Thursday 22 April 2010

Howard Seife
Chadbourne & Parke LLP
Board Director, INSOL International

Jorge Sep úlveda
Bufete García Jimeno, S.C.

• 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

AlixPartners LLP
Allen & Overy LLP
Alvarez & Marsal LLC
Baker Tilly
Begbies Global Network
Bingham McCutchen LLP
Cadawalader, Wickersham & Taft LLP
Chadbourne & Parke LLP
Cleary Gottlieb Steen & Hamilton LLP
Davis Polk & Wardwell
De Brauw Blackstone Westbroek
Deloitte
Ernst & Young
Ferrier Hodgson
Freshfields Bruckhaus Deringer
Goodmans LLP
Grant Thornton
Greenberg Traurig LLP
Huron Consulting Group
Jones Day
Kaye Scholer LLP
Kirkland & Ellis LLP
KPMG LLP
Linklaters LLP
Lovells LLP
Norton Rose LLP
Pepper Hamilton LLP
PPB
PricewaterhouseCoopers
RSM Corporate Advisory Services
Skadden, Arps, Slate, Meagher & Flom LLP
Shearman & Sterling LLP
Vantis
Weil, Gotshal & Manges LLP
White & Case LLP
Zolfo Cooper LLP

• No Smoking
• Coffee Breaks and Lunch – timing
• Mobile telephone & Blackberry switched off
• Assessment forms – completion & return

Preside: Thomas Heather
Heather & Heather
The Honorable Samuel Bufford
US Bankruptcy Court
Brock Edgar
FTI Consulting
Bill Govier
Bingham McCutchen LLP

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
• Debtor/ Debtor-inpossession
• Judge
• Secured Lenders
• Unsecured Bonds
• Official Committee of
Unsecured Creditors
• Other Committees
• Trade Claims
• Landlords
• Other “parties in interest”
(SEC, unions, etc.)
• Foreign Representative (in chapter 15 cases)
• United States Trustee
Mexico Proceedings
• Debtor
• Judge
• Secured Lenders (not required to participate)
• Unsecured Bonds
• Trade Claims
• Visitador (examiner)
• Conciliador
• IFECOM (Instituto Federal de Especialistas de
Concursos Mercantiles)
• Interventor
• Government Entities
(Taxing Authorities,
Attorney General, etc.)

Commencement of a Case
U.S. Proceedings
• Voluntary petition
• Involuntary petition
• No insolvency requirement for voluntary petition
Mexico Proceedings
• Voluntary petition
• Involuntary petition
• Insolvency requirement
– IFECOM appoints
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
• Automatic stay halts efforts by secured and unsecured creditors to collect prepetition debts
• Relief from the stay is available, for cause if the debtor has no equity in property that is not needed for reorganization, or failure to compensate secured creditor for declines in collateral value
• Automatic stay is a central component of forcing creditors to stay at the table
Mexico Proceedings
• Court issues “Declaration of Insolvency”, which will date back to the filing date and act as a “stay”
• Stay is valid as against secured and unsecured creditors during the
“conciliation phase” (185 days + up to 2 potential extensions of 90 days each)
• Limited opportunity for relief from the stay during conciliation phase

Key Issues
Post Petition Borrowing
U.S. Proceedings
• Debtor-in-possession financing
(“DIP financing”) is encouraged, and is given super-priority status
• Existing secured lenders often use it to shore-up or protect their position, and impose restraints on operations
Mexico Proceedings
•
Theoretically available, but no specific mechanism
• Lack of post petition loans can be a major impediment to seeking Concurso protection
Adequate Protection
U.S. Proceedings
• Interim payments during proceedings to secured creditors to compensate for diminution of value of collateral during the case
Mexico Proceedings
• No interim payments during proceedings, limited opportunity to protect against decline in collateral value absent special
Court permission to foreclose

