Antonio Franck and Fernando Ballesteros Cameroni anticipate a wave of restructurings and an increasing frequency of case precedents in Mexico in the wake of the recently reformed bankruptcy legislation.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
During 2015, 50 new concurso mercantil (bankruptcy/insolvency) cases were filed in Mexico, most of them before courts in Mexico City and the State of Baja California. Since 2014, the date the Financial Reform was published in the Federal Official Gazette, two major trends can be identified. First, the three largest Mexican home builders filed for concurso mercantil proceedings to restructure their debts, directly affecting the home building industry. Second, an important increase of filings related to corporate groups has been experienced. However, over the last 12 months no specific industry can be marked as specifically affected.
2. What is the market view on prospects for the coming year?
For 2016 it is expected that due to lower oil and gas prices, many of the companies that comprise PEMEX’s supply chain may be affected by a reduction of investment, suspension of projects, and late payments. Many companies that depend entirely or almost entirely on PEMEX’s operations may need to restructure.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
Insolvent entities and their creditors have multiple mechanisms available for purposes of negotiating and achieving a corporate restructure. On one hand, there are out-of-court processes, where results depend on the agreements that all interested parties may reach. Interested parties may agree upon their credits with the insolvent entity either independently or in conjunction with all other creditors. The decision on whether an out-of-court restructuring is possible or not, and which path the insolvent entity and its creditors should take towards achieving a restructuring, shall depend on many different factors; for instance, whether or not a third party will provide financial assistance. Once those factors are identified, it will be essential to determine the best approach for implementing the restructure. In any event, the key issue to be observed in obtaining a solid restructuring agreement while minimising the risks of a potential annulment, is to avoid any transaction considered in fraudulent conveyance.
On the other hand, there are court-driven processes available. The three main processes are: (i) the insolvent entity filing for a voluntary concurso mercantil starting either at the mediation stage or the bankruptcy stage; (ii) the insolvent entity acting as a respondent party whenever a creditor or the prosecutor (ministerio público) file for a concurso mercantil; or (iii) the insolvent entity and its creditors representing a simple majority of its outstanding liabilities filing for a concurso mercantil under a prepackaged deal.
As for the effectiveness of the tools at hand, it is difficult to predict the likely outcome that a case may have, mostly for court-driven processes, because many parties intervene throughout the proceeding; e.g., the court itself, the mediator (conciliador), the receiver and tax authorities, among others. However, a more realistic assessment can be done depending on the collateral that a creditor may have, if any.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
In Mexico, sophisticated lenders would commonly request collateralisation of company assets. This would protect their ranking and payment preference, meaning those creditors’ payments are protected in the first instance. The Mexican Bankruptcy Law provides that creditors with collateral shall have preference over unsecured creditors. Whenever intercreditor agreements violate rights of third parties or are executed within the suspicious period, they may be deemed done as a fraudulent conveyance and consequently declared null and void.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
In Mexico, international loan transactions are commonly governed by New York law or other foreign jurisdictions, while local loan transactions with Mexican banks are commonly governed by local law. The originating banks usually have a direct relationship with the borrower during the restructuring process. Such relationship helps to obtain waivers, amendments and relief directly from the bank. It is a common practice that banks have an active role in the concurso mercantil proceedings. Depending on the company and its restructuring arrangement, banks have participated in the capital structure of companies.
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
Distressed debt funds play an important role in nearly every high-profile restructuring in Mexico. However, in Mexico, the banks normally prefer to remain as debt holders and directly negotiate their credits instead of transferring such credits to a distressed debt fund. Therefore, in Mexico, distressed debt funds participate mainly through the purchase of debt notes placed abroad.
7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
As a consequence of the Financial Reform, the Bankruptcy Law provides for a new category of creditors known as subordinated creditors, deemed as those which voluntarily decide to subordinate their rights vis-á-vis unsecured creditors, as well as inter-company credits. In addition, a new feature introduced as part of the reform is the creation of a proceeding which makes it possible for different insolvent entities to file for concurso mercantil whenever all of them are part of a corporate group. Furthermore, it is important to mention that insolvent entities are entitled to obtain “emergency credits” towards keeping the business in operation, with the necessary cash flow throughout the concurso. In that event, financial institutions granting those emergency credits shall have preference for recovering their payments.
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
Since the Mexican Bankruptcy Law has been reformed and amended recently, we are not aware of any current proposals that may affect the legal framework for this matter in the near future.
9. If it was up to you, what changes would you make?
The current applicable laws will be tested in the courts. This will lead to judicial precedents being issued more frequently in order to bring clarity for all parties involved within proceedings of this nature. In view of this, it is important for the Mexican Federal Institute of Bankruptcy Specialists to make stronger efforts to promote concurso mercantil proceedings, the applicable laws, and of course, the restructuring opportunities they provide to entities facing financial problems, as well as granting protection to the creditors to the greatest extent possible.
The authors would like to thank Diego Noriega for his invaluable assistance in the preparation of this chapter. Diego is an associate at Jones Day and his practice focuses on transactions related to the development and financing of energy and infrastructure projects, general corporate law, and M&A. His experience also includes procedures before the National Banking and Securities Commission, the Mexican Stock Exchange, the National Registry of Foreign Investment, the National Institute of Industrial Property, the Civil Aviation Authority, and energy authorities. Email: email@example.com.