LATIN AMERICA-WIDE Trends and Developments Contributed by: Brian Minutti, Alejandro Carreño and Miguel Martínez Herrera, Legal Disruption
rower’s institutional weaknesses. On the other hand, a large number of companies are completely excluded from the private debt market, not because they lack economically viable projects, but because they do not meet the minimum formal or informal standards that funds require to justify their investment. In this sense, private debt not only reproduces but, in some cases, deepens structural inequalities in access to financing. Furthermore, the limited institutional capacity of many borrowers increases the operational risk of private debt. Weak financial reporting systems, the absence of robust internal controls and excessive reliance on personal management hinder effective credit monitor - ing and reduce the practical usefulness of financial agreements. In these cases, contractual mechanisms designed to anticipate risks lose their effectiveness, forcing the creditor to resort early to corrective meas - ures or the enforcement of guarantees, which dete - riorates the economic value of the transaction and the relationship between the parties. Private debt, conceived as a risk mitigation tool, can thus become a factor in amplifying pre-existing vulnerabilities. Legal Opportunities From a legal perspective, the development of private debt in Mexico relies heavily on the intensive use of guarantee, administration and payment source trusts. These instruments allow for asset segregation, direct control of cash flows, and the implementation of prior - ity schemes that seek to replicate and even exceed the protections of bank credit. However, the formal sophistication of these structures contrasts with the reality of their execution. The judicial interpretation of trusts, the co-existence of multiple creditors with different priority ranks, the lack of consolidated juris - prudential criteria and the limited specialisation of the courts generate uncertainty about the actual recover - ability of credits in default scenarios. Private debt contractual structures tend to reflect a logic of maximising protection for the creditor, incor - porating high interest rates, prepayment penalties and broad early maturity scenarios. Although these conditions are justified by the higher risk assumed, in practice they can create a vicious circle in which the financial cost increases the probability of default and triggers contractual mechanisms that aggravate the
borrower’s situation. This rigidity is particularly prob - lematic in contexts of economic slowdown, where the lack of flexibility limits the capacity for adaptation and renegotiation, increasing the probability of suboptimal
outcomes for both parties. Economic Considerations
An analysis of private debt from a macroeconomic perspective reveals that its growth can no longer be understood solely as an isolated or strictly contrac - tual phenomenon. Although this type of financing takes place outside the regulated financial system, its expansion has given rise to a growing network of interdependencies with systemically important actors. The increasing participation of pension funds, insurers and other institutional investors in private debt vehi - cles introduces indirect channels of risk transmission that, in adverse scenarios, can amplify the effects of credit defaults. In the absence of loss absorp - tion mechanisms comparable to those in the bank - ing system, these adjustments tend to be passed on directly to investment portfolios, increasing volatility and reducing room for manoeuvre in the face of mac - roeconomic shocks. This phenomenon is part of the broader debate on non-banking financial intermediation and so-called shadow banking. Although private debt does not fully fit into this category, it shares with it the assumption of credit risks outside the regulatory perimeter and the reliance on private contractual mechanisms for risk management. The misalignment of incentives in credit origination and management, particularly when portfolio growth is prioritised over credit quality, is an From a comparative perspective, it is clear that the development of private debt in Mexico has followed a different trajectory from that observed in markets with greater institutional depth. In the latter, contractual flexibility is offset by predictable legal frameworks, specialised courts and efficient dispute resolution mechanisms. In Mexico, the gap between contractual design and practical execution introduces an addi - tional degree of uncertainty that affects both creditor additional source of vulnerability. Mexico Versus Other Markets
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