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					INSOL International
Mexico City Seminar
Thursday 22 April 2010
Welcome
Bienvenida e inauguración

Howard Seife
Chadbourne & Parke LLP
Board Director, INSOL International
Seminar Chair
Presidente del Seminario
Jorge Sepúlveda
Bufete García Jimeno, S.C.
 Organising Committee /
 Comité de Organización
• Jorge Sepúlveda, Bufete Garcίa Jimeno S.C., Presidente
• Thomas Heather, Heather & Heather, Copresidente Educacional
• Howard Seife, Chadbourne & Parke LLP, Copresidente
  Educacional
• Adam Bryk, Deloitte, Copresidente Sponsor
• Jaime Guerra González, Guerra González Abogados, S.C.
  Copresidente Sponsor
• Henri Bricard, Bricard, Egure y Espindola Asociados,
  Copresidente Marketing
• Antonio Silva Oropeza, Instituto Iberoamericano de Derecho
  Concusal, Copresidente Marketing
Group of Thirty-Six
El Grupo de Treinta y Seis
AlixPartners LLP                       Jones Day
Allen & Overy LLP                      Kaye Scholer LLP
Alvarez & Marsal LLC                   Kirkland & Ellis LLP
Baker Tilly                            KPMG LLP
Begbies Global Network
                                       Linklaters LLP
Bingham McCutchen LLP
Cadawalader, Wickersham & Taft LLP     Lovells LLP
Chadbourne & Parke LLP                 Norton Rose LLP
Cleary Gottlieb Steen & Hamilton LLP   Pepper Hamilton LLP
Davis Polk & Wardwell                  PPB
De Brauw Blackstone Westbroek          PricewaterhouseCoopers
Deloitte                               RSM Corporate Advisory Services
Ernst & Young                          Skadden, Arps, Slate, Meagher & Flom LLP
Ferrier Hodgson                        Shearman & Sterling LLP
Freshfields Bruckhaus Deringer         Vantis
Goodmans LLP
                                       Weil, Gotshal & Manges LLP
Grant Thornton
Greenberg Traurig LLP                  White & Case LLP
Huron Consulting Group                 Zolfo Cooper LLP
Housekeeping
• No Smoking

• Coffee Breaks and Lunch – timing

• Mobile telephone & Blackberry switched off

• Assessment forms – completion & return
Cross-border proceedings
Procesos transfronterizos
Preside: Thomas Heather
Heather & Heather

The Honorable Samuel Bufford
US Bankruptcy Court

Brock Edgar
FTI Consulting

Bill Govier
Bingham McCutchen LLP
Cross-border proceedings


Thomas S. Heather
Heather & Heather
Cross-border insolvencies:
an overview

• 2008-2009, International financial crisis of
  unprecedented proportions.
• Particularly in Mexico, a handful of important
  cross-border insolvencies developed into
  precedent setting matters.
• Concurso Mercantil: 10 years under a “new” law
• External factors and failure to address key
  structural reform, (taxes, labor, antitrust,
  telecomunications, security) may lead to more
  cases.
Critical factors must be considered in
  answering basic questions:
  – Are creditors/debtors treated equally?
  – Has progress been substantial?
  – Is Chapter II an alternative for
    Mexican/Latinamerican debtors? When?
  – What are the liabilities to management and to
    the board?
  – Is Mexico/Latinamerica competitive?
  – Is there an effective international cooperation
    among our tribunals?
Overview Comparison of Mexican
Concurso Mercantil to US Chapter 11


Bill Govier
Bingham McCutchen LLP



                                  12
Topics For Discussion

•   Overview
•   The Players
•   Commencement of a Case
•   Key Issues
•   Treatment of Certain Claims
•   The Creditors’ Voice
•   Establishing a Claim
•   The Plan
•   Conclusion

                                  13
   Overview
• Primary Goals the Same:
   – Owners and Management Can Preserve a Going Concern,
     and Restructure Debts and Operations, with the Support of
     Most Creditors, While Binding Dissenting Creditors

• Major Policy Differences:
   – Chapter 11 Can Also Impose a Change of Control of the
     Restructured Going Concern, Concurso Cannot
   – Equity is “Just One More Constituency” in Chapter 11, but in
     Concurso, Equity Enjoys Veto on the Reorganization
   – Chapter 11 Can Impose a Restructuring on Secured Creditors
     Without Their Consent, Concurso Cannot


                                                          14
The Players
U.S. Proceedings                Mexico Proceedings
• Debtor/ Debtor-in-            • Debtor
   possession                   • Judge
• Judge                         • Secured Lenders (not
• Secured Lenders                 required to participate)
• Unsecured Bonds               • Unsecured Bonds
• Official Committee of         • Trade Claims
   Unsecured Creditors          • Visitador (examiner)
• Other Committees              • Conciliador
• Trade Claims                  • IFECOM (Instituto Federal
• Landlords                       de Especialistas de
• Other “parties in interest”     Concursos Mercantiles)
   (SEC, unions, etc.)          • Interventor
• Foreign Representative (in    • Government Entities
   chapter 15 cases)              (Taxing Authorities,
• United States Trustee           Attorney General, etc.)
Commencement of a Case
U.S. Proceedings               Mexico Proceedings
• Voluntary petition           • Voluntary petition
• Involuntary petition         • Involuntary petition
• No insolvency                • Insolvency requirement
   requirement for voluntary      – IFECOM appoints
   petition                          Visitador who reviews
                                     the debtor’s books and
                                     records and issues a
                                     report within 15-30
                                     days on whether
                                     debtor is insolvent
  Commencement of a Case: (cont’d)
  Stay
U.S. Proceedings                    Mexico Proceedings
• Automatic stay halts efforts      • Court issues “Declaration
   by secured and unsecured           of Insolvency”, which will
   creditors to collect               date back to the filing date
   prepetition debts                  and act as a “stay”
• Relief from the stay is           • Stay is valid as against
   available, for cause if the        secured and unsecured
   debtor has no equity in            creditors during the
   property that is not needed        “conciliation phase” (185
   for reorganization, or failure     days + up to 2 potential
   to compensate secured              extensions of 90 days
   creditor for declines in           each)
   collateral value                 • Limited opportunity for
• Automatic stay is a central         relief from the stay during
   component of forcing               conciliation phase
   creditors to stay at the table
Key Issues
Post Petition Borrowing
U.S. Proceedings                         Mexico Proceedings
• Debtor-in-possession financing         • Theoretically available, but no
   (“DIP financing”) is encouraged,        specific mechanism
   and is given super-priority status
                                         • Lack of post petition loans can
• Existing secured lenders often           be a major impediment to
   use it to shore-up or protect their     seeking Concurso protection
   position, and impose restraints
   on operations


