Case Highlights Reach Of Transnational Insolvency

March 3, 2025
Javier Garibay Güémez
Abstract

Crédito Real, a Mexican lender, began liquidation in Mexico to bypass bankruptcy protections. After defaulting on payments and failed restructuring, creditors and minority shareholders alleged fraud, leading a Mexican court to suspend the liquidation process.

Financially distressed Crédito Real SAB de CV, a Mexican nonbank lender, has undertaken a corporate liquidation process in Mexico in order to sidestep the protections that Mexican and U.S. bankruptcy laws provide to creditors and minority shareholders.

With declining financial performance due to languishing government utilization of its financing products and the impact of the COVID-19 pandemic, Crédito Real was already vulnerable when investors began to scrutinize its financial statements and reporting practices.

Unable to rationalize not only its depressed profits, cash burn and eroding interest margins, but also the fact that 47% of its loan portfolio was composed of capitalized interest, Crédito Real's meteoric rise came to a screeching halt.

At the end of 2021, Crédito Real announced its intention to find financing sources that would allow it to meet its imminent obligations. However, it failed to attract investor interest in a roadshow organized in Switzerland in November 2021.

Subsequently, its attempts to arrange for the securitization of its payroll loan portfolio and to raise $150 million to refinance its CHF 170 million (about $180 million) bond due Feb. 9 were also thwarted.

Although Crédito Real tried to reassure investors by paying some coupons, each of its attempts to refinance the Swiss bond was a resounding failure, which Crédito Real ended up defaulting on Feb. 9.

The Swiss bond default generated several cross-defaults and forced Crédito Real to try to restructure its debt. All the restructuring attempts failed.

Frustrated with the lack of progress, at the beginning of June, Crédito Real fired its legal and financial advisers, causing the restructuring efforts to grind to a halt. In light of poor restructuring prospects, Crédito Real began to experience growing internal turmoil Frustrated with the lack of progress, at the beginning of June, Crédito Real fired its legal and financial advisers, causing the restructuring efforts to grind to a halt. In light of poor restructuring prospects, Crédito Real began to experience growing internal turmoil that further exacerbated the strained dynamic with its creditors.

Eight of the nine members of the board of directors resigned. In addition, its secured creditors demanded additional assets as collateral for their existing loans to mitigate the deterioration of Crédito Real's portfolio.

Faced with the threat that bank creditors would accelerate their loans and enforce their collateral, Crédito Real focused its attention on these secured creditors.

Consequently, on June 22, three unsecured creditors filed an involuntary bankruptcy petition against Crédito Real under Chapter 11 of the U.S. Bankruptcy Code.

These creditors sought to prevent Crédito Real from continuing to grant additional collateral in favor of its secured creditors and looked for an orderly restructuring involving all interested parties.

Crédito Real responded to this petition by commencing the corporate liquidation process under Mexican legislation, for which it sought recognition under Chapter 15 of the Bankruptcy Code.

Crédito Real filed under Chapter 15 of the Bankruptcy Code in Delaware — the state under which its U.S. subsidiary was organized — to establish the primacy of the Mexican corporate liquidation process.

In addition, Crédito Real argued that the involuntary Chapter 11 case against it pending before U.S. Bankruptcy Judge David S. Jones in the U.S. Bankruptcy Court for the Southern District of New York should be dismissed for lack of jurisdiction and because a courtsupervised liquidation process already was pending in Mexico, where the majority of Crédito Real's assets are located.

While the involuntary Chapter 11 case has been transferred to the Delaware bankruptcy court, the hearing to dismiss the involuntary petition is still pending.

According to some sources, Crédito Real agreed with some of its unsecured creditors to suspend the hearing that was going to take place with the Delaware bankruptcy court on Nov. 3 to recognize or dismiss the company's Chapter 15 filing and the involuntary Chapter 11 petition.

Apparently, the unsecured creditors' advisers are trying to find out from Crédito Real and its liquidator what assets the company still has and which have already been sold.

From the perspective of some creditors, the commencement of the liquidation process by Crédito Real appears to be a fraudulent strategy to avoid the imminent criminal prosecution of its principal shareholders and directors, as well as an improper tactic to avoid paying its unsecured creditors, mainly the bondholders.

From the perspective of minority shareholders, it is a scheme deployed by the controlling shareholders to distribute assets without considering the minority shareholders' views or interests in a shareholders' meeting.

For that reason, this latter group filed in August an appeal against the company's liquidation before the 52nd Civil State Court of Mexico City requesting the suspension of For that reason, this latter group filed in August an appeal against the company's liquidation before the 52nd Civil State Court of Mexico City requesting the suspension ofthe liquidation process.

