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, KETK reported. 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 apellate 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. Read more.