Case Study – Corporate Actions

A Cross Border Bankruptcy Conflict Triggers a Unique Corporate Action Reconciliation.

By John O'Grady, Senior Vice President

Vitro, S.A.B. de C.V., (Vitro) a leading glass manufacturer in Mexico and one of the world’s major companies in its industry, backed by more than 100 years of experience, had a roadblock to final settlement of its Mexican insolvency proceedings (‘Concurso”) originally filed in 2010.

The problem that was blocking resolution of the bankruptcy in both the U.S. and Mexican courts was identifying, reconciling, and removing from the Depositary Trust Company (DTC) Custodians the aggregate amount of “recovered” Old Notes that were fully paid consideration due under the Mexican Concurso Plan, totaling $1,200,967,333.

This problem arose as a result of Vitro making payments on the Bonds outside the settlement system of the DTC and therefore not reflected, and cancelled, on the books of the DTC Custodians of Record.  THE DTC WAS OUT OF BALANCE BY $1,200,967,333. 

Complicating matters further, “Unaccounted” Notes (never paid), totaling $15,032,667, were mixed in with the Recovered Old Notes showing in the DTC systems. No one knew how to reconcile the out of balance to ensure that holders of these Unaccounted Notes legitimately owed payment would be satisfied, and the holders of bonds who had been paid discharged.

This issue had been going on for a significant period of time with no effective resolution in sight, leading to a great deal of frustration on the part of the indenture trustees, , Wilmington Trust National Association and U.S. Bank National Association (collectively the “Trustees.”), and Vitro. Without a resolution to the problem, the Trustees found that they were unable to make accurate distributions to their respective constituents as required under a previously approved Plan of Reorganization for Vitro’s U.S. affiliates. 

In late 2014, during a meeting with Laurel Hill and Jeanne P. Darcey, a Partner ofSullivan and Worcester, counsel for one of the Trustees,  the situation was discussed, and  Laurel Hill was asked if it could help reconcile the out of balance condition.

Once retained by Vitro, The Laurel Hill Corporate Actions Team, led by John O’Grady, began an ongoing review of the Concurso records and DTC systems.

Constructive communication with Vitro, Trustees and their legal teams allowed Laurel Hill’s reconciliation efforts to accomplish the removal of certain Recovered Old Notes - As of January 26, 2016, $971,156,533, representing 80.86% of the original principal, had been identified, documented, instructed and removed from the DTC Settlement Records.

The out of balance total principal amount of Old Notes still reflected on the systems of the DTC was reduced to $229,810,800 representing 19.14% of the original principal.

$214,778,133 of the remaining balance were Recovered Old Notes (already paid outside of DTC Settlement) that were never removed from DTC’s systems, representing 17.88% of the original principal. These Notes needed to be identified and removed.

$15,032,667 of the remaining balance were Unaccounted Notes (never paid), representing 1.25% of the original principal. These Notes needed to be identified and paid to complete the Reorganization.

Many of these Recovered Old Notes were held in Euroclear, through U.S. Custodian positions. The documentation available was not sufficient to satisfy the demands of the remaining Custodians and allow reconciliation/removal.

The question posed, both by Vitro and the Trustees, was how to identify and cancel those positions that had previously received payment in order to make distributions to the remaining Unaccounted Note holders.

The Laurel Hill Team designed and recommended a unique Corporate Action which would allow the Unaccounted Note Holders to certify through their Bank or Broker DTC Participant Custodians that payment had not been received.

Each special Letter of Transmittal/Certification was subject to review by Laurel Hill, Vitro, the Bond Trustees, and their Attorneys.

After the process was initiated, application was made In the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, featuring a Proffer from John O’Grady of Laurel Hill as Expert Witness, requesting the Court to recognize this unique Corporate Action process as a Final Reconciliation.

The Court granted the Motion and after entry of an Order granted by the Court:
o   The unique Corporate Action designed by Laurel Hill was completed
o   Further claims were barred
o   Removal of all Old Notes held by Non-Responding Holders and Recovered Holders from the systems of the DTC was accomplished

As a result of this Court approved, unique Corporate Action, Laurel Hill was able to assist the Trustees and Vitro in resolving the frustrating problems preventing the Bankruptcy process from being completed.