Weathering the storm

Outside the United States and the United Kingdom, Michel Nader says, there are very few countries that run to massively large law firms – “and Mexico is not the exception.” So the firm in which he is a partner, Jauregui, Navarrete y Nader, may have a comparatively small number of people sitting at desks compared to some of the firms to be found in Mexico’s big northern neighbour, but at more than 100 professionals today, that still makes it one of the five largest firms in the country.

The firm has been in existence for 34 years, founded by a group of lawyers, including Alexander Hoagland, “and my co-partner Miguel Jauregui”. Nader says. Nader himself joined the firm in 1981 as a mid-level associate, after working for a prominent Mexican lawyer who was an expert in commercial law, and then working for a corporate firm, and became a partner in 1983.

Jauregui, Navarrete y Nader has been a leader in banking and finance “since its inception,” Nader says. The two core practices are banking and finance and mergers and acquisitions, but “we have other very important practices,
like infrastructure, real estate, insurance, telecommunications, intellectual property. In banking and finance world we basically do everything but we are very well known for our expertise in structured finance, securitisation, real estate finance, acquisition finance and a very broad range of work for financial intermediaries.”

The firm’s clients include domestic and multinational corporations, the multinationals being based both in Mexico and abroad. Though it does work for those clients abroad, “Mexican law firms, including ourselves, see most of our work happening within Mexico,” Nader says. Although, the amount of work being carried out outside Mexico, particularly in South America is increasing. This is not so much because of the language advantage – “anyone can speak Spanish nowadays,” Nader says.

“Speaking Spanish is a plus, but no one would hire a lawyer because he speaks Spanish.” Instead, he says, “the language element is obviously important, but more important to being able to work in South America is our understanding of the culture and the similarities of the legal systems, derived from the French legal system. In our world you are expected to speak a minimum of two, if not three languages, and understand the legal systems of several other countries as well.”

The industries covered by JN&N’s clients, Nader says, represent “a very wide variety, gas, energy, infrastructure, banking, insurance, real estate, pharmaceuticals, communications, a very wide range.”

Mexico is not immune to the problems spilling out from the credit crunch in the United States, and the impact of that crisis is having an effect on JN&N’s clients. “Today we’re facing difficulties of a different kind than we were facing a couple of months ago: we’re seeing a very steep credit crunch in the markets,” Nader says. “There will be very few places in the world that will not be impacted by the credit crunch in the United States, and it is affecting Mexico, and it will have a very deep effect in 2009, from our perspective.”

Trouble ahead
So far, unlike in the UK, Mexican financial institutions are not finding their very existence at risk, Nader says: “We don’t have any news about Mexican banks being directly affected by the collapse of the Lehmans and the like. But they will be affected indirectly, because there will be less money around and they will encounter defaults from their customers. I don’t think the Mexican banking system has shown any major signs of damage. However, there will be damage in the months to come because we will see an increase in defaulting loans, especially in consumer loans.”

The sort of toxic sub-prime home loans that have hammered financial institutions in the United States are not a feature of the Mexican financial scene, Nader says: “Home loans are divided in Mexico between the banks and the mortgage companies, but unlike what we have seen in other countries, in Mexico most of the mortgages are done with fixed interest rates, which is different to what you will see in the United States.” Even so, he foresees some problems to come: “There are some over-riding deficiencies in the market which will prompt an increase in non-performing mortgage loans, and as the job market weakens some of the borrowers will encounter more difficulties in servicing their loans.”

One problem for Mexico is that, almost inevitably, its economy is dependent upon that of its northern neighbour, something that became even more pronounced after the arrival of the North American Free Trade Agreement (NAFTA) in 1994. “The United States is by far our largest trading partner and the largest source of foreign investment in Mexico,” Nader says. “After NAFTA, US investment multiplied, but the problems in the US economy have put a sharp brake on investment activity. In the past couple of years the tendency has been more to stagnate or remain constant,” Nader says. “We didn’t see an increase in 2007, we’re not going to see an increase in 2008 and probably we will not see an increase in 2009.”

However, Nader cautions against blaming the financial crisis completely for this: “ It’s not only because of the credit crunch in the United States, but also because as a country we have not made enough structural reforms that would make investment in Mexico more attractive, that will distinguish ourselves from other countries that are seeking to attract foreign investment.”

Mexico has the advantages to build on to make it a come∞on to oversees investors, Nader says: “We obviously have a very large domestic market – we have a population of 110 million people. The middle class has grown in the last eight years or so – probably two or three million people have been able to buy homes, which is unprecedented. We have the attractiveness of the proximity to the United States, the attractiveness of being a tremendous alternative for maritime cargo, because all the ports of the western part of the United States are basically operating at full capacity, and they don’t have much room to grow and we have the possibility of Mexican ports as an alternative, so strategically we have a number of advantages. But as time goes by those advantages will not be enough to attract foreign investment unless we make further structural reforms.”

“We need tax reform – to the taxation at an individual level as opposed to at the large corporate level. We need to see a simplified tax system that will broaden the tax base and that will eventually replace an income tax with a consumption tax. That’s very political and there would be constituencies that would oppose such a reform, but unless we have such a reform the government will not be able to increase the number of tax payers and if we don’t increase the number of tax payers, it’s going to be difficult for the government to play a leading role in the development of infrastructure.

Our tax system is more geared to collect taxes than to foster growth – and thereafter collect taxes. I think that a country that has probably one million people joining the job market every year needs a tax system that will not sacrifice collections but that will defer collections for the sake of growth.

