Vitro's Defaulted Bonds Soaring in Precedent-Setting Case: Mexico Credit

Defaulted bonds issued by Vitro SAB, Mexico’s biggest glassmaker, are surging to a 2 1/2-year high as investors try to stave off an unprecedented bid by the company to take control of the creditors’ group.

Vitro’s $700 million of notes due 2017 rose to 77.5 cents on the dollar yesterday from 61 cents at year-end, spurred by a Jan. 9 court decision that maintained bondholders’ majority in the votes on restructuring terms. The ruling set back efforts by Vitro, which is the subject of a bankruptcy court fight, to seize control of the vote by arguing it’s the biggest creditor with $1.9 billion of intercompany debt.

Traders are betting bondholders will win a case that will set a precedent on whether companies can dictate terms of their restructuring. A Vitro victory would curb demand for Mexican corporate debt, said Robert Rauch, who helps manage $2.2 billion of emerging-market assets at Gramercy Advisors LLC. Mexican company bond yields in dollars rose 33 basis points, or 0.33 percentage point, this year, according to JPMorgan Chase & Co. Brazilian company yields fell 18, while Russia’s dropped 37.

“A lot of eyes are focused on this particular case to see how the Mexican legal system approaches this situation of intercompany debt,” Alexander Monroy, a corporate debt analyst with Barclays Plc, said in a telephone interview from New York. “People are holding out for something better than what the company is offering.”

Photographer: Susana Gonzalez/Bloomberg

Workers inspect perfume bottles at glassmaker Vitro SAB's manufacturing plant in Toluca, Mexico. Close

Workers inspect perfume bottles at glassmaker Vitro SAB's manufacturing plant in Toluca, Mexico.

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Photographer: Susana Gonzalez/Bloomberg

Workers inspect perfume bottles at glassmaker Vitro SAB's manufacturing plant in Toluca, Mexico.

Vitro is the first company to test Mexico’s 10-year-old revamped bankruptcy law by trying to use its intercompany debt to qualify as a creditor, said Rauch, who’s based in Greenwich, Connecticut. U.S. bankruptcy law prohibits the use of intercompany debt, or loans from one unit to another, he said.

Creditor Unfriendly Law

“The playing field is not level,” Rauch said. “Certainly it is not a creditor-friendly system.”

The rally in the defaulted bonds puts their price above the 73 cents that Vitro says its Nov. 1 restructuring proposal is worth. Monroy estimated the offer is worth 60 cents and Jim Harper, a debt analyst with BCP Securities LLC, valued it at 55 cents. A court victory for bondholders may lead to new restructuring terms worth as much as 75 cents, according to Eric Ollom, an analyst with Jefferies & Co.

“The market is factoring in that the creditors are in a strong position,” Ollom said in an interview from New York.

Creditors rejected the proposal on Dec. 7, with 68 percent turning it down, according to a Vitro statement the next day. Even with the rejection, the company said it had a majority by counting the $1.9 billion of intercompany debt.

Appeal

A creditors’ group that says it holds about 50 percent of the $1.5 billion of debt Vitro is restructuring filed for involuntary bankruptcy in a Mexican federal court in Monterrey on Dec. 7. A week later, Vitro filed for voluntary bankruptcy in the same court, a move that was rejected in January by the judge. Vitro is appealing.

Mexican Federal Judge Francisco Flores is scheduled to make a ruling by next week that will either declare Vitro in involuntary bankruptcy or reject the case. If Vitro is declared bankrupt, the company will have up to nine months to work out an agreement with creditors under the supervision of a court- appointed mediator. Assets will be liquidated if an agreement can’t be reached.

The use of intercompany debt is clearly allowed under Mexican law, said Alejandro Sanchez, Vitro’s legal director, in an interview yesterday in Monterrey. An appellate judge in Monterrey may rule on Vitro’s voluntary bankruptcy petition as early as next week, Sanchez said.

Vitro can’t pay the creditors in full because the company would likely end up defaulting again in two or three years, Sanchez said. Most of the creditors who hold bonds now bought the securities at a discount and are only trying to maximize their profit, he said. The involuntary bankruptcy petition was filed by four firms that hold $75 million of bonds, he said.

Liquidation

“The price that we’re offering is in function of what the company can pay,” Sanchez said.

Vitro’s earnings are improving as glass demand rebounds, and the company should be able to pay bondholders 90 cents or more on the dollar, said Jaime Guerra, the attorney representing the creditors in Mexico.

“We don’t want liquidation. What we want is for them to pay what they have to pay,” Guerra said. “If it’s not 100 percent, at least they should pay what’s fair.”

Vitro halted debt payments in February 2009 after posting derivative losses of as much as $360 million and as demand for auto and construction glass plummeted amid the worst U.S. recession since the 1930s. Sales dropped 33 percent to $1.77 billion in 2009 and earnings before interest, taxes, depreciation and amortization fell 28 percent to $237 million.

Yields, Peso

The extra yield investors demand to hold Mexican dollar bonds instead of U.S. Treasuries fell 4 basis points to 131 at 5:12 p.m. New York time, according to JPMorgan. The peso gained 0.6 percent to 11.83845 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years fell 3 basis points to 102, according to CMA. Credit- default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Mexico, which sends 80 percent of its exports to the U.S., posted a 6.1 percent decline in output in 2009 after the global recession triggered by a credit crisis in the U.S. At least seven Mexican companies defaulted on dollar bonds since 2008, compared with only two in Brazil, according to BCP’s Harper.

Underperformance

A rebound last year that drove economic growth to the fastest pace since 2000 spurred a 13.3 percent return on Mexican corporate dollar bonds, more than the 12.5 percent gain on emerging-market debt overall, according to JPMorgan. Mexico’s economy grew 5.5 percent in 2010.

Since the beginning of this year, Mexican corporate bond prices have lagged behind Brazil and Russia on concern over drug-trafficker violence and Mexico’s dependence on the U.S. for economic growth, Ollom said.

Yields on Brazilian bonds have declined to 6.01 percent from 6.19 percent at the beginning of the year and Russian bond yields have dropped to 5.42 percent from 5.79 percent, according to JPMorgan indexes of corporate bonds. Mexican yields have climbed to 6.37 percent to 6.04 percent.

With Vitro’s bond prices trading above the value of the company’s offer, Monroy and Harper are recommending investors sell the securities. The bankruptcy case could drag on in court and, even if creditors win the court case, they’re not likely to recover much more than where the bonds are now, Monroy said.

“At a certain level people have to take into account the time value of money,” Monroy said. “We see the situation as definitely having a risk of taking a while.”

To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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