Adequate Protection
U.S. Proceedings                         Mexico Proceedings
• Interim payments during                • No interim payments during
   proceedings to secured                  proceedings, limited opportunity
   creditors to compensate for             to protect against decline in
   diminution of value of collateral       collateral value absent special
   during the case                         Court permission to foreclose
Key Issues (cont’d)
Status of Executory or Partially Performed
Contracts
U.S. Proceedings                     Mexico Proceedings
• Debtor may assume, assume          • General rule is that debtor
   and assign, or reject               must continue to comply with
   executory contracts as it           contracts, unless the
   sees fit, may “pick and             Conciliador objects or rejects
   choose”                             the contract
• Key flexibility to restructuring   • Can be an impediment to a
   the operations of the debtor        restructuring of operations

Substantive Consolidation
 U.S. Proceedings                     Mexico Proceedings
 • Multiple debtors may be            • Not permitted; although
    combined into one “estate”          related party filings handled
    for purposes of calculating         by same judge
    assets and liabilities
Key Issues (cont’d)

Preference/ Fraudulent Transfers
U.S. Proceedings                    Mexico Proceedings
• Fraudulent transfers: Two         • Court may invalidate
   year look back period              transactions made within 270
     – Debtor-in-possession or        day period before Declaration
       trustee may file action to     of Insolvency that are made
       avoid certain transfers        with intent to defraud, or are
• Preferences: 90 day look            otherwise gratuitous or at a
   back period on existing debt;      discount
   1 year look back period for          – Interventor can extend
   insiders                                270 day period to up to
                                           540 days
                                    • Presumption that certain
                                      transactions made during
                                      look back period were made
                                      in attempt to defraud of
                                      creditors, unless debtor
                                      shows good faith
Treatment of Certain Claims
U.S. Proceedings                         Mexico Proceedings
• Secured claims                         • Secured claims
     – Continue to accrue interest           – Continue to accrue interest (not
        (including default rate) up to          including default rate) up to value
        value of collateral                     of collateral (remainder is
     – Can be impaired and                      unsecured claim)
        compromised under a plan             – If secured creditor agrees to
        of reorganization so long as            restructure in Concurso, paid
        recovery value of                       pursuant to agreed Convenio
        restructured claim equals or         – Cannot be forced to restructure
        exceeds the value of the                in Concurso, pre-Concurso liens
        collateral                              and rights ride through the
                                                proceeding unimpaired, and
•   Priority unsecured claims                   must be honored in full after
     – Typically includes                       Convenio finalized
         administrative expenses,        • Priority claims
         taxes, and wages                    – Costs of administration, taxes,
     – “Super priority” for DIP                 wages, and unsecured claims
         financing; trumps almost all           with attachments under Mexican
         else                                   law
  Treatment of Certain Claims (cont’d)
U.S. Proceedings                     Mexico Proceedings
• “General” unsecured claims         • Unsecured claims
    – Cease to accrue interest           – Cease to accrue interest
    – No adequate protection right       – Converted into UDIs
    – Can be impaired and                  (Unidades de Inversión)
       compromised under a plan of       – If denominated in foreign
       reorganization                      currency, converted first to
    – Receives all plan value after        pesos, then to UDIs -
       secured recoveries, and if          currency risk issues here
       not paid in full, can force a     – Before filing, unsecured
       conversion of debt to equity,       creditors with obligations
       and wipe out all of the             under Mexican law may seek
       shareholders, and elect a           attachment of assets
       new board                         – Treatment under concurso is
                                           governed by consensual
                                           decision of 51% of the claims
    The Creditors’ Voice
U.S. Proceedings                       Mexico Proceedings
• Official Committee of                • No official committees
   Unsecured Creditors:                • Creditor(s) representing ten
     – Appointed by the US Trustee       percent of “recognized credits”
       (usually 5-7 largest creditors)   may request the court appoint an
     – Consults with debtor              Interventor
     – Receives confidential                – Representative of appointing
       information from debtor                creditor(s); not a fiduciary
     – Fiduciary for all unsecured          – Fees paid for by the requesting
       creditors                              creditor(s)
     – Paid for by the debtor’s estate •   “Recognized creditors” vs.
•   Additional official committees:        unrecognized creditors
     – Court may appoint or US              – Only “recognized creditors” may
       Trustee may recommend                  appear before the court or file
     – All expenses paid for by               pleadings
       estate                               – Individual bondholders not
•   No secured creditor                       expressly recognized (unless
    committees                                they individualize their claim)
                                            – Indenture trustee recognized (as
                                              long as it files a proof of claim)
  Establishing a Claim
U.S. Proceedings                         Mexico Proceedings
• Bar date                               • To be a “recognized creditor”,
    – Claim allowed unless debtor          must file proof of claim within
        or party in interest objects       certain time period after
    – Those who file a proof of            insolvency judgment published
        claim are subject to the             – 20 days for Mexican
        jurisdiction of the bankruptcy          creditors
        court and allowed to vote on         – 45 days for foreign creditors
        the plan of reorganization       • Conciliador files provisional list
• Bankruptcy court may estimate            of creditors and claims, then
   a claim for voting purposes or          final list
   for allowance purposes                • Court reviews and publishes a
• Typically, indenture trustee files       “Final List of Recognized
   proof of claim on behalf of all         Credits”
   bondholders, but individual           • Right to vote is separate from
   bondholders retain right to vote        recognition as a “recognized
                                           creditor”
                                         • May need to file separate
                                           “voting writs”
    The Plan
U.S. Proceedings                        Mexico Proceedings
• Debtor has 120 day                    •  Concurso Mercantil (2 stage process)
   exclusivity period to file a              – Insolvency test requirement
   plan, but often extended by               – Stage 1: Conciliation
   the court, up to 18 months                       • 185 days, extension for two additional 90
   maximum                                            day periods with certain approvals
• Requires filing of disclosure              – Stage 2: Liquidation (quiebra)
   statement containing                             • If consensual reorganization not reached
   adequate information                               within 365 days
                                        •  Convenio Concursal not voted on, signed
• Plan of reorganization
                                        •  Presented first to Concilador for review and approval
   details creditor
                                           before filed
   classification and treatment
                                        •  Acceptance = consent by more than 50% of allowed
     –   Impaired classes vote on          unsecured claims
         plan; one “impaired class”
         must vote in favor of plan          – Debtor must agree to and sign the Convenio
                                             – Participating secured creditors may agree to
•   Acceptance = consent by                      treatment pursuant to Convenio, nonparticipating
    2/3 in amount of claims and                  secured creditors ride through Concurso
    more than 50% in number             •  Court issues notice of approval after 5 day objection
    (of claims actually voted)             period. 9 days after notice, Convenio approval order
     –   Absolute priority of claims,      is final
         and potential cramdown         •  New pre-pack provisions (2007)
                                             – Filing, signed by debtor & creditors representing
                                                 40% of debtor’s credits, and debtor declaration
                                                 required
Conclusion: Practical Considerations
• Chapter 11 More Useful at Changing Operations and Cash
  Flow of Operating Companies
• Many Mexico Operating Companies or Subsidiaries Cannot
  Make It Through a Concurso
• Chapter 11 Creditors’ Committee Hires Advisors Paid For
  by the Estate, Not the Personal Creditors -- Can be a Major
  Factor, Positive or Negative, Depending on Where You Sit
• Convenio Can Be Much More Flexible and Favorable,
  From Debtor Viewpoint, as to Classification, Treatment,
  and Voting of Claims
• Convenio Cannot Force Secured Creditors to Agree to
  Less Than Full Payment, While a Chapter 11 Plan May
  Cramdown Dissenting Secured Creditors
• Equity Cramdown is a Major Differentiating Factor, and
  Again, Positive or Negative Depending on Where You Sit
Cross-border proceedings

