ON A SCORCHING APRIL MORNING IN Monterrey, Mexico, Enrique Garcia, Vitro SAB’s local plant manager, crosses under a mural that commemorates the 100th anniversary of the company’s first glass factory. He points to brick structures from the original plant.

Then, with visitors in tow, Garcia heads toward a steel and tin building where machines the size of minivans churn out 3 million bottles a day for Avon Products Inc., Coca-Cola Co. and Francis Ford Coppola Winery. Vitro is Mexico’s biggest glassmaker and among the nation’s top employers, with 17,000 workers. “Almost every family in Monterrey has had someone who has worked at Vitro,” Garcia shouts above the hammering of presses and the whoosh of molten glass being fired into bottle-shaped molds.

The whir of activity gives no indication that Vitro has been fighting its way through Mexican and U.S. courts — or that it’s waging a bare-knuckle brawl with a number of hedge funds, including Paul Singer’s Elliott Management Corp. Silver-haired investor Singer, whose New York hedge fund had more than $20 billion in assets as of June, swooped in in 2010, more than a year after Vitro’s February 2009 default on $1.2 billion of bonds. Singer, who’s adept at profiting from the debt of floundering companies such as Lehman Brothers Holdings Inc., snapped up Vitro’s bonds at a discount. Then he sued to be paid in full, countering Vitro’s proposed debt restructuring that offered outside creditors about half of their original investment. In lawsuit after lawsuit in Mexico and the U.S., Elliott and other hedge funds have challenged Vitro’s bankruptcy and sought to seize the glassmaker’s American assets and revenue from customers that include Ford Motor Co.

“Paul Singer’s not afraid to do the work on situations that frankly scare a lot of people off,” says Kenneth Buckfire, chief executive officer and managing director of Miller Buckfire & Co., a New York–based investment bank that has restructured bankrupt companies.

Singer, a Republican power broker who has given $1 million to Republican presumptive presidential candidate Mitt Romney’s super PAC, might have prevailed but for Vitro CEO Hugo Lara. “We started this process with a conviction that we had a business, a legacy and jobs that we were ready to defend,” Lara says. Urged on by Vitro Chairman Adrian Sada, the company founder’s great-grandson, Vitro has gone toe-to-toe with Singer. In May, a Mexican appeals court ordered Elliott and other funds to pay Vitro’s legal expenses on some lawsuits that courts have dismissed.

Vitro’s reorganization was approved by a court in Mexico earlier this year over objections by bondholders who have appealed. Because Vitro has units in the U.S., it asked a Dallas court to enforce its Mexican restructuring under Chapter 15 of the U.S. Bankruptcy Code and to stop litigation by debt holders, such as Singer. On June 13, Judge Harlin “Cooter” Hale denied Vitro’s request, saying the Mexican plan was defective because it didn’t sufficiently protect interests of U.S. creditors. The judge also found that there was evidence of possible suspect voting in company reorganization proceedings because Vitro used insiders to swamp outside creditors. Two days later, the judge reaffirmed that Vitro shouldn’t move assets or divert business to other entities in a bid to frustrate bondholders.

The wrangling showed no signs of dissipating as Vitro appealed Hale’s decision. “We are confident in the legal basis for our arguments,” says Andrew LeBlanc, a U.S. lawyer for Vitro.

Sada, 67, a graduate of the Wharton School at the University of Pennsylvania, says he’s determined to maintain his family’s grip. “We have a very high percentage of stockholders,” says Sada, who looks dapper in his midnight-blue pinstriped suit in spite of the heat. The Sadas and relatives in the Garza family trace their business roots to a brewery started in 1890. The Garzas control Alfa SAB, which owns Alpek SAB, Mexico’s largest petrochemical company, and Fomento Economico Mexicano SAB, which owns Oxxo, Latin America’s biggest convenience store chain. Singer declined to comment for this story.

As the Singer-Vitro battle sprawls across two countries, it’s pitting one of the world’s most successful hedge fund managers against one of Mexico’s elite industrial families. At its heart is a reorganization strategy that Vitro adopted to turn its subsidiaries into its major creditors, enabling them to outvote American bondholders like Singer.

The case is testing the extent to which Mexico’s bankruptcy law applies in the U.S. — an outcome that may shape future deals. If Vitro ultimately prevails, Americans might be less willing to invest without added guarantees because Mexican companies might employ Vitro’s tactics, says Robert Rauch, a partner at Gramercy Advisors LLC, a $2.8 billion hedge fund in Greenwich, Connecticut. Mexican corporate bond prices have lagged behind those in Brazil and Argentina, partly on such concerns, Rauch says. “This is a game changer,” he says.

