Vitro's Defaulted Bonds Soaring in Precedent-Setting Case: Mexico Credit

Vitro’s $700 million of notes due 2017 rose to 77.5 cents on the dollar yesterday from 61 cents at year-end, spurred by a Jan. 9 court decision that maintained bondholders’ majority in the votes on restructuring terms. The ruling set back efforts by Vitro, which is the subject of a bankruptcy court fight, to seize control of the vote by arguing it’s the biggest creditor with $1.9 billion of intercompany debt.

Traders are betting bondholders will win a case that will set a precedent on whether companies can dictate terms of their restructuring. A Vitro victory would curb demand for Mexican corporate debt, said Robert Rauch, who helps manage $2.2 billion of emerging-market assets at Gramercy Advisors LLC. Mexican company bond yields in dollars rose 33 basis points, or 0.33 percentage point, this year, according to JPMorgan Chase & Co. Brazilian company yields fell 18, while Russia’s dropped 37.

“A lot of eyes are focused on this particular case to see how the Mexican legal system approaches this situation of intercompany debt,” Alexander Monroy, a corporate debt analyst with Barclays Plc, said in a telephone interview from New York. “People are holding out for something better than what the company is offering.”

Vitro is the first company to test Mexico’s 10-year-old revamped bankruptcy law by trying to use its intercompany debt to qualify as a creditor, said Rauch, who’s based in Greenwich, Connecticut. U.S. bankruptcy law prohibits the use of intercompany debt, or loans from one unit to another, he said.

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