Brock J. Edgar
FTI Consulting
What happens after default?

• Initial reaction of foreign creditors is
  often to consider filing an involuntary
  insolvency proceeding
  – Mexican involuntary proceedings
    typically take 7+ months to gain traction
  – Practically, the main reason to file an
    involuntary proceeding in Mexico is to
    get the debtor to file a Mexian voluntary
    proceeding
 USA or Mexican Proceeding?
• Creditors always consider filing Chapter
  11 to obtain USA jurisdiction over a
  Mexican Company
• Efforts are unlikely to ever succeed
  given that the Mexican statue states
  that a Mexican company’s
  reorganization is governed by Mexican
  law (Concurso Mercantil)
• However, this is sometimes an effective
  tool to get the Mexican company to file
  voluntarily in Mexico
What type of Company can file?

• Basically all companies are eligible but
  on a practical basis:
  – Operating companies cannot file and
    survive as there is:
     • No critical supplier concept that can be
       implemented immediately
     • No debtor-in-possession financing on a
       practical basis
• Therefore the Concurso Mercantil law
  is mainly useful for holding companies
Individual or Consolidated Cases?

• The concept of a consolidated filing
  does not exist in Mexico – each
  individual company has its own
  estate
Who are the Creditors?
• All liabilities of the company are
  creditors
  – Third party debt
  – Intercompany debt
  – Suppliers
  – Employees
• While there is “superior” treatment for
  secured creditors all other creditors
  receive pari passu treatment unless
  they agree to receive worse treatment
Cross-Border Proceedings


Hon. Samuel L. Bufford
US Bankruptcy Court – Los Angeles
(C.D. Cal.)
Sale of Assets under § 363 in
Multinational Case

• If done in a chapter 15 case, limited
  to assets within US territorial
  jurisdiction

• US chapter 11 case – no such
  limitation
  – Comity concerns apply
Sale of Assets under § 363 in
Multinational Case

• Court must strike balance between
  debtor’s ability to sell assets and
  constituents’ rights to vote on a plan

• Some articulated business justification
  required

• May not be a sub rosa plan or attempt to
  circumvent plan confirmation
  requirements
Sale of Assets under § 363 in
Multinational Case
• Factors

  – the proportionate value of the asset to the
    estate as a whole

  – the amount of elapsed time since the filing

  – the likelihood that a plan of reorganization
    will be proposed and confirmed in the near
    future

  – the effect of the proposed disposition on
    future plans of reorganization
Sale of Assets under § 363 in
Multinational Case

• Factors

  – the proceeds to be obtained from the
    disposition vis-a-vis any appraisals of the
    property

  – which of the alternatives of use, sale or
    lease the proposal envisions

  – whether the asset is increasing or
    decreasing in value.
 Hearing – first day motions