“We need reform in the energy sector, but also reform on our labour system and more efficiency in our judiciary. There has to be administrative simplification – there are too many barriers to being able to set up a business, both at the federal and the state level and you need an environment that is more prone to foster growth and investment. We are competing with the Brazils, we are competing with the Russias and the Chinas and with other Central American countries. So it’s a matter of being competitive.”

Even in the absence of these reforms, however, Nader sees growth opportunities for his own firm. “There’s going to be an increased level of M&A activity – on the banking side there will be fewer transactions but they will be more structured and they will require more ‘lawyering’. This is natural: we’ve just seen a credit crunch, lenders are now more strict with their lending standards and will demand more structured transactions. That’s certainly good for us: the market is going to be smaller but given our level of expertise, when market conditions get tight, we see the market coming to us because they need more complex advice, and not only more complex advice but also the possibility of having enough manpower to carry out a number of large deals at the same time.”

Nader certainly expects, as do almost all observers, an increase in regulatory requirements once the current crisis dies down, even on top of the changes brought in after the financial scandals earlier this century. After the Enron case and the passing of the Sarbanes-Oxley Act in the United States, lawyers’ workloads to meet new standards that were being imposed in the US increased in Mexico, and the same will be true post-credit crunch: “Obviously in the financial markets we expect quite a bit of reaction. I don’t see the United States staying where they are with regard to the regulation of financial intermediaries and other players. A tight credit market and increased regulation is going to be bad for some practitioners, but for others, like us, who have a great depth on the transactional and regulatory areas, will bring about great opportunities.”

On the domestic front the growth of middle classes in Mexico means good chances of growth in areas such as insurance, and JN&N is well-placed to capitalise here, Nader says: “We have the largest insurance practice in the country, we’ve done probably the largest insurance transactions in Mexico and we represent on an ongoing basis a number of insurance companies on their investment and regulatory matters. This will be an area that will continue to grow – growth will continue to be hampered in the next year, and probably beyond, but investors that have strategically positioned themselves will have good opportunities, and, obviously, for insurance companies that are well capitalised, in the mid∞term, a rising middle class means a lot of room for personal insurance growth in both life and health, as well as credit insurance growth, consumer goods insurance, even mortgage insurance.”

Some sectors will not do so well: “I don’t think savings will grow – there’s a scarcity of jobs, the rising middle class has many needs that have never been satisfied, televisions, fridges, all the way up to tuition fees, so the savings possibilities of the middle class are very narrow,” Nader says.  Real estate “has had a tremendous growth in the last six or eight years and it will continue to grow but we are seeing a slow-down.” JN&N is well-placed for when the real estate market picks up again, however: “We represent a number of the largest investors in the real estate sector and we also represent the most active lender in the real estate sector. We started representing this lender fifteen years ago and we got into the real estate practice 10 years before it became an important business for Mexican firms,” Nader says. “Like many things we do as lawyers, it is part opportunity, part luck and a lot of hard work. I’m the responsible partner for that client and when we started working with it I didn’t foresee the growth it would have. We were more focused on providing a good service to the client than thinking about 10 years down the road.”

One of the aspects of Mexico that many outsiders fail to be aware of is its size, and its diversity: the country is the 11th most highly populated in the world, and is divided into 32 state jurisdictions. Although it is the world’s largest Spanish∞speaking country, there are also more than 60 Native languages spoken within its borders. Nader says this diversity can be an opportunity for investors: “There are different regions, and you don’t find the same attitude towards business all over, even within a given state you find differences. It’s increasingly happening that different states are trying to compete with one another, and to widen their own tax base and their own base of investors.” JNN is happy to help out: “We have worked extensively with state governments to prepare reforms that facilitate investment in infrastructure projects, that allow them to have a more varied menu of alternatives, to allow private investment in infrastructure as well as financing of infrastructure projects.”

The firm’s culture, Nader says, is “basically, to serve the client with excellence – just like the old momma∞and∞poppa shops, the client is always right. But also embedded in the culture is the ideas of responsibility to Mexican society as a whole. We are regarded as one of the firms that has the most structured pro bono programmes in Latin America. In the past few years we have, on a pro bono basis, advised the government about a number of reforms, and that is something that is unique to our firm.”

JNN helped advise on reforms to the remittances system, through which $24bn flows every year from Mexicans working abroad, to ensure more of that money reached the people it was intended for. It has also advised the US Treasury Department and the US Department of Commerce over aspects of the North American Free Trade Agreement.

JNN has “an independent corresponding relationship” with Mayer Brown, one of the world’s largest law firms, with a presence across the Americas, Europe and Asia, and “we have very good working relationships with a number of large firms in the US and UK,” Nader says. He expects to see the firm grow organically over the next few years, and “we will recruit where necessary to gain skills we need to service our clients. But I don’t think we will see much consolidation among legal firms in Mexico – there are many cultural factors that get in the way.”

Growth in the future
As JNN grows, and looks forward to growth in the future, Nader says it is aware of the need to recruit and train. “We hire people when they are at law school and we train them and teach them, but we are not exclusive –  we think there is a lot of talent outside our firm and we recruit qualified lawyers from outside,” he say. “We spend a lot of time training our people – we allocate very significant resources, we need to ensure that clients when dealing with different people within the firm, get the same advice. We can’t afford to have inconsistency in the advice to clients.”