By: Michael J. Venditto (Reed Smith) & Alonso Gómez Del Campo (RDA)
Markets and financial distress do not respect national borders. With no border wall to protect Mexico's nascent oil and gas industry, it is susceptible to the same economic headwinds that have plagued global markets for the last several years. In the face of these forces, many US companies have used Chapter 11 of the Bankruptcy Code, either as a tool or a threat, to restructure their balance sheets. But what tools are available if the assets or business are located in Mexico?
The Mexican insolvency regime has some similarities to, and differences with, the restructuring tools available in the United States. Understanding your options in advance will help avoid unpleasant surprises.
At the end of 2013, just as oil prices began to fall, Constitutional amendments and a series of laws were approved in Mexico in an effort to transform the hydrocarbon sector of its economy. Private companies were allowed to participate in the upstream and downstream energy sector. By eliminating the monopoly of Petróleos Mexicanos (Pemex), and transforming it into a profitable and productive state-owned enterprise, Mexico hoped to attract foreign investment. The reforms were greeted with optimism by prospective investors and their implementation did generate increased private and foreign investment. Unfortunately, this optimism was predicated on two assumptions, oil prices remaining above $100 and accelerating global economic growth, neither of which have held up.
Many upstream companies were hedged, so there was some optimism that prices might quickly rebound as global supply rebalanced. However, in an increasingly competitive market, producers were concerned about preserving market share, so the rebound has been slow in coming. Eventually, the impact of falling prices spread throughout the industry as managers reduced headcount and capital expenditures. Some experts believed that as much as one third of all exploration and production companies would need to restructure debt of more than US$100 billion. The risk was particularly high for companies that had their expanded production with debt raised in the high-yield market. Predictably, this generated a host of Chapter 11 filings in the US Sophisticated creditors, familiar with the intricacies of US law and the costs, benefits and risks of Chapter 11 plans, have been willing to negotiate reorganizations, particularly since a quick...