by Mariana Santibáñez
Mexico's Vitro appears to have won a protracted and bitter
war with holdout creditors after a local court ruled earlier
this year in favor of the troubled glassmaker's unpopular
restructuring plans. The results not only have the buyside up
in arms, but could carry broad implications for other Mexican
high-yield names seeking to raise money abroad.
Fixed-income investors are now vowing to take a closer look
at the country's junk names and threatening to charge a "Vitro"
premium going forward while also keeping a close eye on other
companies that have recently struggled under the weight of
heavy debt loads such as cement maker Cemex.
"What Vitro is doing really puts Mexican companies in a very
negative light and as a buyer I'm going to be much more careful
and demand a premium given the many loopholes in the Concurso
Mercantil framework," says Jack Deino, senior portfolio manager
at Invesco, which manages $1.6 billion in EM assets.
At issue was whether Vitro broke Concurso rules by using
$1.9 billion of inter-company debt incurred subsequent to its
2009 default to achieve a majority vote in restructuring
negotiations. In this sense it looks like Vitro has been
But perhaps more importantly Vitro's court victory leaves
many experts saying that Mexico's insolvency law, Ley de
Concurso Mercantil (LCM), needs to be rethought just 12 years
after its creation and five years since it was last
"The Mexican insolvency regime has been put to the test by
the creditor-unfriendly precedent that Vitro S.A.B. is trying
to set," says Arturo Porzecanski, economist-in-residence at the
School of International Service at American University in
Washington and expert in Latin American economics.
Porzecanski adds the precedent would weigh more heavily on
the minds of Cemex bondholders and other risky Mexican
corporations. He adds Cemex has a similar debt structure at the
holding level backed by guarantees from its foreign
subsidiaries. Cemex declined to comment.
The treatment of inter-company claims has been a lingering
issue in bankruptcy cases in Mexico, but few if any of the
country's recent restructurings have created such a vitriolic
By itself, the glassmaker's perspective seems straight
forward enough. It used local laws to defend itself from what
it sees as predatory vulture funds at a time when it was
struggling to survive in the wake of its $1.2 billion debt
default in 2009.
Using inter-company debt at the subsidiary level to push
through a restructuring plan may not be popular, but it is
legal under Mexican law, the company says. "We use
inter-company debt as done in any other types of restructurings
and we did not do anything the law did not want us to do,"
Vitro's chief restructuring officer Claudio Del Valle tells
However, this hasn't sat well with the broader investor
base, which thinks Vitro is setting the wrong precedent and
could harm attitudes toward Mexico's credit markets. "What is
legal and what is right is not the same thing. They crammed
down [legitimate] bondholders with their restructuring plan and
managed to get away with it," says Carlos Legaspy, president at
San Diego-based Precise Investment Management.
Vitro supporters say that the glassmaker's methods are not
unusual, and that companies could in theory have made a similar
case under Australian and Italian law, for example.
"The law in Mexico is perfectly clear about inter-company
debt," says Luis Manuel Méjan, bankruptcy and business
restructuring counsel at Haynes Boone, and former head at
Mexico's Federal Institute of Bankruptcy Specialists
"Mexican law, like restructuring law in other jurisdictions,
does not give specific or special treatment between types of
credits and treats them like any creditor as long as it was
done in good faith, and the law includes strong protection to
ensure creditors are treated fairly," he adds.
In reality such issues are highly complex and
interpretations of the law in each country vary. What is clear
to some, though, is that Vitro outmaneuvered its opponents at
every turn and won the war of attrition against holdouts, some
of which are highly skilled themselves at finding legal
loopholes to work in their favor.
According to EM distressed debt specialist Gramercy, Vitro
was the first large Mexican company to use inter-company claims
to approve a restructuring plan over the objections of
legitimate creditors, in this case holding some $1.45 billion
Vitro isn't the first Mexican company to have used
inter-company debt to leverage its position during
restructuring negotiations, say experts. Paper company Grupo
Durango, later renamed Bio Pappel, did the same but reached a
consensual deal instead.
Durango's ability to strike an agreement with creditors may
have reflected the types of creditors involved, say some legal
sources. Depending on which side of the Vitro fight experts
take, holdouts are either aggressive vulture funds with a
winner-take-all attitude or legitimate creditors bringing to
light loopholes that the glass company unfairly exploited to
the detriment of its bondholders.
Either way, bondholders were less compliant with Vitro.
Elliott International, one of the creditors involved in the
legal battle, has shown in the past a willingness to fight long
court battles and stand its ground to make substantial gains.
In one of its more high profile cases, it reportedly sued the
Peruvian government to make a $47 million profit on debt it
bought for $11 million.
"Some of the vulture funds purchased bonds after the
restructuring began," says Alejandro Sánchez
Mújica, Vitro's vice president and legal counsel.
The Vitro case stands out for several reasons, Gramercy
argues, including the fact that the $1.9 billion in
inter-company claims were incurred after its default and that
an outside party provided financing that some creditors alleged
were fraudulent transfers.
In a ruling by the US Bankruptcy Court Northern District of
Texas, it says that in December 2009, Vitro and Fintech
Investments "entered into several simultaneous transactions
which caused Fintech to invest $75 million and generated $1.5
billion in inter-company debt, payable to Vitro SAB's
subsidiaries by Vitro SAB. It is alleged that these
transactions amount to fraudulent transfers on the part of
Vitro SAB and are an attempt by Vitro SAB's equity holders to
control any attempts at reorganization."
At the same time, the ruling states that an appellate court
reversed a prior voluntary Mexican proceeding through the
Concurso Mercantil system that found inter-company claims
should not be considered. This ultimately helped Vitro claim
victory earlier this year. Either way, some creditors allege
that Fintech's involvement as an investor, creditor and advisor
to Vitro constituted a conflict of interest.
Ultimately, Vitro's position passed muster under Mexican
insolvency law, and according to the company resulted in the
largest payment to debtholders in any Mexican debt
The plan that was ultimately approved involved exchanging
defaulted debt - which included 8.625% 2012s, 11.75% 2013s and
9.125% 2017s - for $814.6 million of new 8% 2019s, $95.8
million of 12% mandatory convertible debt due 2015, and the
pledge that holders will get a 20% equity stake if the
convertible debt is not paid. There was also a cash
restructuring fee in an amount equal to an 8% annualized return
on $814.65 million.
The bondholder proposal that had been rejected earlier
involved the issuance of $1.1 billion in new bonds, a cash
payment of 10% on outstanding principal of the existing notes
and 61% in Vitro's common shares. Recovery values under the
agreed upon plan are hard to come by, but a JPMorgan note put
them at anywhere between 45%-50%.
An ad-hoc group of bondholders, largely comprising hedge
funds and distressed debt specialist, say their terms were
never considered but the conciliator on Vitro's restructuring,
Javier Navarro-Velasco, tells LatinFinance that this is untrue
and that the company hired an independent third party, KPMG, to
analyze the fairness of the restructuring plan for all parties
Each side has battled from its own corner, but the issue of
using inter-company claims to push through debt plans is likely
to require a clearer resolution.
Whether Mexican junk credits will be punished with higher
premiums remains to be seen given the market's grab for yield.
Vitro itself shed its reputation as a troubled borrower in
early 2007 when it re-profiled its debt maturities thanks to
strong demand for its paper. All may soon be forgiven.