Latin Finance - March/April 2012 - 52

Mexico restructuring

argues, including the fact that the $1.9 billion in inter-company which thinks Vitro is setting the wrong precedent and could claims were incurred after its default and that an outside party harm attitudes toward Mexico’s credit markets. “What is legal provided financing that some creditors alleged were fraudulent and what is right is not the same thing. They crammed down transfers. [legitimate] bondholders with their restructuring plan and In a ruling by the US Bankruptcy Court Northern District managed to get away with it,” says Carlos Legaspy, president at of Texas, it says that in December 2009, Vitro and Fintech San Diego-based Precise Investment Management. Investments “entered into several simultaneous transactions Vitro supporters say that the glassmaker’s methods are which caused Fintech to invest $75 million and generated $1.5 not unusual, and that companies could in theory have made a billion in inter-company debt, payable to Vitro SAB’s subsidiaries similar case under Australian and Italian law, for example. by Vitro SAB. It is alleged that these transactions amount “The law in Mexico is perfectly clear about inter-company to fraudulent transfers on the part of Vitro SAB and are an debt,” says Luis Manuel Méjan, bankruptcy and business attempt by Vitro SAB’s equity holders to control any attempts at restructuring counsel at Haynes Boone, and former head at reorganization.” Mexico’s Federal Institute of Bankruptcy Specialists (IFECOM). At the same time, the ruling states that an appellate court “Mexican law, like restructuring law in other jurisdictions, reversed a prior voluntary Mexican proceeding through the does not give specific or special treatment between types of Concurso Mercantil system that found inter-company claims credits and treats them like any creditor as long as it was done should not be considered. This ultimately helped Vitro claim in good faith, and the law includes strong protection to ensure victory earlier this year. Either way, some creditors are treated fairly,” he adds. Vitro’s Financial Indicators creditors allege that Fintech’s involvement In reality such issues are highly Improving ratios as an investor, creditor and advisor to Vitro complex and interpretations of the law in constituted a conflict of interest. each country vary. What is clear to some, 2011 2010 Ultimately, Vitro’s position passed though, is that Vitro outmaneuvered its Debt/EBITDA (LTM) 5.5 6.1 muster under Mexican insolvency law, opponents at every turn and won the EBITDA/Interest Exp (LTM) 2.9 1.6 and according to the company resulted in war of attrition against holdouts, some the largest payment to debtholders in any of which are highly skilled themselves at Debt/(Debt + Equity) 0.9 0.9 Mexican debt restructuring. finding legal loopholes to work in their Debt/Equity 14.7 17.9 The plan that was ultimately approved favor. Current Assets/Current 0.4 0.4 involved exchanging defaulted debt – According to EM distressed debt Liabilities which included 8.625% 2012s, 11.75% specialist Gramercy, Vitro was the first 2013s and 9.125% 2017s – for $814.6 large Mexican company to use interSales/Assets 0.7 0.6 million of new 8% 2019s, $95.8 million company claims to approve a restructuring EPS 0.6 -0.6 of 12% mandatory convertible debt due plan over the objections of legitimate Source: Vitro 2015, and the pledge that holders will creditors, in this case holding some $1.45 Ratios calculated using figures in pesos get a 20% equity stake if the convertible billion in debt. Figures are as of September 2011 debt is not paid. There was also a cash Vitro isn’t the first Mexican company to restructuring fee in an amount equal to an have used inter-company debt to leverage its position during restructuring negotiations, say experts. Paper 8% annualized return on $814.65 million. The bondholder proposal that had been rejected earlier company Grupo Durango, later renamed Bio Pappel, did the involved the issuance of $1.1 billion in new bonds, a cash same but reached a consensual deal instead. payment of 10% on outstanding principal of the existing notes Durango’s ability to strike an agreement with creditors may and 61% in Vitro’s common shares. Recovery values under the have reflected the types of creditors involved, say some legal sources. Depending on which side of the Vitro fight experts take, agreed upon plan are hard to come by, but a JPMorgan note put holdouts are either aggressive vulture funds with a winner-take- them at anywhere between 45%-50%. An ad-hoc group of bondholders, largely comprising hedge all attitude or legitimate creditors bringing to light loopholes funds and distressed debt specialist, say their terms were never that the glass company unfairly exploited to the detriment of its considered but the conciliator on Vitro’s restructuring, Javier bondholders. Navarro-Velasco, tells LatinFinance that this is untrue and that the Either way, bondholders were less compliant with Vitro. company hired an independent third party, KPMG, to analyze the Elliott International, one of the creditors involved in the legal fairness of the restructuring plan for all parties involved. battle, has shown in the past a willingness to fight long court Each side has battled from its own corner, but the issue of battles and stand its ground to make substantial gains. In one using inter-company claims to push through debt plans is likely to of its more high profile cases, it reportedly sued the Peruvian require a clearer resolution. government to make a $47 million profit on debt it bought for Whether Mexican junk credits will be punished with higher $11 million. premiums remains to be seen given the market’s grab for yield. “Some of the vulture funds purchased bonds after the restructuring began,” says Alejandro Sánchez Mújica, Vitro’s vice Vitro itself shed its reputation as a troubled borrower in early 2007 when it re-profiled its debt maturities thanks to strong president and legal counsel. demand for its paper. All may soon be forgiven. LF The Vitro case stands out for several reasons, Gramercy
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March/April 2012

Latin Finance - March/April 2012

Table of Contents for the Digital Edition of Latin Finance - March/April 2012