• Evidence of notice to major creditors
  – Some will normally attend hearing


• Presentation of case
  – May require oral testimony


• Setting timetable for case
 Hearing – first day motions

• Motions – typical for US

  – Use of cash collateral
  – Paying prepetition wages
  – Post-petition financing
  – Cash management system
  – Utilities
 Hearing – first day motions

• Main Point – to have the judge
  become involved in the planning and
  scheduling of the case
Equality of Arms

• Principle of “fair legal process”

• Derives from European Convention
  on Human Rights

• Applied in European Court of Justice
  in bankruptcy cases _ Eurofood
Equality of Arms

• Right to a full and fair opportunity to
  present facts of one’s case to the
  court

• Right to present one’s legal
  arguments to the court

• Right to comment on evidence and
  legal arguments of opponent
Cross-border proceedings
Procesos transfronterizos
Preside: Thomas Heather
Heather & Heather

The Honorable Samuel Bufford
US Bankruptcy Court

Brock Edgar
FTI Consulting

Bill Govier
Bingham McCutchen LLP
Procedimientos con plan de
reestructura (Pre-packs)
Preside: Jaime Guerra González
Guerra González Abogados

Mark Bloom
Greenberg Traurig P.A.

Richard Cooper
Cleary Gottlieb Steen & Hamilton LLP

Luis Enrique Graham
Chadbourne & Parke LLP
Prepackaged Plans Under U.S.
Bankruptcy Law

Richard J. Cooper
Cleary Gottlieb Steen & Hamilton LLP
Prepackaged Plans in U.S.
Bankruptcy: Overview
• In a prepackaged bankruptcy, creditors of a distressed
  company arrive at a mutually acceptable reorganization plan
  with the debtor prior to the commencement of the Chapter
  11 case
• A conventional Chapter 11 case can take a long time (often
  more than 18 months)
• A prepackaged bankruptcy shortens the plan process by
  allowing the debtor to enter Chapter 11 having already
  formulated and negotiated a plan with creditors (and in the
  case of a true prepackaged plan, as opposed to a
  prenegotiated or prearranged plan, having solicited
  sufficient acceptances for the plan)
• Prepackaged bankruptcies also offer debtors greater
  flexibility than out-of-court restructurings because of the
  ability to bind a dissenting minority of creditors
Prepackaged Chapter 11 Plans:
Advantages to Debtors
• Speed
  – Expedite reorganization and exit from Chapter 11
• Cost
  – Minimize typical expenses and deterioration in business
    associated with protracted Chapter 11 proceedings
• Control
  – Minimizing amount of time in Chapter 11 reduces influence of
    court and creditor constituencies
     • Creditors are less likely to force the debtor to replace
       company executives
  – Ability to bind a dissenting minority of creditors
     • In order to block plan approval, dissenting creditors must
       constitute at least 1/3 of the face amount of the class of
       claims being impaired under the plan (and even then,
       cramdown is a possibility)
Prepackaged Chapter 11 Plans:
Advantages
• Unlike out-of-court restructuring, Chapter 11 process
  provides releases and exculpation to the debtor,
  professionals and creditors
• Confirmation Protections
   – Court confirmation of plan mitigates risks of claims
     arising from out-of-court deal:
      • Fraudulent Transfer
      • Preference
      • Lender Liability
Prepackaged Chapter 11 Plans:
Other Considerations
• Under certain circumstances, it may be in the debtor’s best interest
  to immediately seek Chapter 11 protection rather than negotiate a
  prepackaged plan with creditors:
    – If a debtor is burdened with costly executory contracts and leases, it
      might be in its best interest to first file for bankruptcy, reject its
      burdensome contracts and leases (thereby converting them into
      general unsecured claims), and then negotiate a plan with creditors
    – A debtor that has defaulted on a debt obligation or is a defendant in
      litigation may prefer an immediate bankruptcy filing to take advantage
      of the automatic stay

• By soliciting creditor acceptances for a prepackaged plan, a debtor
  alerts its creditors that it intends to file for bankruptcy
    – This advance notice may increase the likelihood of creditors acting
      adversely to the debtor (e.g., filing an involuntary bankruptcy petition
      against the debtor, tightening credit terms or ceasing to extend credit
      altogether)
Prepackaged Chapter 11 Plans:
Other Considerations
• Prepackaged plans are more appropriate in the context of financial
  restructurings (as opposed to operational restructurings)
    – Prepackaged plans are well suited to situations in which a
      sophisticated bondholder group holds most of the debt and a single
      representative can negotiate with the debtor on behalf of the
      bondholders

• In contrast, where a debtor has a large number of creditors
  representing different types of claims, it is often too difficult for a
  debtor to negotiate plan terms with enough of its creditors to obtain
  the requisite number of plan acceptances
    – Problematic with respect to trade, litigation, employment and other
      claims
    – Difficult to adequately identify and solicit claims other than financial
      debt
There Are Three Variants of
Prepackaged Restructuring Plans:
• “True” Prepackaged Plan of Reorganization
   – Prior to filing for bankruptcy, the debtor:
       • Enters into a plan support agreement with creditors in numbers sufficient to
          ensure plan approval
           – With respect to each impaired creditor class, 2/3 of face amount of claims
               and 1/2 of number of creditors voting
       • Prepares and disseminates the Disclosure / Solicitation Statement and Plan
       • Solicits and obtains votes sufficient to ensure plan approval
• Prenegotiated Plan of Reorganization
   – Prior to filing for bankruptcy, the debtor enters into a plan support agreement with
      creditors in numbers sufficient to ensure plan approval
   – After filing for bankruptcy, the debtor:
       • Solicits and obtains votes sufficient to ensure plan approval
       • Seeks court approval of the Disclosure Statement
• Prearranged Plan of Reorganization
   – Prior to filing for bankruptcy, the debtor may enter into a plan support agreement
      with creditors (but generally not in numbers sufficient to ensure plan approval)
   – After filing for bankruptcy, the debtor:
       • Solicits and obtains votes sufficient to ensure plan approval
    Prepackaged Plans in U.S.
    Bankruptcy: A Comparison
                       True Prepackaged Plan               Prenegotiated Plan            Prearranged Plan

