Key Developments in Emerging Markets Restructuring: Insights from Latin America

Over the past few years, the restructuring landscape in Latin America has been shaped by a complex interplay of economic challenges, legal reforms, and strategic responses to corporate and sovereign distress. Argentina, Brazil, and Mexico (which I will collectively refer to as the BAM countries) have each developed distinct legal frameworks and strategies to manage financial distress, influenced by their unique economic conditions and political environments. This article explores key developments in restructuring within these countries, highlighting how legal reforms, macroeconomic factors, and political dynamics have shaped outcomes, and dicusses the New York State Sovereign Debt Stability Act as a significant factor in sovereign debt restructuring.

Argentina: Concurso Preventivo, APE, and Sovereign Debt Restructuring

The Concurso Preventivo: Argentina’s Chapter 11 Equivalent

The concurso preventivo is Argentina’s version of Chapter 11 bankruptcy, designed to allow financially distressed companies to reorganize and continue operations while negotiating debt repayment plans with creditors. This legal framework enables companies to retain control of their operations during the restructuring process, while providing them with protection from creditors’ claims. The concurso preventivo requires the debtor to propose a reorganization plan that must be approved by a majority of creditors, both in number and in value.

A key feature of the concurso preventivo is the automatic stay, which halts all enforcement actions by creditors and provides the debtor with breathing room to develop and negotiate a restructuring plan. This mechanism is crucial in preventing a run on the debtor’s assets and in facilitating a more orderly restructuring process. However, the success of a concurso preventivo depends significantly on the debtor’s ability to negotiate with creditors and secure the necessary majority approval.

Acuerdo Preventivo Extrajudicial (APE): A Flexible Alternative

The APE is another restructuring tool in Argentina, offering a more streamlined and flexible alternative to the concurso preventivo. The APE allows a debtor to reach an agreement with creditors outside of formal court proceedings. Once the agreement is reached and ratified by a majority of creditors, it is submitted to the court for approval. If approved, the APE becomes binding on all creditors, including those who did not consent to the agreement.

The APE process is generally faster and less costly than a full concurso preventivo, making it an attractive option for companies that can secure creditor support without the need for extensive judicial oversight. It provides a practical solution for businesses that are financially distressed but not insolvent, allowing them to restructure their obligations without the stigma or complexity of formal bankruptcy.

Dissenting Creditors and the Holdout Problem: Lessons from the 2000s

Argentina’s sovereign debt crisis in the early 2000s is a prime example of the challenges posed by dissenting creditors, often referred to as "holdouts." During the 2001-2005 debt restructuring process, Argentina faced significant difficulties due to a group of creditors who refused to accept the terms of the restructuring and instead pursued legal action to recover the full value of their bonds. These holdouts, led by hedge funds such as Elliott Management, successfully obtained court rulings that blocked Argentina from making payments on restructured bonds until the holdouts were paid in full.

The situation was finally resolved in 2016 when Argentina, under the new administration of President Mauricio Macri, reached a settlement with the holdouts. The country agreed to pay approximately $4.65 billion to settle the claims, which represented about 75% of the amount owed to these creditors. The settlement allowed Argentina to regain access to international capital markets after more than a decade of exclusion.

This episode highlights the significant impact that dissenting creditors can have on sovereign debt restructurings. The holdout problem in Argentina was exacerbated by the lack of a robust legal mechanism to enforce collective action clauses (CACs) at the time. These clauses, which have since become more common in sovereign bond contracts, allow a supermajority of bondholders to agree to a restructuring that is binding on all bondholders, thereby reducing the risk of holdouts.

Changes and the Current Landscape

Since the resolution of the holdout problem, Argentina has made several changes to its debt issuance practices to prevent a recurrence of similar issues. Modern sovereign bond contracts issued by Argentina now typically include enhanced CACs, which make it more difficult for a small group of dissenting creditors to block a restructuring. These clauses have helped streamline the restructuring process by allowing a supermajority of bondholders to bind all creditors to the terms of the restructuring, thus mitigating the risk of holdouts.

However, challenges remain, particularly in the context of economic volatility and political uncertainty. The effectiveness of these legal mechanisms continues to depend on the broader economic environment, creditor coordination, and the willingness of the government to engage constructively with stakeholders.

