Supermarket poised to test Mexico insolvency law

A man walks past supermarket operator Controladora Comercial Mexicana in Mexico City May 14, 2010.

MEXICO CITY (Reuters) - Supermarket operator Controladora Comercial Mexicana (COMEUBC.MX) could soon become the first major test of Mexico's overhauled insolvency laws as it readies to file a "pre-pack" debt restructuring that would end months of negotiations with creditors.

As shoppers filled their carts at the company's stores around Mexico, behind the scenes its creditors were hammering out a deal to resolve more than $2 billion of derivatives losses the country's No. 3 supermarket operator suffered at the height of the financial crisis.

The company, known as Comerci, is expected soon to announce it has reached a deal with a majority of its creditors, a person familiar with the matter told Reuters.

The "pre-pack" deal would make Comerci the first listed company to use 2007 reforms to Mexico's insolvency law that allow companies with pre-negotiated creditor agreements to enter and exit the courts in just a few months.

"Really, it's never been done before," said Adam Bryk, a restructuring financial advisor at Deloitte in Mexico City. "If it works, then somebody else will do it and, if that works, then it will get more popular."

The move would be a major step for Mexico, whose large multinational companies typically try to avoid restructuring in the courts and often spend years in out-of-court negotiations with lenders in New York, Dallas or Madrid.

"What we've seen for a while in Mexico is that the groups don't rush to court," said Dennis Dunne, an attorney at Milbank, Tweed, Hadley & McCloy in New York, who worked on several Mexican restructurings. "The groups try to work it out consensually and hope to find common ground."

Mexico's insolvency law, called "Concurso Mercantil," is just 10 years old. While it is based on a United Nations Commission on International Trade model for insolvency proceedings, companies and lenders say they are still wary of using it given concerns about transparency and a lack of precedent for many complex situations. Mexico, like many emerging economies, also lacks judges that specialize in bankruptcy.

About a dozen large Mexican companies have been through out-of-court and in-court debt restructurings over the past two years as the recession left them struggling.

STRONGER SYSTEM AHEAD?

Many, like Comercial Mexicana -- which also operates the City Market, Alprecio, Fresko and Sumesa chains -- also made bad bets on derivatives and currency hedges.

Some lenders and creditors have grown frustrated and believe a stronger Mexican insolvency system could improve lending in the emerging economy, where some 130 companies are listed on the stock exchange. Mexican restructuring experts have pushed for changes in the treatment of inter-company claims or more flexibility in repaying secured creditors.

"We haven't put anything in front of Congress, but we are listening to the opinion of all the participants and we've reached the conclusion that the law should be revised in certain areas," said Gricelda Nieblas, head of IFECOM, the Mexican federal agency that oversees bankruptcies.

Nieblas said Mexican companies have "underused" Concurso laws to restructure, partially because they are largely family-run and executives fear the insolvency proceeding will be a black mark or they will lose control of their business.

Still, since 2000, about two-thirds of the companies that used Mexico's Concurso laws have been restructured and only about a third have been liquidated, she said.

Mexico is slowly recovering from the crisis, but with lenders still hesitant and a only a trickle of initial public offerings, it is unclear how companies will get the access to capital that may be necessary to grow.

"In Mexico itself there's a very low level of corporate lending that's occurred over the last 10 or 12 years -- if you look at statistics for Latin American countries, Mexico is significantly lower," said Deloitte's Bryk.

Even when a Mexican company is in a Concurso, banks can be reluctant to lend, often requiring a company to reserve 100 percent of the loan. By comparison, lenders to bankrupt U.S. companies jump to the front of the line and rarely lose money.

Broader use of the "pre-pack" option in Mexico, which requires at least 40 percent of creditors to agree on a deal before filing for court protection, could give lenders more confidence in Mexico. A "pre-pack" takes as little as three to four months, while a typical court restructuring takes 10 or 11 months and carries greater uncertainty about the outcome, Mexican restructuring experts say.

Comerci's move to test the law will be closely watched after a flurry of restructurings in the past two years.

Companies forced to negotiate with their creditors in the past wave ranged from big cement maker Cemex (CMXCPO.MX) (CX.N) and glass bottle maker Vitro (VITROA.MX), to small mortgage lender Metrofinanciera, which is considered the first "pre-pack" restructuring in Mexico.

Most struggling Mexican companies have managed to resolve their debt problems, or are still negotiating with creditors, and Deloitte's Bryk expects there will still be some restructuring -- particularly among mid-sized companies -- over the next few years.

Comercial Mexicana, like many of the companies that ran into derivative troubles when the peso plunged in late 2008, is expected to carry a heavier debt load post-restructuring than it had before the crisis. But results have started to turn around, and it posted a first-quarter net profit compared with a loss a year earlier.

"The crisis hit Mexico and the corporates hard, especially in 2009, but now most of them have started to rebound," said a Mexican banker who declined to be named.

"In general, the emerging markets corporates have learned to take a much more conservative approach to risk management. ... They will focus on having balanced hedges and not a position that is ultimately exposed to large amounts of volatility."

(Reporting by Emily Chasan and Cyntia Barrera Diaz; editing by Andre Grenon)