The local court granted the request, which the Third Chamber of Appeals of the Supreme Court of Mexico City recently confirmed.

Financially distressed Crédito Real SAB de CV, a Mexican nonbank lender, has undertaken a corporate liquidation process in Mexico in order to sidestep the protections that Mexican and U.S. bankruptcy laws provide to creditors and minority shareholders.

With declining financial performance due to languishing government utilization of its financing products and the impact of the COVID-19 pandemic, Crédito Real was already vulnerable when investors began to scrutinize its financial statements and reporting practices.

Unable to rationalize not only its depressed profits, cash burn and eroding interest margins, but also the fact that 47% of its loan portfolio was composed of capitalized interest, Crédito Real's meteoric rise came to a screeching halt.

At the end of 2021, Crédito Real announced its intention to find financing sources that would allow it to meet its imminent obligations. However, it failed to attract investor interest in a roadshow organized in Switzerland in November 2021.

Subsequently, its attempts to arrange for the securitization of its payroll loan portfolio and to raise $150 million to refinance its CHF 170 million (about $180 million) bond due Feb. 9 were also thwarted.

Although Crédito Real tried to reassure investors by paying some coupons, each of its attempts to refinance the Swiss bond was a resounding failure, which Crédito Real ended up defaulting on Feb. 9.

The Swiss bond default generated several cross-defaults and forced Crédito Real to try to restructure its debt. All the restructuring attempts failed.

Frustrated with the lack of progress, at the beginning of June, Crédito Real fired its legal and financial advisers, causing the restructuring efforts to grind to a halt. In light of poor restructuring prospects, Crédito Real began to experience growing internal turmoil Frustrated with the lack of progress, at the beginning of June, Crédito Real fired its legal and financial advisers, causing the restructuring efforts to grind to a halt. In light of poor restructuring prospects, Crédito Real began to experience growing internal turmoil that further exacerbated the strained dynamic with its creditors.

Eight of the nine members of the board of directors resigned. In addition, its secured creditors demanded additional assets as collateral for their existing loans to mitigate the deterioration of Crédito Real's portfolio.

Faced with the threat that bank creditors would accelerate their loans and enforce their collateral, Crédito Real focused its attention on these secured creditors.

Consequently, on June 22, three unsecured creditors filed an involuntary bankruptcy petition against Crédito Real under Chapter 11 of the U.S. Bankruptcy Code.

These creditors sought to prevent Crédito Real from continuing to grant additional collateral in favor of its secured creditors and looked for an orderly restructuring involving all interested parties.

Crédito Real responded to this petition by commencing the corporate liquidation process under Mexican legislation, for which it sought recognition under Chapter 15 of the Bankruptcy Code.

Crédito Real filed under Chapter 15 of the Bankruptcy Code in Delaware — the state under which its U.S. subsidiary was organized — to establish the primacy of the Mexican corporate liquidation process.

In addition, Crédito Real argued that the involuntary Chapter 11 case against it pending before U.S. Bankruptcy Judge David S. Jones in the U.S. Bankruptcy Court for the Southern District of New York should be dismissed for lack of jurisdiction and because a courtsupervised liquidation process already was pending in Mexico, where the majority of Crédito Real's assets are located.

While the involuntary Chapter 11 case has been transferred to the Delaware bankruptcy court, the hearing to dismiss the involuntary petition is still pending.

According to some sources, Crédito Real agreed with some of its unsecured creditors to suspend the hearing that was going to take place with the Delaware bankruptcy court on Nov. 3 to recognize or dismiss the company's Chapter 15 filing and the involuntary Chapter 11 petition.

Apparently, the unsecured creditors' advisers are trying to find out from Crédito Real and its liquidator what assets the company still has and which have already been sold.

From the perspective of some creditors, the commencement of the liquidation process by Crédito Real appears to be a fraudulent strategy to avoid the imminent criminal prosecution of its principal shareholders and directors, as well as an improper tactic to avoid paying its unsecured creditors, mainly the bondholders.

From the perspective of minority shareholders, it is a scheme deployed by the controlling shareholders to distribute assets without considering the minority shareholders' views or interests in a shareholders' meeting.

For that reason, this latter group filed in August an appeal against the company's liquidation before the 52nd Civil State Court of Mexico City requesting the suspension of For that reason, this latter group filed in August an appeal against the company's liquidation before the 52nd Civil State Court of Mexico City requesting the suspension ofthe liquidation process.

The local court granted the request, which the Third Chamber of Appeals of the Supreme Court of Mexico City recently confirmed.

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