"Prime Certification: the stock market within reach of companies". Interview with Jorge Adrián Velázquez Ochoa, Director of Innovation and New Businesses at Bancomext

For the section "Testimonios" at the Comercio Exterior magazine of BANCOMEXT (New Age, Number 20, October - December 2019, pp. 27-30), I interviewed the director of Innovation and New Business of BANCOMEXT about the PRIME certification, instrument created to encourage more Mexican companies to securitize.


PRIME CERTIFICATION: THE STOCK MARKET WITHIN REACH OF COMPANIES

By César Guerrero


The Prime Certification is an innovative Bancomext product —now Nacional Financiera joining in— that supports companies in their goal to finance their productive projects through the stock market. It is comprehensive support that includes financing, consultancy, and training for companies to adopt corporate governance best practices, improve their financial profile, and take a decisive step in their aspirations to go public. In an interview with Comercio Exterior, Jorge Velázquez, Director of Innovation and New Businesses at Bancomext, explains the scope and benefit of this innovative company support program that was named financial product of the year by Alide in 2019.

What are the Prime Certification Program’s main goals?
The country’s development needs all production programs to find a viable financing alternative. Thus, Bancomext supports companies that participate directly and indirectly in the country’s foreign trade and also, contributes in strengthening other sources of business financing. The Prime Certification is part of this second line of institutional action. It is a support program for companies that seek to go public.

Different international comparisons highlight the need to promote a more extensive use of the stock market. In Mexico, its capitalization value is equivalent to 35% of GDP, less than half of that recorded by countries with a similar level of development to ours, such as Chile (79%) and India (74%), and quite far from the OEC average (107%). Companies in the market also show a lag: in the last ten years the number in Mexico has fluctuated between 140 and 150 companies, when in Chile it amounts to 310 and in India 7,630. We must not forget that 45% of the value of the Mexican stock market is concentrated in seven companies and that only 4% of family-run companies in Mexico go past the third generation. As can be seem, there is an important task ahead.

The Prime Certification is the response of renowned financial institutions in the country, that join efforts so that the stock market activity in the country reaches similar levels to those of the most advanced countries.

What are the program’s main features?
The Prime Certification is a Bancomext program that supports companies to prepare to get financing through the stock market. It does so in a comprehensive manner, offering them financing, training, and consultancy, in collaboration with the Mexican Stock Exchange (BMV); the Mexican Association of Securities Intermediaries (AMIB); the new Institutional Stock Exchange (BIVA); and a group of renowned consulting firms specialized in corporate governance. We launched it in 2018 and started operating it at the end of that year.

The Prime Certification is the first step in terms of corporate governance. The diploma has an authentication hologram and a single registration number that distinguishes companies that have the corporate practices required to access financing via the stock market. This is given by the Prime Certificate Committee, which is conformed by the BMV, the AMIB, Bancomext and —soon— BIVA, to the companies that satisfactorily meet the criteria established in the Corporate Governance Recommendation Guide to Obtain the Prime Certification.

This guide follows corporate governance practices issued by the Business Coordinating Council. To be created, a whole diagnosis was made —especially by the AMIB— to select a set of basic recommendations that companies must incorporate to have robust corporate governance. The certification is a registered trademark in the Mexican Institute of Industrial Property (IMPI), together with its graphic seal.

Why is it important to have robust corporate governance?
Robust corporate government favors the professional management of companies and their permanence over time, by defining areas and procedures established in operational and regulatory manuals; with compliance measures that ensure decision making in accordance with administrative, social responsibility and environmental care best practices. They have a robust board of directors that, through the diversity of value judgments, with the participation of independent directors, enriches and provides objectivity to decision making. For financial institutions, the fact that a company has implemented corporate governance, thus professionalizing its processes, makes the analysis easier and drives credibility in its processes and decision making. Nationally, it helps have more and better companies, which translates to more and better jobs.

What institutions participate in this program?
It started with the BMV and AMIB, and has permeated to the business and financial sectors. Today, it includes the Institutional Stock Exchange (BIVA), giving companies the choice of two stock markets. While Bancomext has the calling of supporting companies in the context of foreign trade and in certain strategic sectors, the recent inclusion of Nacional Financiera (Nafin) broadens the program’s coverage.

Since Nafin is a development bank for the domestic market, it expands the “Prime Certification” ecosystem that we have been building. Any of these institutions could have created their own program but instead, they wanted to contribute to the development of a robust program.

Likewise, the numerous firms (about twelve) are an essential ally to help companies crystallize the strategic governance plans that institutionalize and professionalize them. In this group of firms, you will find the largest and best known, but also those specialized in corporate governance. In terms of accessibility, they offer companies a wide range of options.