Rauch says Mexico’s equivalent of a bankruptcy code, known as the Ley de Concursos Mercantiles, doesn’t address intercompany claims — in this case, the internal loans between units that enabled Vitro to restructure. “Vitro decided to use all the flaws in the law very aggressively against the creditors,” he says.

In a U.S. Chapter 11 bankruptcy, a company can’t create intercompany claims to outvote third-party creditors, says Cameron Kinvig, a lawyer at Hunton & Williams LLP in Dallas. “Bondholders come first,” he says. “Intercompany claims are bottom of the ladder.”

Arturo Porzecanski, a professor of international finance at American University in Washington, says the Vitro case is the first time a U.S. judge is being asked to clear a Mexican plan that wouldn’t be approved under the U.S. system. “What Vitro has done is to drive a truck through this loophole,” he says.

Lara says Vitro’s restructuring is consistent with Mexican law and deserves to be enforced in the U.S. The glassmaker used local laws to defend itself after defaulting on its debt. And Vitro’s board hired an outside law firm to examine the plan, says Alejandro Sanchez Mujica, Vitro’s general counsel. “We obtained legal opinion from two experts in stock market laws, corporate law and Concurso Mercantil to be sure we were within the law,” he says.

U.S. lawmakers say Vitro’s approach may cool crossborder investment, hurting both countries. “By upending established international legal norms, this chill will also harm Mexico’s economy by severely reducing access to U.S. and international markets,” Patrick Meehan, a Republican representative from Pennsylvania, and Jared Polis, a Democrat from Colorado, wrote to Mexican envoy Arturo Sarukhan on Oct. 18, 2011.

Allan Brilliant, a lawyer for Vitro’s creditors, is more direct. “Vitro created the debt in bad faith to take advantage of what they see as a loophole in the Mexican bankruptcy law,” he says.

For decades, Singer has reigned as a master of waging — and winning — protracted legal battles. He isn’t afraid of taking on corporations or governments to collect on defaulted debt. During the past 35 years, his fund has returned an average of 14 percent a year, according to his annual letter to investors. The government of Peru in 2000 agreed to pay him $58 million, a 400 percent profit, on the debt of two Peruvian banks he’d purchased four years earlier.

Singer has battled Argentina for a decade after buying more than $600 million of that country’s debt, some for as little as 15 cents on the dollar. In 2005, then-President Nestor Kirchner offered to swap the defaulted bonds for new ones worth about 30 cents on the dollar. About three-quarters of bondholders accepted. Elliott’s NML Capital unit went to court for full payment and has since won five judgments totaling $1.6 billion. Six other lawsuits are pending. Argentina has yet to pay. In the latest round, Elliott’s lawyers prepared to argue in July that the Second U.S. Court of Appeals in New York should require Argentina to settle in full. “It takes a lot of work to play this game, and very few people have the commitment,” says Anna Gelpern, a professor at American University’s Washington College of Law.

Singer has also had outright flops. In 2009, Elliott lost $101.1 million buying phony promissory notes from Marc Dreier, the New York lawyer who pleaded guilty to defrauding hedge funds out of $400 million.

In fighting the Sada family, Singer is also squaring off against David Martinez, a 55-year-old Monterrey native who himself is a hedge fund mogul dealing in distressed debt. Martinez, founder of New York–based Fintech Advisory Inc., came onboard in the fall of 2009. Martinez provided $75 million in financing and helped Vitro move its most profitable units beyond the reach of creditors.

This isn’t the first time the two hedge fund bosses have crossed swords. Martinez has helped Argentina, Brazil and Ecuador restructure their debt. In 2005, he filed a friend of the court brief on behalf of Argentina, opposing one of Singer’s attempts to win payment.

At Fintech’s behest, Vitro devised the plan that shuffled the holding company’s assets so that the glassmaker eventually ended up owing $1.9 billion to its own subsidiaries. The maneuver was kept hidden from creditors for 10 months, according to public documents and court papers. Martinez declined to comment.

The court challenges have taken their toll on Vitro executives. “It’s tough to manage the business under this situation,” says Lara, jabbing the air with his Montblanc pen.