Approval          Generally 30-60 days from             Generally 60-90 days from     Can be as short as 60-
Timeline          bankruptcy filing                     bankruptcy filing (extra      90 days from bankruptcy
                                                        time required for approval    filing; however, can be
                                                        of Disclosure Statement       much longer
                                                        and solicitation of votes)
SEC               May be registered or unregistered     Exempt from registration      Exempt from registration
Registration      (depending on applicability of        pursuant to 11 USC §1145      pursuant to 11 USC
                  exemption from registration)          (for new money invested,      §1145 (for new money
                                                        another exemption must        invested, another
                                                        also apply; e.g., §4(2) of    exemption must also
                                                        the Securities Act)           apply; e.g., §4(2) of the
                                                                                      Securities Act)
Solicitation of   Solicitation occurs prior to          Votes not solicited until     Votes not solicited until
Votes for         bankruptcy filing and prior to        after bankruptcy filing and   after bankruptcy filing
Plan of           approval of Disclosure Statement      after approval of             and after approval of
Reorganization                                          Disclosure Statement          Disclosure Statement
                  Upon filing for bankruptcy, debtor
                  seeks a date for combined hearing
                  on approval of Disclosure
                  Statement and Plan confirmation
Plan Support /    Executed prior to bankruptcy filing   Executed prior to             May or may not be part
Lock-Up                                                 bankruptcy filing             of process
Agreement
  U.S. vs. Mexico:
  A Comparative View
                 U.S. Prepackaged Plan           Expedited Restructuring Under Mexican Concurso
                                                 Mercantil
Requirements      No insolvency requirement      Debtor must be “in generalized breach of payment of obligations”
to Qualify for     to file for Chapter 11            – Where a debtor misses payments to two or more creditors
Expedited                                              over a thirty-day period, these missed payments represent
Procedure                                              at least 35 percent of the debtor’s total debts, and the
                                                       assets of the debtor do not cover 80 percent of its total
                                                       outstanding debts
                                                  Creditors representing at least 40 percent of the company’s total
                                                   debts must agree to the restructuring plan
Acceptance        With respect to each           50 percent of votes of unsecured and secured or preferred
Thresholds for     impaired creditor class,        creditors
Plan to be         2/3 of face amount of
Approved           claims and 1/2 of number
                   of creditors voting
Parties Bound     The debtor                     The debtor
by Plan           All creditors                  Unsecured creditors
                                                  Secured and preferred creditors that agreed to the plan

Experience        Bankruptcy judges are          Virtually untested
With Expedited     very experienced in            Unclear whether procedure significantly expedites restructuring
Restructuring      dealing with prepackaged        process
Process            bankruptcies, particularly
                   in the District of Delaware
                   and the Southern District
                   of New York
                  Well established process
                   with developed precedent
The Pre-Pack Sale -
An English Perspective



Mark Bloom
Greenberg Traurig P.A.
Pre-Packs – An English
Perspective
• Pre-packs are creatures of practice
  not creatures of statute
• There is little or no judicial
  involvement in a pre-pack sale
• There is little or no consultation with
  creditors
The scope of the
Administrator’s appointment
• The hierarchy of purposes
• The approval of the Administrator’s
  proposals
• The “traditional” marketing process
Anatomy of a pre-pack

•   [Marketing]
•   Negotiation of sale contract
•   Agreement with secured creditors
•   Appointment of Administrator
•   Completion of sale
•   Inform creditors
Risk

• The risk associated with a pre-pack
  sale is faced by the Administrator
• Risk may be financial, regulatory or
  reputational
• The court will not approve the pre-
  pack sale
• Creditor remedies
• Minimising risk
Pre-Pack as a deleveraging
tool
• IMO Car Wash
• WIND Hellas
Government intervention

• SIP 16
• Consultation paper
Pre-negotiated plans in insolvency
proceedings in Mexico




Luis Enrique Graham Tapia
Chadbourne & Parke, S.C.
Summary

• Brief overview of the Mexican Insolvency
  proceedings

• Where do pre-negotiated plans come from?

• Relevant differences between Mexican pre-
  negotiated plans and US pre-packaged plans

• Challenges of the Mexican pre-negotiated plans

• Some immediate benefits derived from filing a
  pre-negotiated plan
Brief overview of the Mexican
Insolvency proceedings
• Mexican insolvency proceedings have three
  identifiable stages:

   • Bankruptcy trial (concurso)
             • 116 days (from the request or claim
               to the order for relief)*
   • Conciliation phase
             • 219 days (from the order for relief to
               the order for liquidation)
   • Liquidation

• Pre-negotiated plans are filed with the request for
  reorganization to initiate bankruptcy trial
        * All statistics were obtained from IFECOM’s report available at http://www.ifecom.cjf.gob.mx/
Where do pre-negotiated plans come
from?




