Introduction

In preparing the second edition of this Guide, we note the common themes as well as the jurisdictional differences that affect all the debt restructuring practices in Latin America, as well as the economic and political factors that play into restructuring outcomes. Restructuring lawyers and financial advisers often criticise various perceived failings of their respective court systems, or find fault with various legal or regulatory requirements of their jurisdiction that might favour equity holders or the debtor versus the creditors, or vice versa, depending on their point of view. At the same time, restructuring professionals often find themselves borrowing from reorganisation structures and techniques used in other jurisdictions, both for in-court and out-of-court restructurings, since many of these methods can be applied effectively across borders when dealing with Latin American debt restructurings. Being able to adapt from other experiences where there is commonality, while being mindful of the individual differences in each jurisdiction (and, in some cases, each industry), is both the key to a successful restructuring practice and a continuing challenge as circumstances (including evolving economic and political factors) change.

Common issues (for example, the need for greater efficiency in the process for in-court reorganisations) have helped to shape amendments to bankruptcy law over time, such as the most recent ones adopted in Brazil and the prior series of reforms adopted in Mexico. The latest set of reforms in Mexico, in 2014, imposed a streamlined timetable for a reorganisation to be accomplished, although in practice that timing has not been adhered to, owing to litigation and other issues relating to the courts. In Brazil, new reforms similarly include provisions to speed up the bankruptcy process, for both reorganisations and liquidations, borrowing from the US Chapter 11 playbook, among other sources, to provide greater certainty for creditors and debtors and, in some situations, to help level the playing field between them.

In many countries in Latin America, the bankruptcy laws have tended to provide greater protection to debtors than creditors, but those laws are changing. Corporate legal structures and corporate governance issues are also key in how reorganisations are carried out in Latin America, because of the roles of the different stakeholders in a bankruptcy proceeding. For instance, the statutory pre-emptive rights under corporate law of existing equity holders to approve new equity issuance, or the rights under bankruptcy law to vote on a reorganisation plan, are more protective of equity holders in Mexico than would be the case for a typical Delaware company. Historically, these laws have protected the families that own many of the businesses in Latin American jurisdictions, as the corporate laws make it more difficult for creditors to take over the businesses in debt-for-equity swaps. Nevertheless, there are situations in which the parties are finding ways around the corporate law impediments, through negotiation or otherwise. In other circumstances, companies are using capital markets out-of-court solutions, such as liability management offers, to avoid the complications of in-court procedures, and in some cases companies are taking advantage of the ability to reorganise under the US federal bankruptcy code.

The legal frameworks of each jurisdiction that help to structure the outcomes of bankruptcy and reorganisation proceedings continue to evolve, in some cases becoming more similar in cross-border situations and in others becoming more difficult to reconcile. Some jurisdictions, such as Brazil, have adopted laws based on the UNCITRAL model for recognising foreign insolvency proceedings. This type of reform may become more common with the advent of large multi-jurisdictional proceedings involving assets and creditors with interests in multiple countries trying to accomplish a single comprehensive restructuring with a reorganised debtor (following the debacle of the restructuring of the Brazilian telecommunications giant Oi, for example, which was complicated by litigation regarding the centre of main interest (or COMI) for purposes of the related Chapter 15 proceedings, which has now been clarified in the Brazilian reforms).

Historically, the number of insolvent companies and restructurings has tended to surge through different Latin American jurisdictions in waves, driven by common economic and political factors that undermine certain industries, but sometimes the same factors can bring about very different results. As an example, the Operation Car Wash (Lava Jato) anti-corruption investigations in Brazil triggered a number of corporate bankruptcies in Brazil in the past, whereas an anti-corruption scandal in Argentina did not have the same effect. In Argentina, the sovereign default has been the most significant factor, with the ensuing restructuring process having an outsized impact on Argentina’s economy and the related wave of provincial and corporate debt restructurings. Meanwhile, companies within the oil and gas industry, the homebuilding industry, the sugar and ethanol industries and the fishing industry are among those that have been hit hard in past waves of restructuring across the Latin American region due to economic factors. The most recent wave of restructurings has affected companies in multiple jurisdictions. Those most affected by the covid-19 pandemic include the airline, retail and hospitality industries.

Much has been written about the effects of covid-19 and the related forced shutdowns of workplaces and the resulting economic issues in Latin America, including the infusion of government support (or lack thereof in many Latin American jurisdictions). Many restructuring professionals initially expected a larger wave of bankruptcies to result from these shutdowns, but in many jurisdictions, that wave did not materialise during the first year and a half following the pandemic shutdowns (except for the industries previously mentioned, most visibly the airlines). In recent months there has been a rise in defaults, including among non-bank financial institutions, potentially signalling another wave to come. The past two years of the pandemic, coupled with the effects of rising inflation and Russia’s invasion of Ukraine, have had some other unexpected consequences in the restructuring arena as well, such as making certain distressed investments and mergers and acquisitions (M&A) more attractive to buyers because of historic interest rate and currency developments.