Key Issues
(cont’d)
Status of Executory or Partially Performed
Contracts
U.S. Proceedings
•
Debtor may assume, assume and assign, or reject executory contracts as it sees fit, may “pick and choose”
• Key flexibility to restructuring the operations of the debtor
Mexico Proceedings
•
General rule is that debtor must continue to comply with contracts, unless the
Conciliador objects or rejects the contract
• Can be an impediment to a restructuring of operations
Substantive Consolidation
U.S. Proceedings
• Multiple debtors may be combined into one “estate” for purposes of calculating assets and liabilities
Mexico Proceedings
• Not permitted; although related party filings handled by same judge

Key Issues
(cont’d)
Preference/ Fraudulent Transfers
U.S. Proceedings
• Fraudulent transfers: Two year look back period
– Debtor-in-possession or trustee may file action to avoid certain transfers
• Preferences: 90 day look back period on existing debt;
1 year look back period for insiders
Mexico Proceedings
• Court may invalidate transactions made within 270 day period before Declaration of Insolvency that are made with intent to defraud, or are otherwise gratuitous or at a discount
– Interventor can extend
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
• Secured claims
–
Continue to accrue interest
(including default rate) up to value of collateral
–
Can be impaired and compromised under a plan of reorganization so long as recovery value of restructured claim equals or exceeds the value of the collateral
•
Priority unsecured claims
– Typically includes administrative expenses, taxes, and wages
– “Super priority” for DIP financing; trumps almost all else
Mexico Proceedings
• Secured claims
–
Continue to accrue interest (not including default rate) up to value of collateral (remainder is unsecured claim)
–
If secured creditor agrees to restructure in Concurso, paid pursuant to agreed Convenio
–
Cannot be forced to restructure in Concurso, pre-Concurso liens and rights ride through the proceeding unimpaired, and must be honored in full after
Convenio finalized
• Priority claims
– Costs of administration, taxes, wages, and unsecured claims with attachments under Mexican law

Treatment of Certain Claims
(cont’d)
U.S. Proceedings
• “General” unsecured claims
– Cease to accrue interest
– No adequate protection right
– Can be impaired and compromised under a plan of reorganization
– Receives all plan value after secured recoveries, and if not paid in full, can force a conversion of debt to equity, and wipe out all of the shareholders, and elect a new board
Mexico Proceedings
• Unsecured claims
–
– Converted into UDIs
–
Cease to accrue interest
( Unidades de Inversión )
If denominated in foreign currency, converted first to pesos, then to UDIs currency risk issues here
– Before filing, unsecured creditors with obligations under Mexican law may seek attachment of assets
– Treatment under concurso is governed by consensual decision of 51% of the claims

The Creditors’ Voice
U.S. Proceedings
• Official Committee of
Unsecured Creditors:
–
Appointed by the US Trustee
(usually 5-7 largest creditors)
– Consults with debtor
–
Receives confidential information from debtor
– Fiduciary for all unsecured creditors
– Paid for by the debtor’s estate
• Additional official committees:
– Court may appoint or US
Trustee may recommend
–
All expenses paid for by estate
• No secured creditor committees
Mexico Proceedings
• No official committees
• Creditor(s) representing ten percent of “recognized credits” may request the court appoint an
Interventor
–
Representative of appointing creditor(s); not a fiduciary
– Fees paid for by the requesting creditor(s)
• “Recognized creditors” vs. unrecognized creditors
– Only “recognized creditors” may appear before the court or file pleadings
–
Individual bondholders not expressly recognized (unless they individualize their claim)
– Indenture trustee recognized (as long as it files a proof of claim)