• Pre-negotiated plans are not an invention of
  Mexican law
Relevant differences between Mexican pre-
negotiated plans and US pre-packaged plans

                 United States’ regime

  • In the US, through a "lockup agreement," the
    votes solicited prior to the bankruptcy filing are
    binding on creditors during the bankruptcy case

  • A pre-packaged plan can generally become
    effective 45 to 60 days after the bankruptcy case
    is commenced
 Relevant differences between Mexican pre-
 negotiated plans and US pre-packaged plans

                    Mexican regime
• Before the recent amendments to the law in 2007, a
  reorganization plan could not be filed at the same
  time as the petition for relief

• The recently passed amendments allow a debtor to
  file a pre-negotiated plan of reorganization signed by
  creditors holding at least 40% of its total debt

• However, the votes obtained prior to the bankruptcy
  filing are not binding, so the debtor is required to re-
  solicit the votes during the bankruptcy
Challenges for the Mexican pre-negotiated
plans

 • Short deadlines within the insolvency proceedings
    – Difficulties in proceedings involving international parties
    – Difficulties in proceedings involving complex financial
      instruments

 • Evolution of the pre-negotiated plan into a creditors’
   agreement
    – Effective management of this evolution
    – Making an agreement that is attractive and functional
    – Gaining the 50% needed for the creditors’ agreement
    – Advisable to make a joint appointment of the conciliator
Some immediate benefits derived from
filing a pre-negotiated plan



• It serves lowering the risk of not getting the
  request for reorganization admitted



• Creditors have a clear starting position in regard
  to their credits
 Some immediate benefits derived from
 filing a pre-negotiated plan

• It helps shortening the time needed for the
  insolvency proceedings

   – Time between the filing of a request or claim
     for reorganizations and its admittance
      • Ordinary proceedings: 23 days
      • With pre-negotiated plan: 15 days±

   – Time between the filing of a request or claim
     for reorganizations and the order for relief
      • Ordinary proceedings: 116 days
      • With pre-negotiated plan: 30 days

                           ± Timeframes for the pre-negotiated plan case were obtained
                           from the public information concerning the only insolvency
                           proceedings started with a pre-negotiated plan
Some immediate benefits derived from
filing a pre-negotiated plan

• It helps shortening the time needed for the
  insolvency proceedings

   – Time between the order for relief and the
     Order of Recognition, Ranking and Preference
     of Claims
      • Ordinary proceedings: 144
      • With pre-negotiated plan: 128
Procedimientos con plan de
reestructura (Pre-packs)
Preside: Jaime Guerra González
Guerra González Abogados

Mark Bloom
Greenberg Traurig P.A.

Richard Cooper
Cleary Gottlieb Steen & Hamilton LLP

Luis Enrique Graham
Chadbourne & Parke LLP
Networking Coffee Break
Post-petition financing
Financiamiento a las empresas en
procesos concursales

Preside: Alan Kornberg
Paul, Weiss, Rifkind, Wharton & Garrison LLP

Henri Bricard
Bricard, Egure y Espindola Asociados

William Fitzgerald
Rabobank International
        Delegate Lunch
  Almuerzo sponsoreado por
  Bufete Garcίa Jimeno S.C.
Guerra González Abogados, S.C.
Independência S.A.


Giuliano Colombo
Pinheiro Neto Advogados
Hot topics

Topicos controvertidos


Preside: Adam Bryk
Deloitte
Treatment of derivatives

El tratamiento de los
derivados
Mauricio Basila
Basila Abogados S.C.

Karen Wagner
Davis, Polk & Wardwell LLP
Treatment of Credit
Derivatives in Mexico
(CDO’s)


Mauricio Basila
Basila Abogados S.C.
Principal Terms

 Credit Derivatives Default. Transactions in which
a Protection Buyer is bind to pay a premium to the
Protection Seller, in exchange of a consideration
when a Credit Event occurs.

 Derivados de Incumplimiento Crediticio. A las
operaciones en las que el Comprador de Protección
se obliga a pagar una prima al Vendedor de
Protección, a cambio de que éste le entregue la
contraprestación acordada en caso de que ocurra el
Evento Crediticio.
 Protection Seller. A person that executes a
Credit Derivatives Transaction covering to a
counterpart, partially or a totally, the Credit Risk of
and Risky Asset.

 Vendedor de Protección. A la persona que al
participar en una Operación de Derivados de
Crédito cubre a su contraparte, en forma parcial o
total, del Riesgo de Crédito de un Activo de
Riesgo.
 The Financial Entities (banks and stock brokerage
houses) that deal with credit derivatives to
guarantee its own risk, must execute the
intermediation and dealing only with financial
entities, licensed by the Mexican Central Bank, to
act as intermediaries foreign entities or recognized
markets.

 Las Entidades Financieras (bancos y casas de
bolsa) que realicen operaciones con derivados para
la cobertura de riesgos propios, sólo podrán
llevarlas a cabo con entidades autorizadas por el
Banco de México para actuar como intermediarios,
con entidades financieras del extranjero o en
mercados no reconocidos.
 The Commercial Banks can only execute
transactions with credit derivatives with other
financial entities as Commercial Banks, and foreign
financial entities*.

 Las Instituciones de Banca Múltiple solo podrán
llevar acabo operaciones de derivados de crédito
con otras Instituciones de Banca Múltiple, otros
Intermediarios mexicanos y autorizados , para
poder realizarlas o en su caso, con entidades
financieras del exterior.