What type of companies can participate in the Prime Certification program?
The program is totally open to companies —whether they are Bancomext’s customers or not— that need financing of three million dollars and up, since we believe that this amount is attractive to the stock market. These are companies that must comply with the Bancomext or Nafin mandate, which covers a very broad spectrum, since both sectors linked to foreign trade and the domestic market are represented. Among the companies with which we have worked closely, there are all kinds of profiles: some were not even aware that they were very close to consolidating corporate governance; others are very large companies that find much greater demand every time they go to other markets; and there are even some surprises, those that have achieved sales of billions of pesos and that still work with a family profile.

In any case, the owner of the company is the person who decides to implement corporate governance. Once the owner is convinced that adopting these practices will give the company greater possibilities to transcend the new generations —the owner’s legacy— participation in the Prime certification process can be formalized.

Which route must be followed to join the program?
The first step is for the company to get to know the firms participating in the program and to decide which one they want to work with. The chosen firm will then decide on what it needs to reach the corporate governance standard established to get the Prime certification, and will propose a plan of action.

The program covers the cost of this institutionalization process. Our promoters are loan organizers who evaluate the financial situation of the company and its ability to pay. Once the loan is authorized, the company must submit the contract signed with the firm to formalize the loan. After that, the process —in loan terms— becomes traditional in the sense of complying with the policies and procedures required by the banking regulation.

With the guidance and support of the specialized advisory firm, the company begins the process to adopt the recommendations established in the aforementioned Guide. When a satisfactory result is reached, the firm issues a guide-adherence report that includes the documentation that supports standard compliance, such as board or internal committee minutes, roles and responsibilities manuals, among others. This expert opinion is sent to the Certification Committee, which evaluates it in detail. If all elements are there, the certification is issued.

Is there a time limit for the company to be certified?
Yes, 24 months. We believe it is an adequate time frame to reach the standard defined by the program.

Is complementary support to the Prime Certification considered?
We must not forget that this is a comprehensive support program. In order to increase possibilities of getting financing through the stock market, specific supports are contemplated for companies to improve their credit profile. Thus, Bancomext or Nafin restructures the maturities of their debt to strengthens their liquidity and, therefore, the ability to pay their obligations; what is referred to as “re-profiling debt.” In addition, we finance their expansion projects, since a very important element in corporate governance is permanence over time. The loans we have granted under this program amount to 260 million dollars. With the inclusion of Nafin, the program will be able to grow significantly in years to come. Both institutions have the financial capacity to help companies who want to join.

What financial supports are considered to support the stock issuance of certified companies?
Once the company is certified, there are additional elements necessary for it to go public, such as an agency rating. The company must build these steps over time. We do not ask this at the beginning because the idea is to start with what is essential to get there. We have a stock market guarantee program with which a company with a Prime certification obtains an endorsement from the bank of about half of what is needed to go public, which favors the financial cost of the issuance.

What size is the market to be covered by the program?
Over 17 thousand companies with annual sales of approximately 30 million pesos are registered in the Mexican Business Information System (SIEM). This is, roughly, the group of companies that are likely to join the program. Together these companies generate 40% of the country's GDP, which accounts for their importance.

How many companies have received this certification to date?
The program is in its first-launch phase. Ever since we started it one year ago, we have had over 30 companies: half have shown significant progress in the program’s process; eight are submitting documentation; and seven have been authorized. Of the latter, three have been certified and one is about to go public. When it does so, a first cycle will be closed and we will see how the market receives it. We are convinced that investors value the support of the Prime Certification very positively.

What are the growth expectations for the coming years?
To double the number of companies with this certification every year. It would be a great success if in the medium term —five years— the number of issuers in the stock market, which has not changed in the last ten years, is also doubled. In the current environment, we believe this trend can change. Another parameter would be to incorporate 50 companies in three years, one third of the current stock market.

We see with great satisfaction the progress registered so far. We are increasingly breaking paradigms around the stock market namely, "that it is only for large companies," "that control over the company is lost" or "that it is very expensive and bureaucratic." The business sector is starting to hear more about this certification. In recent months, important dissemination work has been carried out to raise awareness about the opportunity offered by the stock market to finance productive projects and about the comprehensive support provided by the Prime Certification to make the journey easier. From financing to training. So far, two courses have been given: one on corporate governance; and the most recent one, among family businesses, on the relevance and benefits obtained by professionalizing business management.

The Prime community is increasingly growing with business schools that have joined in to contribute to this program with no competition in Mexico. We have only found a similar product in London, called Elite. The Bank of Mexico and the Secretariat of Finance and Public Credit see it as an instrument that favors the development of the stock market. We have also presented it in Brazil, Portugal and Argentina. In 2019, the Latin American Association of Development Institutions, Alide, named the Prime Certification best financial product of the year.

We believe that all elements are on the table for more companies to go public. When we explain what it is, the reaction is good, they like it, they value the support of institutions participating in the program. It is also nice to see those companies that have been certified become ambassadors of the Prime Certification, promoting it and inviting other entrepreneurs to join in. From our perspective, it is an innovative program that supports company efforts to bring to fruition their productive projects, an alternative that brings together the efforts of renowned institutions in the country’s financial field and that, due to the numerous benefits it provides, is here to stay.