Establishing a Claim
U.S. Proceedings
• Bar date
– Claim allowed unless debtor or party in interest objects
– Those who file a proof of claim are subject to the jurisdiction of the bankruptcy court and allowed to vote on the plan of reorganization
• Bankruptcy court may estimate a claim for voting purposes or for allowance purposes
• Typically, indenture trustee files proof of claim on behalf of all bondholders, but individual bondholders retain right to vote
Mexico Proceedings
• To be a “recognized creditor”, must file proof of claim within certain time period after insolvency judgment published
– 20 days for Mexican creditors
– 45 days for foreign creditors
• Conciliador files provisional list of creditors and claims, then final list
• Court reviews and publishes a
“Final List of Recognized
Credits”
• Right to vote is separate from recognition as a “recognized creditor”
• May need to file separate
“voting writs”

The Plan
U.S. Proceedings
•
Debtor has 120 day exclusivity period to file a plan, but often extended by the court, up to 18 months maximum
• Requires filing of disclosure statement containing adequate information
•
Plan of reorganization details creditor classification and treatment
– Impaired classes vote on plan; one “impaired class” must vote in favor of plan
• Acceptance = consent by
2/3 in amount of claims and more than 50% in number
(of claims actually voted)
– Absolute priority of claims, and potential cramdown
Mexico Proceedings
• Concurso Mercantil (2 stage process)
– Insolvency test requirement
– Stage 1: Conciliation
• 185 days, extension for two additional 90 day periods with certain approvals
– Stage 2: Liquidation (quiebra)
• If consensual reorganization not reached within 365 days
• Convenio Concursal not voted on, signed
• Presented first to Concilador for review and approval before filed
• Acceptance = consent by more than 50% of allowed unsecured claims
– Debtor must agree to and sign the Convenio
– Participating secured creditors may agree to treatment pursuant to Convenio, nonparticipating secured creditors ride through Concurso
• Court issues notice of approval after 5 day objection period. 9 days after notice, Convenio approval order is final
• 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

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

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.

• Evidence of notice to major creditors
– Some will normally attend hearing
• Presentation of case
– May require oral testimony
• Setting timetable for case

• Motions – typical for US
– Use of cash collateral
– Paying prepetition wages
– Post-petition financing
– Cash management system
– Utilities

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

• Principle of “fair legal process”
• Derives from European Convention on Human Rights
• Applied in European Court of Justice in bankruptcy cases _ Eurofood

• 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

Preside: Thomas Heather
Heather & Heather
The Honorable Samuel Bufford
US Bankruptcy Court
Brock Edgar
FTI Consulting
Bill Govier
Bingham McCutchen LLP

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

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
Approval
Timeline
SEC
Registration
Solicitation of
Votes for
Plan of
Reorganization
Plan Support /
Lock-Up
Agreement
True Prepackaged Plan Prenegotiated Plan Prearranged Plan
Generally 30-60 days from bankruptcy filing
May be registered or unregistered
(depending on applicability of exemption from registration)
Solicitation occurs prior to bankruptcy filing and prior to approval of Disclosure Statement
Upon filing for bankruptcy, debtor seeks a date for combined hearing on approval of Disclosure
Statement and Plan confirmation
Generally 60-90 days from bankruptcy filing (extra time required for approval of Disclosure Statement and solicitation of votes)
Exempt from registration pursuant to 11 USC § 1145
(for new money invested, another exemption must also apply; e.g., § 4(2) of the Securities Act)
Votes not solicited until after bankruptcy filing and after approval of
Disclosure Statement
Executed prior to bankruptcy filing Executed prior to bankruptcy filing
Can be as short as 60-
90 days from bankruptcy filing; however, can be much longer
Exempt from registration pursuant to 11 USC
§ 1145 (for new money invested, another exemption must also apply; e.g., § 4(2) of the
Securities Act)
Votes not solicited until after bankruptcy filing and after approval of
Disclosure Statement
May or may not be part of process

