By: Michael J. Venditto (Reed Smith) & Alonso Gómez Del Campo (RDA)
Markets and financial distress do not respect national borders. With no border wall to protect Mexico's nascent oil and gas industry, it is susceptible to the same economic headwinds that have plagued global markets for the last several years. In the face of these forces, many US companies have used Chapter 11 of the Bankruptcy Code, either as a tool or a threat, to restructure their balance sheets. But what tools are available if the assets or business are located in Mexico?
The Mexican insolvency regime has some similarities to, and differences with, the restructuring tools available in the United States. Understanding your options in advance will help avoid unpleasant surprises.
At the end of 2013, just as oil prices began to fall, Constitutional amendments and a series of laws were approved in Mexico in an effort to transform the hydrocarbon sector of its economy. Private companies were allowed to participate in the upstream and downstream energy sector. By eliminating the monopoly of Petróleos Mexicanos (Pemex), and transforming it into a profitable and productive state-owned enterprise, Mexico hoped to attract foreign investment. The reforms were greeted with optimism by prospective investors and their implementation did generate increased private and foreign investment. Unfortunately, this optimism was predicated on two assumptions, oil prices remaining above $100 and accelerating global economic growth, neither of which have held up.
Many upstream companies were hedged, so there was some optimism that prices might quickly rebound as global supply rebalanced. However, in an increasingly competitive market, producers were concerned about preserving market share, so the rebound has been slow in coming. Eventually, the impact of falling prices spread throughout the industry as managers reduced headcount and capital expenditures. Some experts believed that as much as one third of all exploration and production companies would need to restructure debt of more than US$100 billion. The risk was particularly high for companies that had their expanded production with debt raised in the high-yield market. Predictably, this generated a host of Chapter 11 filings in the US Sophisticated creditors, familiar with the intricacies of US law and the costs, benefits and risks of Chapter 11 plans, have been willing to negotiate reorganizations, particularly since a quick resolution at depressed valuations gives them upside.
CHOOSING THE VENUE
When the business or assets are located outside the US, a restructuring may have to take place under foreign law. However, depending on the where the assets and creditors are located, the restructuring may require taking action in multiple jurisdictions. Generally, to effect a cross-border reorganization, the main proceeding will be commenced in one country, with related or ancillary proceedings filed in other nations, as needed, to make the reorganization plan binding in those jurisdictions. The selection of the main forum is an important first step, because differences in foreign insolvency law and practice introduce both uncertainty and delay into debt restructuring.
That changes the dynamic of the creditor-debtor relationship, which can jeopardize success and put assets at risk. For example, in the US, involuntary filings by creditors are relatively uncommon, because they can only be filed by a group of unsecured creditors. This gives debtors control over the whether, when, and where of a filing. By contrast, more than 40% of Mexican insolvency cases are filed by creditors, and, because creditors in Mexico have the ability to force a company into insolvency, they have additional leverage that can be used to their advantage during negotiations.
Despite this and other differences with US restructurings, Mexico's insolvency law does have a mechanism for an efficient and cost-effective reorganization. Unfortunately, Mexico's judicial system is often criticized as both inefficient and ineffective, although those perceptions may be due to the shortage of experienced restructuring professionals. Therefore, distressed businesses in Mexico's hydrocarbon industry with assets or creditors straddling the border should consider two alternative strategies. One is a concurso mercantile in Mexico, coupled with an ancillary proceeding under chapter 15 in the US to deal with creditors and assets north of the border. The second is a US Chapter 11 reorganization coupled with an ancillary proceeding in Mexico under Título XII.
