“Aregra: a credit risk-rating service for companies in Mexico”

A Matter of Trust

We have found that the main reason for the lack of financing to the middle market segment is lack of trust. From companies who do not know the loan application process and from financial institutions who are not provided with reliable financial information and/or hard collateral. This lack of trust has created a vicious cycle in which important growth is only achieved by those companies who have cracked the code into the financial system and are able to leverage new projects, future cash flow or assets.

Executive Summary

Aregra is an ongoing project that caters to the Industry of Capital Allocation for the Middle Market in Mexico (companies with annual sales between US$15 and US$100). This market has long been underserved by the incumbent financial institutions as a result of a lack of transparency and trust among the industry stakeholders: financial institutions, businesses, vendors, issuers of financial information and opinions, and ultimately the Mexican economy.

Aregra’s main objective is to help de-risk lending to the Middle Market segment by screening and vetting the financial reporting quality and availability, a crucial pain point for the lenders and borrowers.

Aregra will provide a condensed report with a company’s most recent financial highlights and a concrete credit recommendation, for lenders to make an informed and reliable credit decision.

The specific recommendations for Aregra are:

- Search and negotiate a Strategic Alliance with an existing risk rating company.

- Partner up with Funds, Niche banks and leasing companies.

- Look for independent sources of Equity, crowdsource some of it (all if possible).

The short term perspective for Aregra is to create a critical mass of companies that will find value in its consulting and easy-to-use approach to generate readily available and reliable financial information, so in the long term Aregra will have pioneered into a virgin market with financing needs of approximately US$160 Bn, charging a fee for its services. Aregra has to look for a right balance in this new venture and create a culture and organizational design that promotes independent thinking and fairness based on hard numerical evidence to create a strong reputation which will become its main asset.

Situation

According to the national statistics institute (INEGI), there are +95k middle market companies in Mexico (11 to 250 workers with annual sales between US$15M and US$100M, most of them family owned). According to the International Finance Corporation (IFC), these companies face annual financing constraints of approximately US$160B. It is a sad paradox that even though these companies provide employment to 30% of the Mexican workforce they are not able to obtain loans from financial institutions, ultimately undermining the country´s economic growth.

Aregra is an initiative to offer a nationwide credit risk-rating service for Mexican middle-market companies to address the following specific problems:

- Mexican financial institutions invest in costly individual efforts to obtain reliable information to perform credit analyses. There are few incentives to try out new customers; existing players get more credit, newcomers are neglected.

- There is no single repository for private companies to share basic financial information and trade activity, leading to huge asymmetries of information and low trust levels within the system.

- The existing alternative (Credit Bureau) only includes payment trend and can only be obtained after the customer has individually granted permission to each institution.

As originally conceived, Aregra will provide:

- Financial consulting: Accounting program tailor made to the family-owned Mexican company, helping our customers issue reliable financial information and trade activity that will later be used as the main input to issue a risk rating.

- Regulatory compliance: all participant will be prescreened for Anti Money Laundering (AML), Know Your Customer (KYC), legal background, fraud and local regulations.

- A Risk Rating with a proposed credit facility: This recommendation will become an endorsement for those credit worthy companies, even those without previous history in the financial system.

Aregra will bring transparency and timely updates to a system that has been working without any changes for the last 25 years.