Circular 1237: Credit Support Program for States and Municipalities

Mexico, D.F., June 1, 1995.
Circular No. 1237

SUBJECT: CREDIT SUPPORT PROGRAM FOR STATES AND MUNICIPALITIES. Applicable provisions for loan restructurings in Investment Units (UDIs) and their impact on trusts.

TO MULTIPLE BANKING INSTITUTIONS:
In relation to the Agreement entered into between the Secretariat of Finance and Public Credit and the Association of Banks of Mexico, by which the Credit Support Program for States and Municipalities (hereinafter the Program) was created, which is annexed to this Circular to form part of it, this National Banking and Securities Commission, based on articles 99 of the Credit Institutions Law and 4, fraction III, of the National Banking and Securities Commission Law, makes known to these institutions provisions applicable to the restructurings of loans in UDIs and their impact on trusts, as indicated in the Program, their accounting registration in the settler bank and in the trusts, the disclosure of the corresponding financial information for these operations, and the pertinent precautions for the effective achievement of the Program's objectives.

1. PROVISIONS APPLICABLE TO THE TRUSTOR INSTITUTION.

1.1 In the trusts constituted in accordance with the characteristics established by the Program, only loans owed by States and Municipalities and their parastatal entities, which are registered with the Secretariat of Finance and Public Credit as of March 31, 1995, restructured, and denominated in UDIs by August 31 of this year at the latest, may be affected.
This National Banking and Securities Commission will grant extensions to the aforementioned deadline only in cases where institutions register significant progress in the restructurings during said period.

1.2 The accounting registration of the loans that are restructured and affected to the corresponding trust, of the two that comprise the Program, will be as follows:

1.2.1 Cancellation of the portfolio being restructured in the bank's assets.
It will be for the amount of the total portfolio that meets the requirements mentioned in the preceding paragraph 1.1, added only by the accrued but uncollected interest and deducted by the early amortizations that the participating entities have agreed with the bank, regarding the portfolio being restructured from the second half of this year, by 10%, 20% or 30% of the outstanding balance at the time of restructuring, with a credit to the accounts of Group 13 "LOAN PORTFOLIO", in which the loans and interest debts subject to the trust impact are registered.

1.2.2 Registration of government bonds.
The registration of investments linked to the Program will be made in account 1201.- "GOVERNMENT SECURITIES", subaccount 120115.- "Government Bonds Credit Support Program for States and Municipalities".
This subaccount will have the sub-subaccounts 01.- "Acquisition Value", in which the entry of the bonds at their acquisition value will be registered, and 02.- "COLLECTED INTERESTS", subaccount 520148.- "For Government Bonds Program UDIs". The capitalization of interests will be monthly. The investment in government bonds will be equivalent to 100% of the amount of the restructured loans transferred to the trust.

1.2.3 Registration of trusts in the bank's accounting.
It will be carried out in UDIs in accounts 6229 "TRUSTS CREDIT SUPPORT PROGRAM FOR STATES AND MUNICIPALITIES, UDIs" and its corresponding creditor account 6529 "TRUSTORS CREDIT SUPPORT PROGRAM FOR STATES AND MUNICIPALITIES, UDIs".
The first will have the following subaccounts:
01 "Option 1.- 8 years with 2 years grace period" 02 "Option 2.- 5 years without grace period"

The balances of these controlling bank accounts and subaccounts must invariably coincide with those of the special accounting records that must be opened for each trust.

1.2.4 Recovery of administrative expenses.
As a concept of recovery of administrative expenses, the trust will pay the bank monthly an amount equivalent to its financial margin, taking into consideration the different active rates established in the Program, deducted by ½ percentage point, calculated on the outstanding balances of the restructured loan portfolio. The registration will be made under the accrual criterion monthly in account 5207.- "RECOVERIES", subaccount 07.- "Recovery of administrative expenses", sub-subaccount 01.- "Trusts. Credit Support Program for States and Municipalities".

1.3 Amortizations and early repayments of principal.
The liquidity generated in the trusts from resources coming from portfolio amortizations and/or early repayments of principal will be applied to settle the liability owed by the trusts constituted by "UDIS TRUST VALUES". Likewise, collections coming from interests, in the part corresponding to the funding cost, will be applied to pay trust liabilities, provided that it has liquidity, once administrative expenses for its management have been covered. The Federal Government, in turn, will early amortize government bonds of the program that appear in the bank's assets, for the amount equivalent to the resources received.

1.4 Withdrawal of excesses in the trusts.
The withdrawal of excesses in the profit margin of the trusts, which in case authorizes the National Banking and Securities Commission, will be registered by crediting the creditor income account 5234 "WITHDRAWAL OF EXCESSES IN THE PROFIT MARGIN STATES AND MUNICIPALITIES PROGRAM", against a cash account.

2. ACCOUNTING GUIDELINES FOR UDIs TRUSTS.

For the benefit of uniformity in the accounting of operations in the trusts instituted in accordance with the Credit Support Program for States and Municipalities, these institutions will observe the following guidelines:

2.1 Registration procedures for operations involving UDIs and new pesos.
The accounting of operations carried out in UDIs will be done precisely in that unit of account. To facilitate the accounting of those that simultaneously involve UDIs and new pesos, they will use a mechanism similar to the "buy-sell system" for foreign currency operations, opening for this purpose the following bridge accounts:
CONTROL OF UDIs OPERATIONS
CONTROL OF NEW PESOS OPERATIONS

2.2 Entry of the restructured loan portfolio in UDIs.
By the transfer of 100% of the total portfolio as of March 31, 1995, deducted by the early amortizations that the participating entities have agreed with the bank for 10%, 20% or 30% of the balance at the time of its restructuring, it will be charged to the asset account "UDIs LOAN PORTFOLIO PROGRAM".