*The   financial entities that are licensed to perform on a professional basis with securities and
derivatives, in the country they were corporated.
Selected derivative cases
in the United States

Karen E. Wagner
Davis Polk & Wardwell, LLP
OUTLINE

• General Bankruptcy Structure
  – Derivative Contracts May Be Executory
  – Protected Contracts May Be
    Terminated After Party’s Bankruptcy
    Filing Despite Automatic Stay
  – Generally Rights Determined As Of
    Filing Date
BANKRUPTCY CASES – LEHMAN

• Dante
  – Swap Terminated After Lehman Filing
  – English Court – Honored Priorities
    Under Transaction (English Law)
    Documents
  – US Bankruptcy Court – Did Not Honor
    Priorities – Held Triggers Were Ipso
    Facto Provisions
BANKRUPTCY CASES – LEHMAN

• Metavante
  – Swap Agreement Not Terminated
    After Filing
  – Court Ruled:
    • Performance (Payment) Required From
      Non-Debtor Party Before Termination
    • Termination Right Waived Because Not
      Exercised Contemporaneously With Filing
BANKRUPTCY CASES –
SEMCRUDE

 – Many ISDA Contracts Provide Setoff
   Permitted As To Affiliate Obligations
 – Triangular Setoff Not Permitted
   In Bankruptcy
 – Mutuality Required
NON-BANKRUPTCY CASES –
VITRO AND CCM

• Both Pending In State Court In
  New York
  – Complaints Sought Payment After
    Derivative Contracts Under Master
    ISDA Agreements Were Terminated
    Upon Default
  – Defenses Included Illegality Under
    Mexican And US Law
  – CCM Decision In Banks’ Favor
Treatment of derivatives

El tratamiento de los
derivados
Mauricio Basila
Basila Abogados S.C.

Karen Wagner
Davis, Polk & Wardwell LLP
Treatment of inter-company loans

Los préstamos inter-compañías


Fernando del Castillo
Santamarian y Steta

Judge Cristina O’Reilly
Poder Judicial de la Nacion, Argentina
Concurso Mercantil / Insolvency
Proceeding
Subsidiaries Creditors

Fernando del Castillo
Santamarina y Steta
Subsidiaries Creditors
Créditos Intercompañías

• Upon declaration of concurso the
  Conciliation period begins.



• Una vez declarado el concurso
  mercantil, la etapa de Conciliación
  comienza.
During the Conciliation the creditors have
the right to file proofs of claims.

Durante la etapa de Conciliación los
acreedores tienen el derecho de solicitar
sus reconocimientos de crédito.

 Financial / Financieros
 Suppliers / Intercompañías
 Subsidiaries / Proveedores
The purpose of the Conciliation is to
reach a convenio concursal.

La finalidad de la Conciliación es
celebrar un convenio concursal con
los acreedores.
The convenio concursal might be
executed by the recognized creditors
including subsidiaries.

El convenio concursal será firmado
por los acreedores reconocidos,
incluidos los créditos
intercompañías.
Treatment of Intercompany Loans

Tratamiento de los Préstamos
Interempresarios


María Cristina O’Reilly
Commercial Judge/Juez Comercial
Treatment of Intercompany Loans

Tratamiento de los Préstamos
Interempresarios
OVERVIEW OF ARGENTINE BANKRUPTCY LAW


BREVE DESCRIPCION DE LA LEY CONCURSAL
  ARGENTINA

    • JUDICIAL REORGANIZATION/ CONCURSO
      PREVENTIVO
    • EXTRA JUDICIAL REORGANIZATION / ACUERDO
      PREVENTIVO EXTRAJUDICIAL (APE)
    • LIQUIDATION/ QUIEBRA
Treatment of Intercompany Loans


 INTERCOMPANY LOANS IN BANKRUPTCY LAW AND
   CASE LAW
 PRÉSTAMOS INTEREMPRESARIOS EN LA LEY DE
  CONCURSOS Y EN LA JURISPRUDENCIA

  BOND HOLDERS RIGHTS AND LIMITATIONS/ DERECHOS Y
   LIMITACIONES DE TENEDORES DE OBLIGACIONES
   NEGOCIABLES
          • JUDICIAL REORGANIZATION/ CONCURSO
            PREVENTIVO
          • EXTRA JUDICIAL REORGANIZATION/ ACUERDO
            PREVENTIVO EXTRAJUDICIAL


  COMPANIES FILING TO BE REORGANIZED AS AN
   ECONOMIC GROUP/ SOCIEDADES QUE SOLICITAN SU
Treatment of inter-company loans

Los préstamos inter-compañías


Fernando del Castillo
Santamarian y Steta

Judge Cristina O’Reilly
Poder Judicial de la Nacion, Argentina
Networking Coffee Break
Distressed debt trading

Compraventa de deuda de la
insolvente

Jeffrey Hoberman
Recovery Group

Anthony Murphy
Citi
Distressed debt trading



Jeff Hoberman
CEO
Recovery Asset Management
DISTRESSED ASSET TRADING –
THE PERSPECTIVE OF A BUYER

     Give me your tired, your poor ,Your
     huddled masses yearning to breathe
  free,The wretched refuse of your teeming
    shore.Send these [Distressed Assets],
   tempest-tost to me,I lift my lamp beside
              the golden door!


  One man’ meat is another man’s poison.
Overview

• Market –Lots of distressed assets out there to
  buy.
• Types of distressed assets are bought/ sold.
• Experiences with larger credits.
• Experiences with less liquid pools of credits.
• Some conclusions: a few take aways.
• Questions.
              STOCK OF DA’s – Example: BRAZILAN
             NPLS

                                                                                                           Overview
       On-balance NPL Inventory Evolution (BRL
140
       billions)                                                             126        •   The NPL inventory in Brazil was growing
                                                                                            alongside the expansion of the overall
120
                          20% p.a.                                                          credit market until 4Q08;
                           growth                           95
100                                                                          53.2
                                                                                        •   Post-4Q08, the supply of new NPLs grew
80                                                                                          at a faster rate;
                           68              71              36.0
                61                                                            8.3
60    53                                                                     13.0
                                                                                        •   On-balance sheet NPLs inventory (less
                           25.1           26.2              7.1
               19.9
                                                            9.1
                                                                                            than 360 days delinquency) reached BRL
      17.0                                 5.7                               15.8
40              5.2        5.6
                                                           12.4                             126bn as of Dec/09;
      4.2       6.3        6.5             7.3
      4.4
                8.2        10.5           10.6
20
      6.4
                                                           30.6              35.8       •   Total Banking NPLs inventory (On-
      20.7     21.3        20.4           20.7                                              Balance + Off Balance) is estimated at
 0
                                                                                            BRL200bn+ as of Dec/09;
      2004     2005       2006            2007             2008              2009

                          D       E   F   G      H     Source: Central Bank of Brazil   •   Non-Banking NPLs (retailers, utilities,
                                                                                            funds/securitizations) potential market is
                      Letters D-H refer to the aging (D>60d / H>180d)
                      Delinquent Credits > 180 days (H) are fully charged-off               estimated at BRL100bn+.
                      Source: Central Bank of Brazil




                                                                                                                              107
What are these loans and how do
you get these loans to trade?
Some thoughts About Single
Names
Individual credits. Liquid trades.