Adrian Sada says he’s drained but optimistic. “The past three years have been the toughest,” he says, sitting in a conference room across the street from conveyor belts laden with Coke bottles. He says he has never feared he would lose the company his great-grandfather, Francisco Sada, started with Isaac Garza as an offshoot of Cuauhtemoc brewery. The families established the glass factory in 1909 to provide a steady supply of bottles.

The Sadas grew rich and powerful as Monterrey, capital of the northeastern state of Nuevo Leon, emerged as Mexico’s industrial heartland. Adrian Sada became Vitro chairman in 1991, according to company spokesman Roberto Riva Palacio. Sada paid almost $1 billion for Tampa, Florida–based Anchor Glass Container Corp. and Latchford Glass Co. in Huntington Park, California. The timing was disastrous, coming as soft-drink makers switched to plastic. Vitro sold Anchor for $392.5 million in 1997, less than half of what it had paid. The company shed a home appliance unit and cut costs to convince investors to buy $1.2 billion of bonds in 2007.

A year later, Vitro’s sales plunged amid the global economic slowdown. Derivatives that bet on rising natural gas costs backfired as prices fell, forcing the company to shell out $85 million for margin calls. In February 2009, Vitro missed a $44.8 million interest payment on the $1.2 billion of bonds and couldn’t repay $255 million in derivatives losses.

Martinez stepped in. Fintech’s founder sat on Alfa’s board alongside Adrian Sada and had helped restructure family-controlled chemical company Cydsa SAB in 2004. In December 2009, Fintech gave Vitro $75 million to buy the land on which company factories sit and lease it back to Vitro. Martinez urged a complete reorganization, sparking 43 transactions in which Vitro acquired the stock of subsidiaries and exchanged debt for capital so that Vitro SAB eventually wound up owing $1.9 billion to its units. Martinez profited by gaining an option for a 24 percent Vitro stake in return for the land.

By the fall of 2010, Vitro had failed to settle with bondholders. It filed for bankruptcy protection in Mexico that December, which was finally accepted in April 2011. It also made the U.S. Chapter 15 filing to have its reorganization recognized across the border.

In the process, Vitro used $1.9 billion in intercompany loans to vote down opposition from third-party creditors. Many of the original bondholders couldn’t stomach further machinations and sold out. “The creditors didn’t want to go through Mexican courts,” says Brian Cullen, a managing director at Duff & Phelps Corp. who advised bondholders. “Instead, Vitro got hedge funds that welcome litigation when they believe they’ve been wronged.”

Singer’s Elliott and New York–based Aurelius Capital Management LP piled in. The two, along with other hedge funds, including New York–based Davidson Kempner Capital Management LLC and Lord Abbett & Co. in Jersey City, New Jersey, have filed more than 300 legal challenges in Mexico alone.

In April 2011, Judge Sandra Lopez in Monterrey appointed Javier Navarro-Velasco, a partner in the local offices of Baker & McKenzie LLP, to bring the two sides together. The hedge funds weren’t interested in negotiating, Navarro-Velasco says. They wanted $1.1 billion in new bonds, a 10 percent cash payment and 61 percent of Vitro shares. “It was ridiculous,” he says. “It wasn’t serious. They didn’t want to negotiate.”

At the end of October 2011, Navarro-Velasco unveiled terms that offered creditors 45 to 55 cents on the dollar. In February 2012, a court in Monterrey approved Vitro’s reorganization. Elliott and other creditors filed a more-than-600-page appeal, which is pending.

“We offered to negotiate with Elliott and Aurelius, show them our books, to have a rational discussion,” legal chief Sanchez Mujica says. “They only wanted to continue trading and continue litigating.”

To emphasize his point, Sanchez Mujica unpacks his iPad to read a quote from an interview that Singer gave to BLOOMBERG MARKETS in 2008. “Our primary goal is to find bankruptcy situations where our ability to control or influence the process is the driver of value,” Singer said at the time. “That’s our favorite.”

After triumphing over governments and winning payouts from Lehman Brothers and Enron Corp., the master of distressed debt is on his way to adding the tenacious Mexican glassmaker to his list of wins.

KAMBIZ FOROOHAR IS A SENIOR WRITER AT BLOOMBERG MARKETS IN NEW YORK. This email address is being protected from spambots. You need JavaScript enabled to view it. BRENDAN CASE COVERS MEXICAN INDUSTRIAL COMPANIES AT BLOOMBERG NEWS IN DALLAS. This email address is being protected from spambots. You need JavaScript enabled to view it.

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