. . . . . . . . . . . . . .
Finally, I attach memorandum on that point of security for the new
refunding debt of Mexico as arranged in the Agreement, the point which
you brought up to me last Wednesday in the talk which I had with
you.
[Enclosure]
Memorandum With Respect to Such Bonds of the
Mexican Government as Originally Were Unsecured hut Under the
Agreement of 1922 Were Accorded Security and Are Accordingly To
Be Refunded Under the Agreement of July 25, 1930
The reason for refunding the Mexican Government obligations
(originally issued as unsecured) with Refunding Bonds which have
security is to be found in the record of the negotiations with the
Mexican Government, looking to a dealing with its unpaid
obligations, beginning in 1922 and extending down to date. In 1922
the Finance Minister offered, in return for the excessive sacrifices
which he was demanding from the bondholders, certain provisions for
security to be applicable to all bondholders who became parties to
the Agreement.
The essential information with respect to this record was promptly
furnished to and is to be found with the State Department. The
Mexican Government in the July 25, 1930, Agreement proposes to
refund its obligations dealt with in the 1922 Agreement (modified in
1925) by the issue in two series of a Refunding Bond which will have
as security its entire import and export custom revenues. The new
[Page 488]
Refunding Bonds will
be issued to refund obligations which fall in two classes—those
which at the time of issue were given security, such as the Customs
Secured Bonds; and those which, although at the time of their issue
were not given security, yet following the lines of the 1922
Agreement as modified, have obtained the benefit of the new
obligations secured by the revenues specified in such Agreement. It
therefore appears that the present secured Refunding Bonds are being
offered to the holders of obligations which either originally, or as
a result of the 1922 Agreement as modified, have obtained security
in the form of an obligation given by the Mexican Government in
consideration of the agreement of the holder of the bonds to reduce
his debt and to accept a lesser amount; on condition that the
obligation to pay such lesser amount should be secured as stated in
the 1922 Agreement by “the entire oil export taxes as provided in
the Decree of June 7, 1921, and any increases thereof and the
specified sum of $5,000,000 U. S. Gold annually payable in equal
monthly instalments of $416,667 each out of the oil production taxes
…” (Paragraph (c) of 1922 Agreement as modified by the Agreement of
October 23, 1925).
It will be recalled that the 1922 Agreement obligation was secured
not alone by the oil export taxes, but by a 10% gross railway
revenue tax, and that upon the modification of the 1922 Agreement in
1925, resulting in a separation of the Government Direct Debt and
the Railway Debt, the security of the railway taxes was limited to
railway obligations. It will also be recalled that the 1925
amendment extended the five year period so that payments of the
amounts due in respect of the settlement of the Direct Debt should
not be finally completed until December, 1935, such payments being
secured in the manner above stated. In 1921 many millions of dollars
were due in respect of the Government’s secured and unsecured debts.
It was recognized that a mere promise to pay a reduced amount gave
little to the holders of such debt. In recognition of the necessity
of offering to its secured as well as its unsecured debt something
which would be acceptable to them, the Mexican Government provided
the maximum sum that it could make available for its debt with due
recognition of its other obligations, and secured such amount with
the revenues stated in the law passed by Congress on September 29,
1922, and promulgated by the Executive Decree of September 30, 1922,
and published in the Official Gazette in Vol.
22, Number 24. Thus was accorded to the Government debt which was
unsecured when issued the security specified in the 1922
Agreement.
It will be remembered that as a result of internal disturbances, the
Government was unable to make the payments which it had agreed to
make in the 1922 Agreement, and consequently in 1925 it proposed a
modification of this Agreement, which was accepted by the
bondholders
[Page 489]
with the
result that when the Government was again unable to perform its
undertakings expressed in the 1925 modified Agreement, it undertook
through a Commission created in 1927 and the negotiations in 1928,
and later in the negotiations resulting in the 1930 Agreement to
make such a proposal to the holders of its obligations (which had
already been accorded security) as would be sufficiently attractive
to them to obtain their co-operation. Obviously, such co-operation
could not be obtained unless the Government was willing to give
security in exchange for an obligation which had in effect already
obtained security. In dealing with its debt, the Government and the
International Committee of Bankers on Mexico, composed of
representatives of banking houses which had been instrumental in
past years in raising capital for the Government by placing
obligations with investors, acted, according to its own statement,
with due regard to the Mexican Government’s other obligations. As
stated in the 1922 Agreement such Committee
“also recognize that the Mexican Government
has other obligations which it is important for it to meet,
such as the restitution to the banks of the specie fund, the
agrarian debt and arrears of pay, which may have to be cared
for by the issue of internal bonds or in some other manner
later to be considered;”
The very material reduction in the amount of the
debt which resulted in the Agreement of 1930 was also due to the
recognition by the Government and by the Committee of the
Government’s other obligations.
The 1922 Agreement was made in the expectation that at the expiration
on January 1, 1928 of the five year period, the original contracts
affecting the obligations of the Mexican Government would be
reinstated. Due to internal disturbances these contracts have not
only not been reinstated, but a considerable part of the interest
which was deferred under the 1922 and 1925 Agreements and which
received security in consideration of the reduction in the amount
payable, is still outstanding and unpaid.
As between the debt accorded security at the time of original issue
and that not accorded security at the time of issue, the former has
of course at all times received a preference. Such secured debt
under the 1922 Agreement as modified was not asked to consent to any
reduction in interest during the five year period, and the overdue
interest upon such debt was given a preference over that on the debt
which was unsecured at the time of issue.
Following the failure of the Government to provide the sums required
by the modification of 1925, there waited upon the Committee in 1927
a Finance Commission of the Government which proposed a refunding of
its debt on the basis of a secured issue of substantially less in
principal amount than the issue proposed by the July 25, 1930,
Agreement. Again in 1928 when the Government renewed its proposal
[Page 490]
to refund its
outstanding debt, it proposed a secured issue to be distributed
among the holders of the obligations dealt with in the 1922 and 1925
Agreements.
It thus appears that since 1922 the Government has repeatedly asked
for concessions from the holders of its debt and that those
concessions principally have been asked from the holders of its debt
which was originally issued without security. In order that such
concessions might with some reason be accepted by the holders of its
debt, the Government has proposed and its creditors have accepted
obligations secured in the manner above stated. The debt which was
afforded security at the time of its issue has consequently received
secured obligations having a lien prior to the secured obligations
issued to refund the balance of the Government debt, and the
percentage of allocation of new bonds to the secured debt will
recognize the superiority of that debt over the debt originally
issued without security.
It may be well to note the provisions of the 1930 Agreement whereby
the Government may use the customs revenues as security for future
borrowing of additional funds, if it should choose to do so. This is
a facility not contemplated by the Government’s own memorandum
submitted to the Committee in 1927 and not incorporated in the
provisions of the understanding reached in the latter part of 1928.
While the unsecured debt, therefore, receives a pledge of revenue
under the new Agreement as partial compensation for the reductions
in the amount of such debt, the lien which the unsecured bondholders
receive may be used to secure further bonds issued on a parity
therewith.
To summarize: In all the negotiations following the failure of
performance of the 1922 Agreement as modified, there was uppermost
in the minds of the Minister as voiced by him or his Commission that
having bargained with the holder of the unsecured debt on the basis
of a very material reduction in principal of that debt and the
substitution of an obligation secured by oil and other revenues, and
such bargain having been accepted by over 98% of the holders of such
debt, it was incumbent upon the Mexican Government to protect that
settlement sponsored not only by the Committee but not questioned by
our State Department nor by the other Governments concerned.
