Unequal access to restructuring behind crash in Chapter 15 filings

Jack Barton

29 June 2017

Any Latin American debtor with a view to the “long game” knows that a Chapter 15 filing is the best way to achieve legal certainty – but a disparity in access to restructuring between big and small debtors has led to a decline in use of the instrument, according to speakers at the Latin Lawyer – GRR Live 2nd Annual Restructuring Summit, held in New York earlier this month

On 5 June at the offices of Paul Hastings LLP in New York’s MetLife Building, a panel of cross-border specialists offered varying perspectives on a decline in the number of Latin American debtors seeking protection of foreign proceedings under Chapter 15 of the US Bankruptcy Code.

In a later session on restructuring in alternative commodities, another panel agreed that larger debtors are advantaged when it comes to extrajudicial restructuring, possibly explaining why there might be a reduced need to seek US protection.

Risk vs reward in shunning Chapter 15

Thomas Heather, partner at Ritch, Mueller, Heather y Nicolau, SC, introduced the session with the stark statistic that there were only 25 Chapter 15 filings made by Latin American debtors in 2015, down from 230 filings in 2010.

With this in mind, he asked whether the instrument, which provides for recognition of foreign proceedings and the protection of US courts for multinational debtors, is losing its relevance in Latin America.

Fábio Rosas, partner at Souza, Cescon, Barrieu & Flesch Advogados in São Paulo, responded “no”.

Any debtor with substantial assets knows that they still benefit from the insurance that Chapter 15 provides, Rosas explained.

Alejandro Sainz, name partner at Cervantes Sainz SC in Mexico City, agreed, noting that filing for Chapter 15 protection used to be the “general rule” for companies in Mexico. He acknowledged that the decline in filings had been noticeable, and suggested that the root of the problem was cost: “it is very expensive, especially for smaller companies,” he said.

A Chapter 15 proceeding does increase the cost of a restructuring, ceded Gary Bush, vice president at Bank of New York Mellon. However, any debtor with a view to the long game knows that they need to deal with their liabilities in the US at some point, he said.

If a debtor that has liabilities in the US wants to restructure and have the possibility of issuing US-governed debt or do a merger or sale in the US at any point in its future, it needs to carry out a Chapter 15 proceeding, said Bush.

For large Brazilian companies, the proceeding is essentially “automatic” as an accompaniment to domestic proceedings, said Rosas. While Chapter 15 used to be seen as a source of extra protection for an international restructuring, it is now perceived as a means to help companies secure financing in the future, he added.

Despite this, a trend that practitioners have started to see in Brazil is a leaning toward out-of-court proceedings, Rosas went on, such as in the restructuring of offshore oil drilling subsidiary of Brazilian conglomerate Odebrecht.

This might help explain why companies are relying less on Chapter 15 – if they negotiate a settlement with creditors, they have no need to seek protection, Rosas said.

Thomas Felsberg of Felsberg Advogados, speaking from the audience, asked whether a company might seek to save money by inserting clauses in their restructuring plans which deal with US liabilities. Would a US court recognise such clauses if the company had not gone through Chapter 15?

Benjamin Finestone, New York-based partner at Quinn Emanuel Urquhart & Sullivan, pointed out that comity between courts in the US and Latin America is “strong”.

There is significant case law, said Finestone, that supports the idea that as long as a restructuring plan is not “abhorrent” to US policy, US courts will not impede it and tell creditors to take their claims to the main proceeding.

There is a strategic business judgment to be made in these situations, Finestone went on. If a debtor thinks that they are unlikely to be the subject of aggressive creditor action in the US then they might rely on clauses like Felsberg suggested and save on the not insignificant cost of Chapter 15.

Lessons from alternative commodity restructuring

The day’s penultimate panel discussed the recent turbulence in alternative commodity sectors, and what practitioners should learn from a wave of restructurings in some of the core industries of Latin America.

Introducing the session, José Jiménez, partner at Rebaza, Alcázar & De Las Casas in Lima, explained that a recent production glut had caused a wave of bankruptcies in sugar and ethanol in Brazil.

Alongside this he noted the travails of Chilean and Peruvian fishmeal companies that have suffered from depleted stock in the wake of a particularly severe El Niño, a phenomenon of oscillating ocean temperature in the Eastern Pacific.

The most obvious lesson, said Renato Maggio, partner at Machado Meyer Advogados in São Paulo, is the need to be aware of “external events” and to build an appreciation of the risk of events such as an extreme El Niño into company financings – and refinancings.

Referring to an earlier panel on the need for reform in Brazilian bankruptcy law, Maggio said, “we know that Brazil is very debtor-friendly – what can we do with that information?”

As far as possible, Maggio went on, debtors and creditors need to achieve “alignment” and compromise. Both sides need to be transparent to reach a restructuring that is realistic and effective, rather than forcing through a contentious restructuring that will end up with the debtor back in court, said Maggio.

In the context of a flawed in-court restructuring process, Maggio said, Brazil’s extra-judicial restructuring process can become a “powerful tool”.

Another thing Brazilian law offers industries that are vulnerable to external shocks, said Maggio, is strong collateralisation and securitisation structures. Companies can secure new financing on the strength of their industrial assets, he said.

Marcos Spieler, managing director at Rothschild in São Paulo, agreed that strong securitisation is an asset for large debtors in Brazilian sugar and ethanol, but noted that smaller companies find it harder to emerge from restructuring because creditors find it easy to enforce their collateral.

Alfonso Pérez-Bonany López, partner at Philippi Prietocarrizosa Ferrero DU & Uría (Peru), said that Chilean and Peruvian fishing saw a similar disparity between small and large companies in the wake of another severe El Niño in 1997.

Only the bigger fishing companies emerged from financial difficulties, said López, causing a “consolidation” of the sector into several large groups.

Jiménez expanded on this point, adding that the 1997 El Niño was an opportunity for creditors to consolidate the market among a few powerful companies – this has meant that the recent turmoil in South American fishing has been set against a very different industrial landscape to that of 1997.

The parallel is telling, said Spieler, as Brazilian sugar is similarly experiencing a consolidation into conglomerates, due to the difficulties smaller companies have in restructuring. Smaller producers are more vulnerable to bankruptcy as a result of industrial overproduction and have fewer valuable assets to use for securitisation.

Michel Diban, of Morales & Besa in Santiago, added that in Chile other factors can affect debtors’ restructuring potential. Creditors generally prefer to assist with a restructuring as liquidation usually gets them a very low rate of recovery, for example, said Diban.

Creditors in Chile are often also influenced by an awareness of the detrimental impact on their public image if they are seen to drive a company into bankruptcy, said Diban. As in Peru and Brazil, a lack of confidence that major creditors have in Chilean restructuring proceedings particularly disadvantages smaller debtors, said Diban.

In Peru, Lopez said, the legal framework is not amenable to debtor in possession financing agreements. In general, banks and other major creditors are reluctant to get involved in formal insolvency proceedings, he said, echoing Maggio’s thoughts on Brazilian sugar companies.

The panel concluded that, thanks to the fact that their assets put them in a good position in extrajudicial restructuring, industrial companies are better placed to deal with unreliable bankruptcy frameworks than those in other sectors. However, this is skewed against smaller companies, which are disadvantaged when it comes to negotiating with creditors.

Latin Lawyer's coverage of the conference will continue tomorrow. Previous coverage focused on what impact the election of US President Donald Trump might have on Mexico's restructuring space and the potential for Brazilian bankruptcy reform.

(Latin Lawyer – 29.06.2017)

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