Mexican private-sector banks have reached an agreement to refinance 8.5 billion pesos ($631 million) in debt owed by the northwestern state of Sonora, one of the creditors said in a statement Monday.

About MXN4.75 billion of that debt, or 56%, is owed to Mexico's Grupo Financiero Banorte SAB (GBOOY, GFNORTE.MX), the bank said, derived from loans extended since May 2008.

The restructuring produced significantly better rates, commissions, payment deadlines, grace periods and reserve fund requirements, Banorte said, yielding MXN860 million in savings for the state.

Sonora is just south of Arizona and New Mexico, and across the Sea of Cortez from Baja California.

A number of local governments in Mexico have run into debt troubles in recent months after having contracted short-term bank loans without boosting their revenue streams.

Deputy Finance Minister Gerardo Rodriguez alerted market participants in August that local governments had MXN50 billion in off-the-books debt that isn't guaranteed by the states' share of federal tax collections.

Banorte said Monday that BBVA Bancomer, a unit of Spain's Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC), Canada's Scotiabank (BNS, BNS.T) and Mexican financial institution Invex also participated in the deal to refinance Sonora's debt.

Banorte said it will continue to finance projects in Sonora, adding that it has committed to inject MXN2 billion to improve 2,700 schools there.

-By Amy Guthrie, Dow Jones Newswires; (5255) 5980-5177, amy.guthrie@dowjones.com

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