•   Case of forestry company. We were interested in getting into industry. Two partners
    fighting. Both said they wanted to sell. Local guy continued to steal from foreign partner –
    foreign partner didn’t bring investment and markets. We ended up buying out the
    distressed loan. Blocked competitors from coming into the equity deal to some extent.
    Worst cash – new buyer would mean coming out at par.. Debtor with control threatened
    bankruptcy. That would allow him to continue not too nice local practices. He wouldn’t let
    us get cash. He would create damage. We brought in criminal lawyer. At end of day we
    traded into buying out equity. One deal for one guy, and another deal for other seller.

•   Flip side – we bought highway bonds in liquid trade in Argentina. Didn’t have control.
    Largest private holder but state banks wouldn’t sell. Should have traded up because of
    tariff improvements. Didn’t happen. Could try to kick out operator and take control.
    Blocked. Operator stealing cash and got an injunction against taking over the company
    and collecting more cash. Locked in a bad deal. Could trade out.

•   Similarities – Court systems don’t work well. In all cases we entered willing to take over
    companies – some industry expertise. While locked away discussing, people pillaring
    cash. One worked. Other didn’t. Make sure you have a portfolio.

•   Guys who buy these are big guys. Liquid. Love sovereigns too in many case. Maybe they
    have an industry play but not all have management team behind.

•   Generally more or less liquid. Size depends. Not everyone is willing to step up and go to
    the mat.
Distressed Pools

• We have bought all sorts of pools.
   – Some are homogenous – residential
     mortgages, credit cards or SME loans.
   – Others are mixed bag – bank sells in
     batch.
• We have bought in auctions. We have
  bought in negotiated transactions.
• My question in life is trying to find banks
  that sell & trying to get to a reasonable
  price with them… my biggest concern but
  not resolved here.
What are key things for buying
distressed loans.

• Have a servicer. Who is aligned.
  – Many banks don’t have a servicer when
    buying. They hire advisors. How to
    translate info into price is hard.
  – Others hire former bankers who translate
    existing practices.
  – Or they buy with someone who is not
    specialist but engaged in collecting but not
    as a principal (ie. call center or law firm.)
  – Don’t blame the pig – blame the guy who
    fed it.
Two Key PSA Issues
(here is some proprietary information that I probably
shouldn’t share)


• Purchase and sales agreement – reps and
  warranties. Usually enforceable credit and balance.
  On mortgage usually get a rep that it is a mortgage.
  There is a put back if not mortgage or difference –
  this practice doesn’t exist in normal collections
  because unique for buying. Not rocket science
  Additional issue is put back/ reps and warranties are
  also good to defend against liabilities. Fraud on credit
  cards. Some avoid. Some don’t.

• Power of atty to instruct lawyers. Usually buy with
  lawyers already in place. Hard to change. Cant
  always change formal actor in litigation. Sometimes
  doesn’t make sense. Key is power of atty to act in
  name of selling entity and give lawyers these
  instructions. Need to give a good indemnity.
  Making illiquid assets liquid.

• Advice is to always have a way to make an
  illiquid asset slightly more liquid.

• Vehicle – spvs – tax is king, and isolating
  liabilities important but I would add liquidity.

• Align servicer.

• Don’t buy if not going to do the the work.
Changes

• Market was overheated. People went into
  portfolios. Then blew up.
• Market stopped.
• Thought that people were going to trade
  when desperate. Not too many hail mary
  trades. Some exceptions but not rule.
• Sellers may be coming back.
• Big loans first.
• Then portfolios perhaps. Right now still
  wanting to keep portfolios – lots of people in
  lending who are moving over to recovery
  etc….
Take Aways

• Buyers should try to structure so that later they can
  sell without having to own through collection.

• Buyers of single names. Better to be able to hold
  through collection and not just trading. Finding
  assets is not the problem – pricing and volatility on
  particular credit. Greed is biggest issue for bad
  deals.

• Buyer of portfolios tend be more about holding assets
  through collection process. Harder to find deals and
  place cash.
– tie into servicers – without too many bodies
– be careful with psa’s.
– structure vehicles so that investment more liquid
INSOL CITI




             Anthony Murphy
               April 22, 2010
ISSUES IMPACTING DISTRESSED DEBT
TRADING

• Regulatory and Accounting environment

• Mexico vs South America

• International banks vs Regional Banks

• Clarity of financial information
ISSUES IMPACTING BANKS AS SELLERS


• Relationship with Borrower

• Relationship with Private Equity Sponsor

• Creditor dynamics

• Derivative exposures
Distressed debt trading

Compraventa de deuda de la
insolvente

Jeffrey Hoberman
Recovery Group

Anthony Murphy
Citi
Cierre
Seminar Chair
Presidente del Seminario


Jorge Sepúlveda
Bufete García Jimeno, S.C.
Cierre

Howard Seife
Chadbourne & Parke LLP
Board Director INSOL International
 Cocktail reception
Cocktail de recepción
  sponsoreado por

				
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