Vitro to Vote $1.9 Billion of Loans to Win Debt Offer

Vitro SAB, the Mexican glassmaker that defaulted on $1.2 billion of bonds last year, plans to ensure creditors approve a debt-restructuring offer by voting $1.9 billion of its intercompany loans in favor of the deal.

The majority of the $1.9 billion of loans among Vitro’s subsidiaries was created in December 2009, after the company defaulted on its debt, and counts toward the debt restructuring under Mexican bankruptcy law, Alejandro Sanchez, Vitro’s legal director, said in an interview.

“This debt is obviously properly based,” Sanchez said. “Mexican law allows intercompany debt to be voted in bankruptcy proceedings.”

Vitro, based in Monterrey, said Nov. 23 that it will take its final debt offer to Mexican bankruptcy court after a Dec. 7 deadline for bondholders to participate. The company said then it has the required majority support of creditors to implement the plan.

Vitro is offering $850 million of new bonds that mature in 2019 and $100 million of debt convertible to shares in exchange for $1.5 billion of total debt in default. The company will pay an incentive of $75 million to creditors that accept the offer. Vitro hired U.S. law firm Haynes & Boone LLP to handle creditors’ votes, Sanchez said.

Bondholder Challenge

Bondholders will challenge the use of intercompany loans in the offer and Mexican bankruptcy, said Thomas Lauria, a partner at White & Case LLP in Miami, who represents holders of about $650 million of bonds. There’s never been a contested bankruptcy case that involves third-party debt, he said.

“The applicable statues are silent on the issue,” Lauria said in a telephone interview. “It’s absurd to suggest that the insiders can cause a deal, which is rejected by the third-party creditors, to be accepted.”

Creditors holding at least $750 million of the bonds have said they will vote against the restructuring offer, which makes it unlikely Vitro will get a majority of third-party debt, Lauria said. Bondholders filed involuntary Chapter 11 petitions on Nov. 17 in a Texas court against 15 Vitro units in the U.S. and that case will proceed outside of Mexican bankruptcy proceedings, Lauria said.

‘Gray Area’

It’s unusual for a company to enter Mexican bankruptcy without an agreement with the creditor committee, said Jim Harper, director of corporate research at BCP Securities LLC in Greenwich, Connecticut. Corp. Durango SA, the Mexican paper maker now known as Bio Pappel SAB, had created intercompany debt during debt negotiations and later reached an agreement with creditors on a bankruptcy plan, he said.

“I think creditors would argue there was bad faith involved,” Harper said, referring to the intercompany debt. “We’re very much in a gray area.”

The company estimates the offer will give creditors a return of 68 cents on the dollar. Harper estimates the value of the offer is between 55 cents and 60 cents.

Vitro’s $700 million of 9.125 percent bonds that mature in 2017 traded at 54 cents on the dollar today, according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority.

Intercompany Debt

Most of the intercompany debt was formed in conjunction with a $75 million loan obtained from Fintech Advisory Ltd. last December to provide Vitro with cash to keep the company operating, Sanchez said. As a guarantee for the loan, Fintech, a New York-based hedge fund headed by David Martinez, received seven Vitro properties in a trust fund.

The intercompany loans were placed in a sub-holding company called FIC Regiomontano, Sanchez said. Vitro declined to say how much intercompany debt it had before December 2009.

The intercompany debt won’t be paid back until the restructured debt matures in 2019, Sanchez said. The debt won’t participate in the incentive creditors will receive for accepting the debt offer and can only vote in this bankruptcy, he said.

The process will probably take six months once the bankruptcy plan is filed in December, Sanchez said. The restructuring plan will allow the company to begin expanding again after years of struggle to reduce debt, he said.

“With this plan that we are proposing, we’re not only ensuring the survival of the company, we’re allowing the company to begin growing again,” Sanchez said.

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