Latin Finance - July/August 2012 - 19

Corporate bankruptcy

in the forum. He reiterated the company is free of any wrongdoing and that it’s vexed with iudge Hale’s decision, which he claimed goes against a plethora of other Mexican bankruptcy cases US courts have approved since 2000. However, Vitro’s case is like no other, experts said. “When have you seen a bankruptcy case where creditors lose their T-shirts while shareholders come out intact?” said lead panelist Arturo Porzecanski, a professor of international economics at American University in Washington.   According to Porzecanski, throughout 2009 (about a year before it filed its December 2010 Mexican restructuring plan), Vitro engaged in a series of “covert transactions to manufacture intra-company debt” to becoming heavily indebted with its subsidiaries. In this way, the holding company would “look poor and worthy of debt forgiveness”, Porzecanski claimed. This move also enabled the US subsidiaries to cast votes in the restructuring, enough to out-vote the original creditors (which included the American bondholders) and win approval for its turnaround plan. Under the transaction, Vitro’s shareholders avoided taking any losses.   “They went from a holding company that had $1.2 billion in net assets to one with $1.5 billion in net liabilities, a $2.7 billion turn,” Porzecanski said. “In another part of the world, such a maneuver would be categorized as a fraudulent conveyance and the people responsible for it might go to jail.” Under the restructuring, Vitro’s shareholders stayed with $500 million of company assets while the US creditors did not receive anything, Porzecanski said. He backed judge Hale’s view that the Mexican bankruptcy court approved a restructuring that failed to honor the subsidiaries’ guaranteed payments to bondholders.  According to another panelist José Coballasi, director of corporate ratings at Standard & Poor’s, the bondholders could lose as much as 50% of the value of their holdings if Vitro wins its appeal. Héctor Alfonso Villavicencio, senior partner at Mexican law firm Villavicencio Abogados, backed Porzecanski’s views, adding that there was “no transparency in

the case.” He said the case could make it harder for Mexican corporations to lure international financing. According to Villavicencio, Mexico’s bankruptcy law or Ley Concursal must change to include more transparent rules to protect and properly define a company’s ‘creditor mass’ – who is a creditor and in what circumstances – as well as all the assets and liabilities a company

“When have you seen a bankruptcy case where creditors lose their T-shirts while shareholders come out intact?”
Arturo Porzecanski, American University
should declare as part of its bankruptcy case. More specific rules about how the appointment of bankruptcy judges takes place should also be introduced. Several observers in the forum said Vitro could have used these ‘law gaps’ to flout its US creditor obligations. “If there were a better definition of the assets and liabilities that go inside a bankruptcy case, maybe that intracompany maneuver [Vitro’s holdingsubsidiary asset transfer] would have not been fruitful,” Porzecanski said. Mexico also needs more specialized bankruptcy judges that can deal with complex international proceedings, observers said, in response to suggestions that Vitro’s bankruptcy judge, Sandra Elizabeth Barajas, made a mistake in her ruling. Villavicencio said: “Judges are not knowledgeable and professional enough to handle these types of cases. They don’t have enough experience with complex international financing cases.” Jesús Guerra Méndez, a bankruptcy lawyer with Guerra González y Asociados,

backed Villavicencio’s view. He said: “The judge clearly made mistakes that need to be analyzed.” Guerra said he expects the New Orleans court to dismiss Vitro’s appeal, forcing it to honor its US bondholder obligations. “The New Orleans judge is going to confirm Hale’s decision and I think there will be changes in Barajas’ resolution. We are confident that this case will change the rules of the game, that Mexico’s bankruptcy law will become clearer.” He added: “It’s in the best interest of Mexican authorities to comply with the spirit of the law, which is to treat all creditors in bankruptcy proceedings fairly.” He said Mexico needs “more sophisticated judges that understand international financing instruments”.New rules to govern judges’ behavior and ethics must also be enacted, Porzecanski said. “There is so much mistrust in Mexico’s judicial proceedings. There have to be several revisions linked to how a judge becomes judge, how an actual law is drafted and how transparent it is.” That may take a while. Villavicencio said: “It’s hard to see when and how the reforms will be done. The political system needs to change and the legislative bodies don’t appear to be in a rush.” Still, most observers hoped the New Orleans judge will overturn Vitro’s appeal, setting a precedent for how future international bankruptcy proceedings with be handled in the US, Mexico and Latin America. If Haley is backed then: “what the judge will do is set a precedent for what the US rules of the game are for companies filing a case there,” Guerra said. “The message will be clear: US laws must be respected. Companies will not be able to do the same thing Vitro did.” Several major Latin American economies have in recent years modified their bankruptcy laws to give international creditors more certainty about their rights. The hope is that Mexico will eventually follow suit. “There have been many other bankruptcies that have been resolved without so much fanfare,” said another observer. “Vitro clearly is the big exception.” LF 

July/August 2012

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Latin Finance - July/August 2012

Table of Contents for the Digital Edition of Latin Finance - July/August 2012
