Recent Trends Regarding Mexican Insolvency Proceedings: The Pre-Packaged Bankrupcy
The restructuring and insolvency activity in Mexico during the past few years has been primarily driven by the aftermath of the credit crisis originated in the United States in late 2008. The Mexican economy was rapidly and severely affected as a result, among other factors, of an important decline in exports, as over 75% of Mexican exports are destined to the United States, and a significant decrease in remittances of dollars from Mexican workers in the U.S., which still represents the second largest component of Mexican GDP. Other issues, such as the depreciation of the Mexican peso, the variations in oil prices, stock market volatility and the reduction of foreign investments due to drug related violence and instability have contributed to the deterioration of certain sectors, such as housing, although the economy has experienced modest growth and strengthening of its fundamentals during the past years.
Since its enactment in May 2000, the Concurso Law seemed to provide certain key improvements for bankruptcy proceedings, such as a better framework to carry out “equitable restructurings”, through a procedure that addresses the interests of creditors and debtors alike, and specified time frames that aimed to prevent the abuses of unscrupulous debtors, which used to take advantage of the loopholes in the former law to stay in a literally endless suspension of payments. Nevertheless, recent decisions would question the modest advances.
The Concurso Law was amended in 2007 to include the possibility of a pre-packaged insolvency proceeding (concurso mercantil con plan de reestructura previo). Such Law provides that the insolvency procedure can begin directly at the conciliatory stage if the debtor and the creditors representing at least 40 percent of the credits jointly file a request with a proposed pre-packaged restructuring plan attached. The formal requirements to be included in such pre-packaged restructuring plan are set forth in the Concurso Law, which describes its required contents while specifically allowing for restructured loans to be maintained in the original currency contracted under.
To become effective, a restructuring plan must be subscribed to by the debtor and creditors representing more than 50 percent of the sum of the total amount corresponding to recognized unsecured creditors and the total amount corresponding to recognized secured or privileged creditors subscribing the plan. Any such plan, with the validation of the court, would become binding on all creditors and the insolvency proceeding will be considered as final and concluded.
Official records of the Federal Institute of Specialists in Commercial Insolvency (Instituto Federal de Especialistas de Concursos Mercantiles, known by its acronym in Spanish, IFECOM) show that during the last two quarters of 2011, formal filings for protection under the Concurso Law slightly decreased. During the aforementioned period, 15 petitions for insolvency were filed, 8 of which were involuntary petitions by creditors, and 7 were voluntary petitions, as opposed to the average of 20 petitions per semester during 2009 and 2010. Roughly the equivalent of US$60 billion in debt, with respect to 456 corporations has been subject to a concurso proceeding since the enactment of the Concurso Law in 2000. However, as the amendment that provides for a pre-packaged insolvency proceeding has been in effect for less than 5 years, only 5 significant corporations have resorted to a pre-packaged concurso filing.
Perhaps the most relevant development in the insolvency field is that the effectiveness of such pre-packaged restructuring plan has been proven. Although there have been only 5 cases filed under a pre-packaged scenario, the Controladora Comercial Mexicana and Grupo Iusacell Celular cases were highly successful, mainly because of the high rate of approval from creditors of the respective pre-packaged plans.
Unlike the first case of pre-packaged concurso mercantil, filed by Metrofinanciera, the restructuring plan proposed by Controladora Comercial Mexicana –the second corporation to file for a pre-packaged bankruptcy- was a true success. After complex negotiations with its creditors, Controladora Comercial Mexicana agreed to the restructuring of its debt pursuant to the provisions of a pre-packaged restructuring plan. The restructuring plan presented by Controladora Comercial Mexicana was supported by over 95% per cent of its creditors and was approved by the Court in a record time of three and a half months. The concurso plan provided for the issuance of new debt for a total amount of approximately US$1.6 billion in exchange for certain derivatives claims, commercial bank loans and publicly issued bonds. The Controladora Comercial Mexicana concurso proceeding was followed concurrently by a proceeding under Chapter 15 of the U.S. Bankruptcy Law.
As the next example of this trend, Grupo Iusacell Celular also petitioned for a pre-packaged concurso mercantil for the restructuring of its Notes due 2011 and 2012. The Grupo Iusacell Celular pre-packaged plan was supported by approximately 95 percent of its creditors and approved by the Court in 4 months. The concurso plan provided for the issuance of new debt for a total amount of approximately US$345 million.
We believe that these cases have set the grounds for other troubled companies to consider the protection of a pre-packaged concurso mercantil under the Concurso Law, as it has been demonstrated to be a valuable tool in the financial restructuring of companies in Mexico.
Apart from the notable developments in the insolvency field through the past years, and the improvements on related legislation, recent experiences in the delays by Mexican courts in accepting filings, the uncertainties associated with the appointment of procedure-related experts by the IFECOM, and the lack of immediate protective measures upon filing, among other compelling reasons, have led Mexican companies to turn North for protection of U.S. bankruptcy courts under Chapter 11 filings. The recently concluded second insolvency case of SATMEX, and that of Industrias Unidas, proved to be efficient and predictable in such respect.
In conclusion, it is urgent that the Law be revised in certain key areas such as the protective aspects of filing, the pre-pack procedure generally, the rules of the IFECOM, the treatment of intercompany loans and the measures to be adopted in corporate group filings. Similarly, the form-over-substance approach typical of the Mexican legal system allows the concurso to be entangled with delaying procedural tactics that negatively affect the interests of corporate entities, of those seeking the protection afforded by insolvency statutes and ultimately, of all stakeholders.
Notwithstanding the existing uncertainty arising from the Compañia Mexicana de Aviación, the aforementioned problems in the insolvency field, and the fact that there is currently no pending legislation on the subject, Mexico is generally viewed as a success story in the history of concerted restructurings, having innovated solutions for both the public and private sectors. Indeed, Mexico is a mature, proven jurisdiction, supported by sophisticated legal, accounting and financial experts in the field of restructurings. Formal filings for bankruptcy protection have been, historically, rare and few, and consensual workouts have been the norm. The usual restructuring exercises with the creation of ad-hoc committees working with the debtor, and the implementation of techniques such as auctions, refinancing menus, capitalization options, bond exchanges and hedging support, have indeed led to significant success outside the unpredictability of the Courts, and together with the relatively recent pre-packaged bankruptcy scenario, the outlook for successful restructurings is positive.
Thomas S. Heather is a Partner, Heather & Heather, S.C.; Mr. Heather has more than 30 years of experience in banking, restructuring and mergers and acquisitions. Prior to founding Heather & Heather, S.C., he was a partner at White & Case Miami, where he headed the Latin American Insolvency and Restructuring Group and the managing partner at Ritch, Heather y Mueller in Mexico City. Mr. Heather is a founding member of the International Insolvency Institute and a member of the Mexican Institute of Insolvency Specialists (IFECOM). He holds an LLM form the University of Texas at Austin and obtained his law degree from the Escuela Libre de Derecho. Thomas can be contacted at + (52 55) 2167 9690 or by email at email@example.com.