U.S. vs. Mexico:
A Comparative View
Requirements to Qualify for
Expedited
Procedure
Acceptance
Thresholds for
Plan to be
Approved
Parties Bound by Plan
Experience
With Expedited
Restructuring
Process
U.S. Prepackaged Plan
 No insolvency requirement to file for Chapter 11
Expedited Restructuring Under Mexican Concurso
Mercantil
 Debtor must be “in generalized breach of payment of obligations”
– Where a debtor misses payments to two or more creditors over a thirty-day period, these missed payments represent 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
 50 percent of votes of unsecured and secured or preferred creditors
 With respect to each impaired creditor class,
2/3 of face amount of claims and 1/2 of number of creditors voting
 The debtor
 All creditors
 Bankruptcy judges are very experienced in dealing with prepackaged bankruptcies, particularly in the District of Delaware and the Southern District of New York
 Well established process with developed precedent
 The debtor
 Unsecured creditors
 Secured and preferred creditors that agreed to the plan
 Virtually untested
 Unclear whether procedure significantly expedites restructuring process

Mark Bloom
Greenberg Traurig P.A.

• 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 hierarchy of purposes
• The approval of the Administrator’s proposals
• The “traditional” marketing process

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

• 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 prepack sale
• Creditor remedies
• Minimising risk

• IMO Car Wash
• WIND Hellas

• SIP 16
• Consultation paper

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 prenegotiated 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 prenegotiated 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 prenegotiated 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 resolicit 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 prenegotiated 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

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

Preside: Alan Kornberg
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Henri Bricard
Bricard, Egure y Espindola Asociados
William Fitzgerald
Rabobank International

Giuliano Colombo
Pinheiro Neto Advogados

Preside: Adam Bryk
Deloitte

Mauricio Basila
Basila Abogados S.C.
Karen Wagner
Davis, Polk & Wardwell LLP

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.

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

Mauricio Basila
Basila Abogados S.C.
Karen Wagner
Davis, Polk & Wardwell LLP

Fernando del Castillo
Santamarian y Steta
Judge Cristina O’Reilly
Poder Judicial de la Nacion, Argentina

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.

Mar ía 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

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 CONCURSO
COMO CONJUNTO ECONÓMICO

Fernando del Castillo
Santamarian y Steta
Judge Cristina O’Reilly
Poder Judicial de la Nacion, Argentina

Jeffrey Hoberman
Recovery Group
Anthony Murphy
Citi

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.

• 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
80
60
40
20
0
140
120
100
On-balance NPL Inventory Evolution (BRL billions)
53
17.0
4.2
4.4
6.4
20.7
2004
20% p.a. growth
95
126
53.2
61
19.9
5.2
6.3
8.2
21.3
2005
68 71 36.0
25.1
5.6
6.5
10.5
20.4
26.2
5.7
7.3
10.6
20.7
7.1
9.1
12.4
30.6
8.3
13.0
15.8
35.8
2006 2007
D E F G H
2008 2009
Source: Central Bank of Brazil
Letters D-H refer to the aging (D>60d / H>180d)
Delinquent Credits > 180 days (H) are fully charged-off
Source: Central Bank of Brazil
Overview
•
The NPL inventory in Brazil was growing alongside the expansion of the overall credit market until 4Q08;
•
Post-4Q08, the supply of new NPLs grew at a faster rate;
•
On-balance sheet NPLs inventory (less than 360 days delinquency) reached BRL
126bn as of Dec/09;
•
Total Banking NPLs inventory (On-
Balance + Off Balance) is estimated at
BRL200bn+ as of Dec/09;
•
Non-Banking NPLs (retailers, utilities, funds/securitizations) potential market is estimated at BRL100bn+.
107

What are these loans and how do you get these loans to trade?
Tradable exchange listed securities
• Very little due diligence
• Comparatively liquid.
Single Loans
• Due Diligence Intensive
Pools of Loans
• DD intensive – structurally intensive
• Less liquid.

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.

• 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.

• 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.

• 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….

• 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

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

Jeffrey Hoberman
Recovery Group
Anthony Murphy
Citi

Jorge Sep úlveda
Bufete García Jimeno, S.C.

Howard Seife
Chadbourne & Parke LLP
Board Director INSOL International