Mexican firm's bankruptcy case has cross-border impact
Investors and financial analysts have their eyes on a bankruptcy case, pending in a Dallas courtroom, that they say could systematically shift how American firms do business with Mexican companies.
The case also comes at a time when business interests from both sides of the Rio Grande are pushing to include Mexico in the current Trans-Pacific Partnership negotiations.
Mexican glass company Vitro S.A.B filed for voluntary bankruptcy in December 2010, after defaulting on about $1.2 billion in bond debt held by foreign banks, including American interests. But in its reorganization plan, the company aimed to place its internal shareholders in first order for bankruptcy settlement ahead of its bondholders.
This was done through a rarely used strategy of creating intra-company loans from subsidiaries, said Arturo Porzecanski, a professor of international economics and international finance at American University and a senior associate with the Center for Strategic and International Studies. He added that those loans totaled $1.9 billion, more than they owed their creditors.
“The company’s intention was to enable these subsidiary creditors — the ones that had lent money to the holding company — to cast votes in support of Vitro’s restructuring plan, thereby overwhelming any opposition from unrelated creditors,” Porzecanski wrote in a November 2011 study titled Mexico’s Retrogression: Implications of a Bankruptcy Reorganization Gone Wrong.
Vitro’s filing was initially denied by the Mexican court in Monterrey in January 2011, and was denied again after a judge ruled the decision could not be appealed. But the appellate judge reversed himself in April and approved Vitro’s reorganization.
“So why is this case so important? Because the ruling in this case is very awkward, even by Mexican standards,” Porzecanski told the Tribune.
Cameron Kinvig, a Dallas-based bankruptcy lawyer, said the practice starkly contrasts with current industry standards.
“What they said was ‘You know what, we are going to pay the banks — which are the senior creditors — less than 100 percent, and then we are going to let shareholders keep the money,’” he said. “It is the exact opposite of how things would work in the United States, and frankly the exact opposite of how most people agree things should work in Mexico as well.”
Kinvig said that because Vitro has U.S. subsidiaries, it filed a Chapter 15 action, which asks the U.S. Court to respect the Mexican court’s ruling. That case is pending in Dallas.
The process has stakeholders wondering whether the outcome will taint what many in the finance business consider remarkable progress in Mexico’s civil system since 2000, when legislation to modernize its bankruptcy proceedings and have them fall more in line with U.S. procedures was passed.
“Everybody thought [the legislation] was just what the doctor ordered,” Porzecanski said. “It tried to incorporate best practices from around the world, and it incorporated something that many countries had incorporated into their bankruptcy laws now.”
The Chapter 15 action could ultimately determine if the court in Dallas will uphold Vitro’s Mexican reorganization plan.
“It is asking a U.S. court to say ‘whatever is going on with the foreign bankruptcy proceeding since it was filed first, that’s what will bind the U.S. subsidiaries,” Kinvig said.
Chapter 15 was added to the bankruptcy code in 2005 in order to facilitate insolvency cases involving overseas debtors and other parties of interest. But Porzecanski said that a ruling upholding the Monterrey court’s action — in this specific case — would amount to approving a fraud.
“Creditors are saying, ‘You surely don’t want to bless a fraud, at least under U.S. law, so please don’t do this and accept the fact that a second workout is necessary under U.S. law because we didn’t get a fair hearing,” Porzecanski said.
The case could also indicate whether future cases will probably see judges take more of a laissez faire approach when ruling on international business matters.
“It puts the judge in an awkward position because in general, especially if there is a Chapter 15 or other law that encourages judges not to retry cases, but to recognize a foreign proceeding, they are kind of morally obligated to do it,” he said.
The case in Dallas is scheduled for June. Meanwhile, Porzecanski and Kinvig said the Vitro dilemma could affect Mexico’s bid for inclusion in the Trans Pacific Partnership, a multi-country trade pact aimed at decreasing tariffs between member countries.
Texas lawmakers sent a letter to U.S. Trade Representative and former Dallas Mayor Ron Kirk this year, asking him to consider including Mexico in the partnership dialogue. They argue that including Mexico could add to the 6 million jobs supported by the current trade relationship and that it makes sense geographically because its five largest trading destinations include the trade districts of Laredo, El Paso and Houston.
“So that’s why the Vitro case is so important because Mexico is saying ‘We want to be part of this partnership, we’re a good country to invest in, we’re a safe country to invest in,’ ” Kinvig said. “But the Vitro case is saying 'if you invest money in our country, our legal system may put you at the back of the bus.’ ”
Porzecanski does not think the negotiations will be the death knell for Mexico and the TPP, but he said that it should urge financiers in the country to rethink its processes.
“It behooves them to clarify this … or else at least acknowledge the problem,” he said. “Even the other Mexican companies I have spoken to, some of them should be saying to Vitro, ‘Come on man. Don’t ruin it for us, don’t ruin the party.’ ”
What is more important for the long-term, Porzecanski says, is an escalated “retrogression” in Mexico where businesses are reverting to older financial practices.
“People say ‘If I have some collateral I stand a better chance, I am further up on the queue and might actually get paid,’” he said. “For me, who has been following Mexico and other emerging markets for several decades, to see that retrogression beginning to happen, never mind the possibility of the floodgates to that opening, is a very sad thing.”
Even though the Vitro case could be a thorn in U.S.-Mexico trade relations, trade between the two countries continues to trend upward.
For the first time since 2006, Mexico surpassed China and became the United States’ second-largest trading partner, according to Florida-based WorldCity, a media and data clearinghouse that ranks trade data by import, export and country of origin. Using U.S. Census Bureau data, WorldCity concluded that U.S. trade with the world through the first quarter of 2012 was a record $934.38 billion. Mexico’s trade with the United States through March totaled $122.40 billion compared with China’s $120.98 billion. Canada remained in the top spot with $154 billion.
“Mexico overtook China because of surging U.S. exports to the NAFTA partner, led by motor vehicle parts, gasoline, computer parts, computers and corn,” WorldCity officials said in a statement. “The change comes in the third year of the Obama administration’s efforts to double U.S. exports in five years and as more multinationals look to ‘near-sourcing,’ as a less expensive option to manufacturing in China and other Asian nations.”