LatinFinance - January/February 2014 - 20

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privileged, unsecured and subordinated creditors.
in oGX's case, domestic and international bondholders account for
most of the firm's debt.
"it's hard to tell where the negotiating power would be in this
discussion," says marianna Waltz, associate managing director at
moody's.
another concern surrounding corporate bankruptcies in Brazil
is that the expertise of courts varies by location. Some jurisdictions
have specific bankruptcy courts, while some of the provisions of the
code have reached the superior courts. lower-level courts elsewhere,
however, could reach different conclusions, Waltz says.
nevertheless, the fact that oGX's restructuring is taking place in
Rio de Janeiro means it will be treated by a court with more expertise,
Waltz says.
Brazilian oil parts manufacturer lupatech agreed a restructuring
plan with bondholders at the end of november. What's encouraging
for creditors is their opportunity to come away with equity.
in the plan, holders of the $275 million outstanding in 9.875%
perpetual bonds - owed $298 million including interest - would
receive the right to subscribe to american Depositary Receipts (aDRs)

SOFT LANDINGS: Brazilian airline Varig's offers an
example of a satisfactory resolution to a restructuring. Rival firm Gol purchased the passenger
transport business.

representing one lupatech common share and corresponding to
85% of the amount owed. they will also receive new five-year bonds
paying a 3% coupon to make up for the haircut.
Holders of domestic bonds, owed 383 million reais ($163 million),
will also get shares worth 85% of their holdings, and new five-year
debentures paying 100% of the Di. in the case of both foreign and
domestic investors, the shares will be issued at 0.25 reais each.
Getting better in Mexico?
While eike Batista's is an isolated case that features a particular set
of circumstances, the collapse of oGX comes at a time when analysts
see defaults in latin america on the rise.
mexico has also had its share of high-profile defaults. there
are useful examples of successful outcomes in the country's
concurso mercantil (commercial bankruptcy) process. as with
Brazil, uncertainties remain. However, by the end of 2013, there
was optimism surrounding changes to the bankruptcy framework
included in the government's Pacto por México package of reforms.
new rules seek to close a loophole which was notably exploited by

20 l atinfina nce.com - January/February 2014

Joy Gallup, paul HastinGs

"One Of the gOals Of Brazil's
Bankruptcy law was tO give
cOmpanies mOre rOOm tO cOme
up with their Own plans fOr
restructuring. and in OgX's
case, that appears tO Be what's
happened"

glassmaker Vitro following its default in 2009. the firm manipulated
intra-company debt to force a favorable restructuring that many
outside creditors opposed. Vitro's outcome prompted investors to
demand covenants prohibiting such an outcome in new bonds and
was also thought to have driven up borrowing costs for mexican
companies - making it a priority for enrique Peña nieto's incoming
2012 government to fix.
Previously, the law - itself implemented in 2000 to replace a
decades-old framework - only recognized secured and unsecured
creditors. the new framework also calls for a mechanism that would
bolster outside creditors' control over the outcome of a restructuring,
and aims to make the process more standardized and transparent.
Vitro's investors believed the borrower exploited the rules
requiring equal treatment of all creditors. it used $1.9 billion of intracompany debt, which it took on after its default, to reach a majority
vote in restructuring negotiations, forcing its external creditors
to go along with the unpopular move. mexican judges found the
moves did not violate the laws of the concurso mercantil process. a
challenge in the US court was also ultimately unsuccessful, with the
process finalized in march 2013.
in latin america's other high-profile default last year, mexican
homebuilders Homex, Urbi, and Geo were still negotiating with their
creditors by late December. the three were victims of a government
housing policy shift that went against their business model and
destroyed their credit metrics. the three missed coupon payments
and reached standstill agreements with lenders to work out a deal.
the homebuilders were working on settling with investors out of
court before a likely pre-packaged concurso filing.
in contrast to Brazil, entering protection with a pre-negotiated
plan is one recourse that has been widely used in mexico following
the 2000 law.
"a lot of investors see more convergence and a little more
certainty in the mexican system," Gallup says. "the more recent
cases have had outcomes that are more predictable, or at least in are
line with what people expected."
Some uncertainty still looms, as Vitro demonstrated, but being
able to negotiate within the concurso framework tends to lend
more certainty than in Brazil. there still remains work to be done,
however, to get all the options on par with the US.
meanwhile, the recuperação process could give oGX another
chance at survival, if the deal proceeds as indicated at the end of
December. the new cash and the debt-to-equity swap could allow
oGX to operate the tubarão martelo field and raise cash - if the field
turns out to have any oil. LF

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LatinFinance - January/February 2014

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