Strike two against Paul Singer’s hedge fund Elliott Management.
Court won’t hear hedgie’s $2B in Argentinas debt but
Singer’s hedge fund Fights Mexico elite in legal showdown
On a scorching April morning in Monterrey, Mexico, Enrique Garcia, Vitro SAB’s local plant manager, crosses under a mural that commemorates the 100th anniversary of the company’s first glass factory. He points to brick structures from the original plant.
Then, with visitors in tow, Garcia heads toward a steel and tin building where machines the size of minivans churn out 3 million bottles a day for Avon Products Inc., Coca-Cola Co. and Francis Ford Coppola Winery. Vitro is Mexico’s biggest glassmaker and among the nation’s top employers, with 17,000 workers.
Enlarge image Paul singer, founder and president, Elliott Management Corp.
“Almost every family in Monterrey has had someone who has worked at Vitro,” Garcia shouts above the hammering of presses and the whoosh of molten glass being fired into bottle-shaped molds, Bloomberg Markets magazine reports in its August issue.
The whir of activity gives no indication that Vitro has been fighting its way through Mexican and U.S. courts — or that it’s waging a bare-knuckle brawl with a number of hedge funds, including Paul Singer’s Elliott Management Corp.
Silver-haired investor Singer, whose New York hedge fund had more than $20 billion in assets as of June, swooped in in 2010, more than a year after Vitro’s February 2009 default on $1.2 billion of bonds.
Sued for Full Payment
Paul Singer, who’s adept at profiting from the debt of floundering companies such as Lehman Brothers Holdings Inc., snapped up Vitro’s bonds at a discount. Then he sued to be paid in full, countering Vitro’s proposed debt restructuring that offered outside creditors about half of their original investment.
In lawsuit after lawsuit in Mexico and the U.S., Elliott and other hedge funds have challenged Vitro’s bankruptcy and sought to seize the glassmaker’s American assets and revenue from customers that include Ford Motor Co.
“Paul Singer’s not afraid to do the work on situations that frankly scare a lot of people off,” says Kenneth Buckfire, chief executive officer and managing director of Miller Buckfire & Co., a New York-based investment bank that has restructured bankrupt companies.
Singer, a Republican power broker who has given $1 million to Republican presumptive presidential candidate Mitt Romney’s super PAC, might have prevailed but for Vitro CEO Hugo Lara.
“We started this process with a conviction that we had a business, a legacy and jobs that we were ready to defend,” Lara says. Urged on by Vitro Chairman Adrian Sada, the company founder’s great-grandson, Vitro has gone toe-to-toe with Singer.
In May, a Mexican appeals court ordered Elliott and other funds to pay Vitro’s legal expenses on some lawsuits that courts have dismissed.
Vitro’s reorganization was approved by a court in Mexico earlier this year over objections by bondholders who have appealed. Because Vitro has units in the U.S., it asked a Dallas court to enforce its Mexican restructuring under U.S. Bankruptcy Code Chapter 15 — which applies to cross-border issues — in an effort to stop litigation by debt holders, such as Singer.
On June 13, Judge Harlin “Cooter” Hale denied Vitro’s request, saying the Mexican plan was defective because it didn’t sufficiently protect interests of U.S. creditors.
The judge also found that there was evidence of possible suspect voting in company reorganization proceedings because Vitro used insiders to swamp outside creditors. Two days later, the judge reaffirmed that Vitro shouldn’t move assets or divert business to other entities in a bid to frustrate bondholders.
‘We Are Confident’
The wrangling showed no signs of dissipating as Vitro appealed Hale’s decision.
“We are confident in the legal basis for our arguments,” says Andrew LeBlanc, a U.S. lawyer for Vitro.
Sada, 67, a graduate of the Wharton School at the University of Pennsylvania, says he’s determined to maintain his family’s grip.
“We have a very high percentage of stockholders,” says Sada, who looks dapper in his midnight-blue pinstriped suit in spite of the heat. The Sadas and relatives in the Garza family trace their business roots to a brewery started in 1890.
The Garzas control Alfa SAB, which owns Alpek SAB, Mexico’s largest petrochemical company, and Fomento Economico Mexicano SAB, which owns Oxxo, Latin America’s biggest convenience store chain. Singer declined to comment for this story.
As the Singer-Vitro battle sprawls across two countries, it’s pitting one of the world’s most successful hedge fund managers against one of Mexico’s elite industrial families. At its heart is a reorganization strategy that Vitro adopted to turn its subsidiaries into its major creditors, enabling them to outvote American bondholders like Singer.
The case is testing the extent to which Mexico’s bankruptcy law applies in the U.S. — an outcome that may shape future deals.
If Vitro ultimately prevails, Americans might be less willing to invest without added guarantees because Mexican companies might employ Vitro’s tactics, says Robert Rauch, a partner at Gramercy Advisors LLC, a $2.8 billion hedge fund in Greenwich, Connecticut.
Mexican corporate bond prices have lagged behind those in Brazil and Argentina, partly on such concerns, Rauch says.
“This is a game changer,” he says.
Rauch says Mexico’s equivalent of a bankruptcy code, known as the Ley de Concursos Mercantiles, doesn’t address intercompany claims — in this case, the internal loans between units that enabled Vitro to restructure.
‘All the Flaws’
“Vitro decided to use all the flaws in the law very aggressively against the creditors,” he says.
In a U.S. Chapter 11 bankruptcy, a company can’t create intercompany claims to outvote third-party creditors, says Cameron Kinvig, a lawyer at Hunton & Williams LLP in Dallas.
“Bondholders come first,” he says. “Intercompany claims are bottom of the ladder.”
Arturo Porzecanski, a professor of international finance at American University in Washington, says the Vitro case is the first time a U.S. judge is being asked to clear a Mexican plan that wouldn’t be approved under the U.S. system.
“What Vitro has done is to drive a truck through this loophole,” he says.
Lara says Vitro’s restructuring is consistent with Mexican law and deserves to be enforced in the U.S. The glassmaker used local laws to defend itself after defaulting on its debt. And Vitro’s board hired an outside law firm to examine the plan, says Alejandro Sanchez Mujica, Vitro’s general counsel.
‘Within the Law’
“We obtained legal opinion from two experts in stock market laws, corporate law and Concurso Mercantil to be sure we were within the law,” he says.
U.S. lawmakers say Vitro’s approach may cool crossborder investment, hurting both countries.
“By upending established international legal norms, this chill will also harm Mexico’s economy by severely reducing access to U.S. and international markets,” Patrick Meehan, a Republican representative from Pennsylvania, and Jared Polis, a Democrat from Colorado, wrote to Mexican envoy Arturo Sarukhan on Oct. 18, 2011.