2.3 Funding of the restructured portfolio transferred by the bank to the trust.
The trust will issue fiduciary values denominated in UDIs at a rate of 6% annually, for the equivalent to 100% of the restructured portfolio, determined as established in point 2.2 above, which it will register in its liability in the account "UDIs TRUST VALUES". This will have the following subaccounts: 01 "Nominal Value" and 02 "Capitalized Interests", affecting the latter monthly for the interests that accrue, charged to the debtor income account "ACCrued INTERESTS ON UDIs TRUST VALUES".

2.4 Payment to the bank for administrative expenses.
For this concept, monthly an amount equal to the financial margin of the trust will be paid to the bank, deducted by ½ percentage point, calculated on the outstanding balances of the loan portfolio affected by the Program, so each month the amount accrued will be charged to the debtor income account "RECOVERY OF ADMINISTRATIVE EXPENSES TO THE TRUSTOR".

2.5 Investment of trust liquidity.
When this is generated for any concept, it will be invested in securities issued by the Federal Government denominated in UDIs at a rate of 6% annually.
This investment will be registered at acquisition cost and affected by the monthly capitalization of interests in the account "GOVERNMENT SECURITIES UDIs", which will have as subaccount 01.- "Acquisition Cost" and 02.- "Capitalized Interests". The interests that accrue will be credited to the creditor income account "ACCrued INTERESTS ON GOVERNMENT SECURITIES UDIs". The financial authorities will review the accumulated amount of these instruments and, according to the evolution of the portfolio, will authorize, if applicable, their partial or total withdrawal.

2.6 Interest on the loan portfolio.
Based on what has accrued, the interests will be registered in the asset account "ACCrued INTERESTS ON LOANS AND CREDITS UDIs".

2.7 Amortizations and early repayments of principal.
The liquidity that is generated in the trusts by concept of portfolio amortizations as well as by concept of early repayments, will be destined to the early repayment of the principal of the liability owed by the trust constituted by "UDIs TRUST VALUES". If there is liquidity, once administrative expenses have been covered for the bank, the accrued interests coming from the principal of the portfolio in the part corresponding to the funding cost, will be used to pay liabilities owed by the trust. At the moment when the trust settles the fiduciary values and/or their corresponding interests, the Federal Government will in turn redeem early, up to the amount of the resources received, the government bonds affected by the program.

2.8 Amortization of the principal of the loans.
In order to ensure that the amortization of the principal of the loans is distributed adequately during the period established for its redemption, monthly amortizations of the principal in equivalent amounts, at minimum those resulting from applying the annuity method or the linear amortization calculation, must be agreed upon.

2.9 Withdrawal of the profit margin.
At the end of each year, the PROFIT MARGIN (financial margin minus recovery of administrative expenses) obtained during the period will be evaluated. In case that this margin is positive, a request may be made to the National Banking and Securities Commission for the release of these resources in favor of credit institutions, charged to the trust's equity.

2.10 Preparation of financial statements.
For purposes of formulation of monthly and year-end financial statements, the balances of the accounts denominated in UDIs must be valued in national pesos, at the value in national currency of the UDI that determines the Bank of Mexico based on the variation of the National Consumer Price Index and publishes in the Official Gazette of the Federation for the last day of the month in question.

2.11 Supplementary accounting regulations.
In what is not provided for in the preceding provisions relating to the particular accounting of the trusts, the regulations, accounting practices, and criteria that apply to credit institutions will be followed.

3. RULES FOR DISCLOSURE OF FINANCIAL INFORMATION.

With regard to rules for the disclosure of financial information corresponding to these operations, both as it applies to the institutions and to the particular accounting of the trusts, this Commission will make them known in a subsequent circular.

4. TRUST CONTRACTS.

The trust contracts that are entered into in accordance with the Program will be presented to this Commission within 5 business days following the date of their signing.

5. COMPLIANCE WITH THE AGREEMENT.

Institutions that assume the operational facilities derived from the Program must comply with the regulations issued for this effect by the financial authorities and contained in this Circular.

5.1 This Commission will supervise that institutions apply the financial margins established in the loan restructurings, without allowing them to exceed the maximum interest rates agreed upon in the Agreement between the Secretariat of Finance and Public Credit and the Association of Banks of Mexico.

5.2 When exercising its inspection and surveillance powers, if the Commission knows and proves deviations in the execution of the Program, it may proceed to:

5.2.1 Fix a higher capitalization index for the portfolio of securities constituted by Government Bonds affected by the Credit Support Program for States and Municipalities.

5.2.2 Order the reversal of operations that have been carried out irregularly, which will entail the reincorporation of the restructured loans to the bank's assets, precisely in UDIs; early repayment of the UDIs fiduciary values and early payment of the Government Bonds affected by the Credit Support Program for States and Municipalities, received when affecting the portfolio in trust.

5.2.3 Recommend to the Federal Government to modify upwards the interest rate that accrues on the financing granted to the trusts.

5.2.4 Order the extinction of the trust in question and the consequent reversal of the operations in the terms and with the effects indicated in paragraph 5.2.2.

6. APPENDICES.

The pages of the chart of accounts that are affected by the modifications established in paragraph 1 "PROVISIONS APPLICABLE TO THE TRUSTOR INSTITUTION" are annexed.

7. TRANSITORY PROVISION.

The restructurings may be carried out even if the government bonds and fiduciary values that support the Program have not been issued, for which a transitory mechanism must be created for the registration in the terms of this Circular, of the amounts to be restructured determined in strict adherence to the reference Program.