With the covid-19 pandemic and recent experience in mind, this guide sets out to offer the perspectives of top Latin America-focused restructuring experts on a number of significant topics of current interest that highlight both some of the common themes touched on above and the differences throughout the practice in Latin America. The aim of this guide is not to introduce the restructuring laws in the region but rather to offer an insight into the state of the practice from highly qualified and experienced practitioners in Latin America and the United States who are involved in cross-border restructurings. The range of topics is broad, as might be expected given the complexity of the practice area and the regional differences.

Part I examines recent developments in the restructuring laws and legal systems in Argentina, Brazil and Mexico. The first chapter is a discussion of the recent financial restructuring developments in Argentina, from Tomás M Araya and Lucía Carro of Bomchil, including how liability management techniques and out-of-court debt restructurings work with the relevant bankruptcy laws. The second chapter provides an overview of the recently adopted reforms (some might say long overdue) to the Brazilian bankruptcy laws from Thomas Benes Felsberg, Fabiana Solano, Clara Moreira Azzoni and Thiago Dias Costa, of Felsberg Avogados, including a discussion of how the new laws provide a welcome innovation for debtor-in-possession financing, and how they are expected to improve the relative position of creditors and impose new challenges on debtors. However, since the new reforms have only been effective since January 2021 and have yet to be fully tested, the full outcome of the changes remains to be seen. Following that is a chapter discussing recent developments in restructuring in Mexico from Thomas S Heather and Christian Dorantes Picazo, of Creel, García-Cuéllar, Aiza y Enriquez, including as a result of the covid-19 pandemic.

Part II picks up on the theme of developments arising from the covid-19 pandemic. Pedro A Jimenez of Paul Hastings collaborates with editor Joy K Gallup to explore why the pandemic may be accelerating the choice of Chapter 11 as an attractive alternative to local filings in cross-border restructurings, including in the recent Latin American airline restructurings. In the following chapter, Jorge Luis Moreno Félix, José Ignacio El-Mir Arnedo, Abraham Maldonado Zenteno and Iván Neftalí Hernández, of PwC México, explain the effects of the pandemic on M&A and distressed investment activity in the region (including distressed M&A), in particular which sectors and countries have been most affected and where there is likely to be the best recovery going forward (focusing on Mexico, Brazil, Colombia, Chile and Argentina). Robert L Rauch, of Miller Buckfire & Co, then provides a perspective on the trends driving distressed investing in Latin America historically and in recent years, as well as an outlook for what to expect going forward.

Part III focuses on issues that, from an international investor perspective, are more specific to Latin America and the outcomes investors can expect in debt restructurings in the region. Francisco José Rodríguez Nepote, of Corona & Nepote, provides an insight on pre-packaged bankruptcy petitions in Mexico (and why, in his view, they are not a useful tool). Similarly, the following chapter, by Fernando del Castillo and Karla Silva of Del Castillo y Castro Abogados, reviews how litigation and other factors affect bankruptcy proceedings in Mexico. Another common theme in Latin American restructurings is addressed by Alejandro Sainz and Ana Gabriela Avendaño, of Sainz Abogados, which is the interplay between the equity and debt stakeholders and their relative priorities, focusing on Mexican restructurings based on their extensive experience. In addition, Juan Carlos Machorro, Ana Paula Ibarra and Guillermo Moreno, at Santamarina y Steta, explore another topic of great current interest in the region and elsewhere: how the emphasis on environmental, social and governance investment criteria is growing and is expected to affect investments and outcomes in distressed situations, particularly in the energy and infrastructure sector.

In Part IV, we examine two Latin American sovereign debt restructuring situations, with very different perspectives. First, Roberto E Silva, Jr, Martín Campbell and Agustina M Ranieri, of Marval, O’Farrell y Mairal, provide a very useful overview of the lessons learned in Argentina from its previous restructurings triggered by the sovereign default in 2001, and how those lessons were applied in Argentina’s most recent restructuring, which was completed in a fraction of the time in 2020 (following the sovereign’s ninth default), as well as the related restructuring of local law bonds and refinancing discussions with the International Monetary Fund and the Paris Club. Next, Fulvio Italiani, Carlos Omaña and Roland Pettersson, of D’Empaire, provide a thoughtful analysis of the ongoing massively complicated debt crisis in Venezuela, with ideas for possible solutions.

Finally, in Part V, our experts take a closer look at a couple of specialised industry case studies. Marcelo Ricupero, Frederico Kerr Bullamah, Giovanna Campedelli and Bernardo Ferreira Martins da Costa, of Mattos Filho, provide an in-depth analysis of debtor-in-possession financing in Brazil in general and as specifically applied in the well-known judicial reorganisation of the Brazilian telecommunications group Oi. And last but not least, Eric Deichmann and Michael Oestreich, of AlixPartners, look at the history of the aviation industry and what has been happening during the pandemic to the airlines in the region, including the significant number going through restructurings.

We are very appreciative of the tremendous effort put into this Guide by so many people. We are extremely grateful for the insights provided by all our esteemed contributors and wish to extend our thanks for their time and thoughtfulness in sharing their expertise and their views on these topics, and we look forward to their input on future editions. We are also very grateful for the contributions of all our colleagues at Paul Hastings who assisted in the production of this Guide.

Notes