Mexico's business insolvency law, known as the "Ley de Concursos Mercantiles," or "LCM," was enacted in 2000 and amended twice, most recently in 2014. The later amendments eliminated provisions which undermined Mexico's reputation as a reliable jurisdiction for enforcement of creditors' rights. The changes included the subordination of unsecured intercompany debt, restrictions on the use of insider debt to impose a restructuring plan on dissenting creditors, a one-year time limitation on workout proceedings, and a new process to facilitate post-petition financing secured by liens on the debtor's unencumbered assets. To ensure greater fiscal accountability, the amendments also added provisions making directors and officers personally liable for certain transactions when the company is in the zone of insolvency. Of particular importance for debtors and creditors, who need an efficient and economical process that will bind non-consenting creditors, is the ability to pre-negotiate a restructuring plan and then have it approved by the court—a process similar to the pre-negotiated plans that are now common in the US. For insolvent businesses, the LCM provides a single process with two distinct phases, known as a "concurso mercantile." The first phase, known as the "conciliation," gives the debtor a period of time in which to reorganize, and concludes with either the approval of a reorganization plan or a declaration of bankruptcy. The latter commences the second phase, in which a bankruptcy trustee takes control of the business and liquidates the assets.
Insolvency is not a requirement for commencing a concurso mercantil under Article 20 of the LCM. If insolvency is imminent, which is defined to mean that it is inevitable during the next 90 days, the debtor or its creditors can commence a proceeding. This is a major difference from US law, which only imposes an insolvency condition on involuntary filings by unsecured creditors. There is no insolvency requirement for a voluntary Chapter 11 filing. Unlike US law, the debtor's voluntary filing must also be authorized by stockholders, a process that can be time consuming. Additionally, the petition to commence the concurso must be accompanied by a plan, although the requirements of this plan are very minimal. However, these impediments are largely irrelevant if the plan has been pre-negotiated with creditors.
As in the US, conciliation triggers a stay against enforcement of any claims. However, unlike the US, this moratorium does not take effect until the court signs a judgment commencing the conciliation phase and appointing a concliliador (or, a "conciliator," in English). However, in a voluntary, or a "pre-packaged," case, this judgment will quickly follow the filing. The purpose of the conciliation is to preserve operations while a plan is negotiated. The conciliation terminates at the end of 185 days, unless the court grants a 90-day extension for exceptional circumstances. The statute permits only two such extensions, both of which must be supported by a supermajority of creditors. If a plan is not approved within 365 days, the case moves into the liquidation phase. At that point, a bankruptcy trustee is appointed and the debtor is no longer able to manage its business or dispose of assets.
A reorganization plan must be accepted by a majority of creditors, both secured and unsecured. It is then presented to the judge for approval. Once approved, the plan binds all creditors, including those who dissented, if it provides for payment of their claims in accordance with its terms. However, dissenting secured creditors will be able to foreclose on their collateral, unless the plan provides for a payment of either the amount of their claims or the value of their collateral. This is similar to, but less flexible than, a secured creditor cram-down under Chapter 11.
CROSSING THE BORDER
When a debtor has either assets or creditors in different countries, enforcing a restructuring approved by a court in one country may require obtaining the assistance of a court in another country. This cross-border assistance is generally needed either to protect assets located outside the jurisdiction of the court that approves the plan or to bind non-consenting creditors that are not subject to its jurisdiction. In 1997, the United Nations Commission on International Trade Law published a Model Law on Cross-Border Insolvency (the Model Law) to create procedures for providing this assistance. The purpose of the Model Law was to create uniform procedures for ancillary proceedings, in which local court could issues orders extending the reach of the reorganization court.
The Model Law has been adopted in both the US and Mexico. In fact, Mexico was one of the first countries to adopt the Model Law in 2000. In Mexico, an ancillary proceeding is known as "Título XII," and, in the US, it is incorporated into Chapter 15of the Bankruptcy Code.
In either country, an ancillary proceeding is commenced by filing a petition seeking recognition of an insolvency pending in another country. If recognition is granted, the court can grant "appropriate relief," which usually takes the form of enforcing the plan approval or confirmation order.
In other words, a cross-border debtor may be able to select the best place to file its reorganization. While that selection could have a significant impact on the success or failure of the reorganization, it requires an evaluation of a variety of legal, financial, and logistical considerations.
As the Mexican market develops, the oil and gas industry will need to continue accessing capital from the US. Therefore, when projects encounter operational and financial headwinds, solutions will usually require efforts in both countries. However, if the assets are valuable, this will not be a meaningful obstacle. There are options on both sides of the border. Navigating the complexities of two legal systems requires some expertise, but with careful analysis and efficient execution, they provide the means to preserve that value.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official opinion or position or institutional view of Rodríguez Dávalos Abogados.