By: Georgina Gatsiopoulos, Mexico City (Debtwire LatAm Plus)
The Mexican Finance Ministry should submit a white paper proposing changes to the country's 12-year-old bankruptcy law, sources familiar with the situation said.
With just days remaining before a December 1, 2012 turnover to a new administration representing a change in political parties, outgoing high-level officials in the government of President Felipe Calderon said they will push for near-term changes to the bankruptcy law, the sources said.
Dozens of top-tier bankers and lawyers — veterans of Mexico's largest bankruptcy proceedings — said they had been consulted by the Finance Ministry in its analysis of Mexico's Ley de Concursos Mercantiles (LCM). At least 2 working groups have been formed while another raft of procedural changes should be proposed by Mexico's bankruptcy authority IFECOM via the Mexican judiciary.
"The trigger for the change is Vitro," said the lawyer of a prominent Mexican distressed investor, referring to a controversial restructuring of the Mexican glassmaker. By standing by and allowing the "Vitro exception [to become the] asymmetric rule," Mexico's legal system is promoting economic distortions that Mexico "can't live with," the lawyer said.
In February 2009, Vitro defaulted on US$1.25 billion in bond debt, citing poor economic conditions and bad bets made on exchange rate and natural gas derivatives. Three years later and after generating US$1.9 billion in intercompany debt, Vitro was able to use the intercompany loans and other related party debt to approve a restructuring that entailed significant NPV losses for third-party creditors while preserving the position of its existing shareholders. The company filed for bankruptcy in Mexico and months later sought Chapter 15 recognition in the US, which was denied.
"An effective legal framework regarding creditor rights and insolvency boosts competitiveness," and is therefore a goal of the current administration, said Deputy Finance Minister Rodriguez in an emailed statement. After a recent conference of the American Bankruptcy Institute in Mexico, Rodriguez confirmed that the Finance Ministry is currently analyzing Mexico's Ley de Concursos Mercantiles with the goal of proposing changes.
The Mexican bankruptcy law continues to come under fire in Mexico and the US after a local district court located in Vitro's headquarter city of Monterrey recognized close to US$2 billion in intercompany claims submitted by the glassmaker in its Mexican court-supervised reorganization earlier this year. The intercompany debts are linked to a sale-lease back transaction between Vitro with Fintech Advisory, according to testimony taken during Vitro's Chapter 15 case in Texas.
The same Monterrey district court later validated a plan of reorganization proposed by Vitro and friendly entities that was approved via a voting scheme that swamped legitimate third-party creditors of the Mexican glassmaker, forcing them to take significant NPV haircuts while preserving and enhancing the position of equity. The district court's decisions are on appeal in Mexico and the ruling regarding claims recognition and the POR voting are not definite (or 'firme' under Mexican law).
A higher court that has historically and consistently ruled against third-party creditors in the Vitro case has yet to rule on those appeals. Timing on the Mexican appeals is unclear, a source familiar with that situation said. A final decision by the 5th Circuit is expected soon but could take until year end, speculated a source familiar with that situation.
In the meantime, Vitro's creditors are preparing to challenge the constitutionality of the glassmaker's Mexican legal strategy and use of loopholes in the LCM even as they await a ruling on the US bankruptcy case currently before the US 5th Circuit Court of Appeals. The government of Mexico filed an amicus brief in the Vitro bankruptcy appeal case seeking comity of local court rulings that defend and validate the legal actions of Vitro and Fintech.
"It was never supposed to get to this. The LCM is not a tool to resolve restructurings in litigation. The LCM serves to get debtors and creditors to negotiate a solution and present an agreement to the court," said a source familiar with the situation. "Intercompany debt has never before been used to out-vote third-party creditors. The debtor and the creditors come to an agreement first and the agreed-to plan is presented to the court," the same source said.
"No matter what" any changes to the law won't take hold in time to impact Vitro's Mexican court supervised reorganization, said a source close to the Mexican judiciary. A third source familiar with the situation said that the mishandling of the Vitro case proves that Mexico should scrap the LCM and start over with a law that complements and is homogenous with US bankruptcy law. "People have been talking about globalization for decades. Insolvency is a global business too."
This article was provided by Debtwire Latin America PLUS, a company that provides actionable intelligence on event-driven equity in addition to the distressed and high-yield markets in Latin America. With an on-the-ground team of journalists based in Sao Paulo, Buenos Aires and Mexico City, Debtwire LatAm PLUS closely tracks special situations throughout the LatAm market, providing real-time coverage of primary equity issuance, and alerting subscribers early-on to restructuring events and key credit situations. Please visit www.debtwire.com
|ALI Membership Benefits