Economist Arturo Porzecanski fears that a phenomenon he calls the “Vitro effect” could deal a serious setback to trade relations between the United States and Mexico, and in the long run damage Mexico’s standing in the global markets.
The retired Wall Street economist who is now a senior associate at the Center for Strategic International Studies and a distinguished economist-in-residence at American University in Washington, D.C., says the way that a massive Mexican corporation has handled its 2009 bankruptcy could chill trade relations with our neighbor to the south.
Porzecanski, a native of Uruguay, believes that if Vitro SAB, a glass manufacturer based in San Pedro Garza García, is able to prevail with its workout plan, international investors will be averse to investing in Mexican companies, shrinking the capital they need to grow and compete in global markets.
Porzecanski travelled to Dallas this week to observe the Trans Pacific Partnership meetings being held through next week and to conduct a media briefing along with Dallas attorney Cameron Kinvig.
Both men say the problem with Vitro’s bankruptcy is that a Mexican court has approved a workout plan that allowed the company to create debt to itself that jumped to the head of the line for repayment and gave the company a majority on the debtor’s committee that approved the workout.
Vitro defaulted on $1.5 billion of debt, including $1.2 billion in bonds three years ago. Bond holders have sued in Mexican and American courts to challenge the company’s reorganization plan after it created $1.9 billion in inter-company loans after the February 2009 default.
Porzecanski and Kinvig say they are concerned about the rights of investors, but they are also concerned Vitro case could have a lasting impact on Mexico, including on its efforts to join the nine nations that are already part of the TPP – the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. Both of America’s partners in the North American Free Trade Act – Mexico and Canada – are trying to join the TPP.
Mexico rewrote its bankruptcy laws more than a decade ago to bring them more in line with international norms. Porzecanski says that doing so opened the doors to capital markets for Mexican businesses, making it possible for them to sell bonds and equities to investors in the world’s richest economies.
Now, Porzecanski and Kinvig say they fear the Mexican economy could regress.
“A process where a Mexican company can use Mexican courts to bypass American laws can discourage trade relations and international investment in Mexico,” Kinvig says. “Our bond holders need to feel comfortable investing in Mexico.”
Porzecanski says that the TPP represents a good opportunity for the participating nations and adds, “I think that Canada and Mexico should be part of it. We’re just inextricably linked.”
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The problem for the nine nations already part of the new trade group, “Is you need to be aware of who you’re getting into bed with. The fundamentals of Mexico as a sovereign creditor are good,” he says. “But this workout process is pointing to a deficiency” in the Mexican bankruptcy process.
“This is utterly ridiculous and would even be considered fraudulent” if someone tried it in the United States, Porzecanski says.
The Mexican court’s ruling approving Vitro’s reorganization plan has been appealed and could still be overturned, but Porzecanski says that even if that happens it could be too late for investors. He says it could take “some time” for the Mexican appeals process to run its course and in the meantime the company has already begun to issue new bonds to raise new capital.
“There is a possibility that even if justice is done it will be too late.”
Kinvig adds, “If the Mexican court’s decision stands … then it sets a horrible precedent. It really has much broader ramifications than one bankruptcy case.”
In U.S. courts, one case on appeal to the U.S. Fifth Circuit Court of Appeals, bond holders are asking that the bankruptcy decision in Mexico be blocked. At the U.S. Bankruptcy Court in Dallas, Vitro is seeking “comity” as part of its Chapter 15 bankruptcy proceedings in the United States. It is asking that the debts of its extensive U.S. operations be handled in the same manner as approved by the Mexican court.
“The concept of comity is asking the U.S. courts to respect and earlier decision from a different court,” Kinvig says. “That’s OK if the earlier court got it right. Here, the earlier court got it so wrong that if [the U.S. court] grants comity, it’s a horrible slippery slope.”
Kinvig says Mexican lawmakers intended to create a bankruptcy system that mirrors those of the United States and other economic leaders, but they may have created a loophole.
“Maybe the letter of the law could be more specific, but the spirit of the law” is more in line with U.S. law and international law.
In the meantime, Vitro has returned to profitable operations. In its first quarter report released April 30, the company posted a 14 percent gain in earnings, netting $88 million before interest, taxes, depreciation and amortization.
Although Porzecanski says that Vitro’s bankruptcy tactics are an anomaly and not indicative of modern Mexican business practices, he fears the “Vitro Effect” could be widespread in that nation.
Right now, he says, “There is no ‘Vitro Effect’ you can see without a magnifying effect.” But if investors and potential trade partners see the case stand and become a precedent, they will begin to question the safeguards that are supposed to protect investors and suppliers.