

Yeah. Fantastic. Listen, I know we did cover quite a bit of information. It is a complex topic, but I think if I had to summarize it, I would just say, you know, businesses need to get in there early, identify the issue, act right away, and make sure they find a knowledgeable partner. So I think those are really the critical takeaways. And I’d like to thank you again, Jan, for your time and for all the detail that you provided. And for those who want to reach out to you for more information, how can they get in touch with you?

Jan René Aguirre  25:29

Sure, Steve, I mean, thanks once again for this opportunity. I can be reached by email at J, A, G, U, I double R, E, at Hilcoglobal.mx, or also just make sure to search for me on LinkedIn and send me a message, and I’ll be happy to connect and reach out to you.

Steve Katz  25:50

Perfect. Perfect. Well, we look forward to another discussion with you sometime soon. Listeners, we hope that the Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts like Jan at Hilco global.com/smarter-perspectives, until next time, for Hilco Global, I’m Steve Katz.