Trouble is brewing in the industrial heartland of Mexico, but it’s not the violent drug wars that have plagued the boomtown of Monterrey. It is a legal brawl over the bankruptcy of the country’s largest glassmaker, Vitro.
Hedge funds and others who own the company’s bonds have accused Vitro of conspiring to bilk them out of hundreds of millions of dollars by exploiting legal loopholes.
Vitro, meanwhile, says its actions were perfectly legal under the Mexican system, and accuses the hedge funds of trying to impose U.S. laws on a foreign court.
The cross-border battle touches the foundations of international investing and law, some academics and investors say. The dispute also raises questions for global investors navigating legal systems in emerging countries that may be different from those found in the industrial world.
Vitro creditors say that if Vitro’s bankruptcy plan were to be upheld, other Mexican companies could have trouble raising money in the United States.
When a company files for bankruptcy in the United States, the absolute priority rule prevails. The rule establishes an order as to who is paid first when a company is in bankruptcy; senior bondholders get the most and shareholders are often wiped out.
In the Vitro case, the opposite seems to have happened. The shareholders, including the Sada family, which has owned the company for more than 100 years, maintained control of the glassmaker. The bondholders, meanwhile, received 40 to 60 cents for every dollar of debt they owned under the company’s bankruptcy plan, according to some estimates.
The case has sent ripples through the Mexican debt market. Creditors are leery of other companies’ pulling a similar move. Cemex, a major Mexican cement maker, recently had to place a clause into bond documents promising not to do what Vitro did. Market participants have taken to calling this attitude the “Vitro effect.”
The company and its lawyers dismiss the notion of a Vitro effect. They say that Mexican law has always had the loophole, which allows a company to use loans to its subsidiaries to generate votes to approve a bankruptcy plan.
Nothing is different, they say, except for the obstinacy of the parties on the other side of the table: Elliott Management and Aurelius Capital Management.
“If you’re a sophisticated party that chooses to go and institute litigation in Mexico, you can hardly claim the benefits of U.S. law, and particularly the benefits of U.S. policy, to protect you from the decision that comes out of that court,” said Andrew M. LeBlanc, a lawyer for Vitro, in arguments before a federal judge in Dallas.
Despite the uproar among Vitro’s creditors, both Elliott and Aurelius continued to buy the bonds even after the company issued a news release detailing a number of the actions that the hedge funds are now questioning, people briefed on the matter say.