Brazil: Recupera??o Judicial and Recupera??o Extrajudicial

Judicial Reorganization (Recupera??o Judicial): Brazil’s Structured Approach

Brazil’s restructuring landscape was significantly modernized with the introduction of the new Bankruptcy and Insolvency Law in 2005, which marked a turning point in the country’s approach to corporate restructuring. The centerpiece of Brazil’s modern restructuring regime is the recupera??o judicial, a court-supervised reorganization process similar to Chapter 11 in the United States.

Under recupera??o judicial, financially distressed companies can continue their operations while negotiating a reorganization plan with creditors. The process provides the debtor with protection from creditors’ claims through an automatic stay, allowing the company to stabilize its operations and propose a plan to restructure its debts. The plan must be approved by a majority of creditors classified into different groups, such as secured, unsecured, and labor creditors.

The flexibility and structured nature of recupera??o judicial have been critical in managing large-scale corporate restructurings in Brazil’s dynamic economic environment. High-profile cases like Oi S.A., one of the largest telecommunications companies in Latin America, and the construction giant Odebrecht have utilized recupera??o judicial to navigate complex financial challenges while maintaining operations.

Extrajudicial Reorganization (Recupera??o Extrajudicial': A Streamlined Alternative

Alongside recupera??o judicial, Brazil’s legal framework includes recupera??o extrajudicial, an out-of-court reorganization process that allows companies to negotiate directly with their creditors. This process is less formal and can be faster than judicial reorganization, making it an attractive option for companies that have already reached agreements with a majority of their creditors.

In recupera??o extrajudicial, the debtor negotiates a restructuring plan with creditors, and once a sufficient majority (typically two-thirds) of creditors have agreed to the plan, it is submitted to the court for approval. Upon court approval, the plan becomes binding on all creditors, including those who did not consent to the agreement. This tool is particularly useful for companies that are not yet insolvent but are facing financial challenges requiring restructuring.

The recupera??o extrajudicial has been successfully utilized in several Brazilian restructurings, providing companies with a more streamlined and less disruptive alternative to full judicial proceedings. It is particularly advantageous for firms that have strong relationships with their creditors and can reach consensual agreements without extensive court involvement.

Mexico: Concursos Mercantiles and Concurso Preacordado

Concursos Mercantiles: Mexico’s Structured Restructuring Process

Mexico’s restructuring landscape was significantly enhanced with the introduction of the Ley de Concursos Mercantiles (LCM) in 2000. This law created a modern and comprehensive framework for managing corporate insolvencies and restructurings, aligning Mexico’s practices with international standards and providing greater legal certainty for both debtors and creditors.

The concursos mercantiles process is Mexico’s primary mechanism for corporate restructuring, offering a structured, court-supervised process for companies facing financial distress. Similar to Chapter 11 in the United States, concursos mercantiles allows companies to reorganize their debts while continuing their operations.

A concurso mercantil begins with a petition filed by the debtor or creditors, demonstrating that the company is unable to meet its obligations. Once the petition is accepted, the court appoints a conciliator (*conciliador*) to oversee the process and facilitate negotiations between the debtor and its creditors. The debtor remains in control of its operations during this period but is protected from creditor actions through an automatic stay.

The goal of the concurso mercantil is to reach a reorganization agreement (*convenio concursal*) between the debtor and its creditors. This agreement, which must be approved by a majority of creditors representing at least 50% of the total debt, outlines how the debtor’s obligations will be restructured, such as through payment extensions, interest rate reductions, or partial debt forgiveness. Once approved by the court, the agreement is binding on all creditors.

The concursos mercantiles process has been critical in several major restructurings in Mexico, such as the case of Altos Hornos de México (AHMSA), one of the largest steel producers in the country. AHMSA used concursos mercantiles to restructure its debts while continuing its operations, demonstrating the effectiveness of this legal tool in preserving business continuity during financial distress.

Pre-packaged Bankruptcy (Concurso Preacordado): A Faster Resolution

Another important feature of Mexico’s restructuring landscape is the concurso preacordado, or pre-packaged bankruptcy, which allows a company to expedite the restructuring process by presenting a pre-negotiated reorganization plan to the court at the outset of the proceedings. This mechanism is particularly useful for companies that have already reached agreements with a significant portion of their creditors and want to avoid the lengthy and complex process of traditional *concursos mercantiles*.

In a concurso preacordado, the debtor negotiates a restructuring plan with its creditors before filing for bankruptcy. Once a sufficient majority of creditors have agreed to the plan, the debtor submits it to the court for approval. If the court approves the plan, it becomes binding on all creditors, allowing the company to implement the restructuring quickly and efficiently.

This tool has been effectively utilized in Mexico to streamline restructurings and reduce the time and costs associated with traditional bankruptcy proceedings. It is particularly advantageous for companies with strong creditor relationships and the ability to negotiate consensual agreements outside of court.

The New York State Sovereign Debt Stability Act: A New Framework for Sovereign Debt Restructuring

The New York State Sovereign Debt Stability Act, enacted in 2020, represents a significant development in the global landscape of sovereign debt restructuring. Given that a substantial portion of the world’s sovereign debt is issued under New York law, this Act has far-reaching implications for countries like Argentina, Brazil, and Mexico that have historically relied on New York courts for debt issuance and restructuring.

The Act introduces several key provisions aimed at promoting more orderly and predictable sovereign debt restructurings. One of the most notable features is the enhancement of collective action clauses (CACs), which allow a supermajority of bondholders to agree to a restructuring that becomes binding on all bondholders. This is designed to prevent holdout creditors from obstructing the restructuring process, a problem that was notoriously highlighted during Argentina’s early 2000s debt crisis.

The Act also introduces the concept of “qualified restructuring” for sovereign debt, where countries that adhere to specific principles of transparency, good faith negotiations, and equitable treatment of creditors are afforded certain legal protections under New York law. This framework encourages sovereign borrowers to engage in constructive dialogue with their creditors and facilitates smoother restructuring processes by reducing litigation risks.

For Latin American countries, the Sovereign Debt Stability Act provides a clearer and more structured environment for sovereign debt restructuring. It reduces the likelihood of protracted legal battles with holdout creditors and aligns New York law with international best practices in sovereign debt management. Countries like Argentina, which have faced significant challenges in past restructurings due to the actions of holdout creditors, stand to benefit from the increased predictability and fairness introduced by this legislation.

The Impact of Macroeconomic and Political Dynamics on BAM Countries

Argentina:

Argentina’s restructuring landscape continues to be heavily influenced by its volatile economic conditions and shifting political landscape. High inflation, a deep recession, and political uncertainty have made the restructuring process more challenging. The success of mechanisms like the concurso preventivo and APE depends on the government’s ability to engage constructively with creditors and maintain economic stability. The country’s reliance on enhanced CACs and the framework provided by the New York State Sovereign Debt Stability Act will be critical in managing future sovereign debt challenges.

Brazil:

Brazil’s economic volatility, marked by periods of recession, high inflation, and currency fluctuations, has created a challenging environment for corporate restructurings. The country’s political instability, exemplified by corruption scandals such as the Lava Jato investigation, has also played a significant role in shaping the restructuring landscape. Companies involved in these scandals have faced increased legal scrutiny and public backlash, complicating their restructuring efforts. Additionally, Brazil’s reliance on commodity exports has exposed the economy to global market fluctuations, further influencing the financial health of Brazilian corporations.

Mexico:

Mexico’s restructuring environment is heavily influenced by its integration into the global economy and its close economic ties with the United States. The country’s reliance on trade, particularly under the United States-Mexico-Canada Agreement (USMCA), has shaped its economic stability and, by extension, its restructuring landscape. Political changes, such as the election of President Andrés Manuel López Obrador, who has taken a more interventionist approach to economic policy, have also impacted investor confidence and the availability of capital for restructuring efforts. These factors, combined with Mexico’s susceptibility to global economic trends, have made the restructuring landscape highly dynamic and dependent on external economic conditions.

Conclusion

The restructuring landscapes in Argentina, Brazil, and Mexico have evolved significantly, with each country developing legal frameworks and strategies tailored to their unique economic and political contexts. The introduction of mechanisms like the concurso preventivo, APE, recupera??o judicial, recupera??o extrajudicial, concursos mercantiles, and the concurso preacordado have provided companies with more effective tools to manage financial distress. At the same time, the broader macroeconomic and political environments, along with new developments like the New York State Sovereign Debt Stability Act, continue to influence the success of restructuring efforts in these countries. As Latin America navigates ongoing economic and political challenges, stakeholders must remain vigilant and adaptable, leveraging the lessons of the past while preparing for the uncertainties of the future.