Part two of our series on distressed businesses operating within Mexico focuses on the benefits of engaging the right partner early on to serve as both a master and substitute servicer.
Part two of our series on distressed businesses operating within Mexico focuses on the benefits of engaging the right partner early on to serve as both a master and substitute servicer.
Steve Katz
Hi, everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco global smarter perspective podcasts as return listeners know by now, I'm your host, Steve Katz. And if this is your first time with us, welcome, welcome, we are really glad that you could tune in. Today we're joined by Samuel Suchowiecky, CEO of Hilco global Mexico. And we're going to continue our discussion here about the many complexities of managing the affairs of distressed businesses that have locations within the borders of Mexico. focusing today on part two of that discussion, which concerns ensuring successful outcomes through proper selection of a substitute servicer, a topic we have not really covered before, we have a semi authored an article a while back on it, but we didn't really dive into it the same way. So should be very interesting. And if you haven't already listened to part one, I encourage you to do so. either right on the Hilco website or on your favorite podcast platform as well. It was quite an interesting conversation filled with insights from Sam, who I know is going to give us many more here as well. So Sammy, thanks for joining us again, and we're looking forward to this follow up discussion.
Samuel Suchowiecky
Thank you, Steve. Great to be back.
Steve Katz
All right, to kick us off, it would be great if you could talk a little bit about what makes the environment surrounding restructuring in defaults in regard to asset backed securities. So different in Mexico. I know we talked last time about liquidations and what makes things different there. I'm sure there's some parallels. But as compared with the US, you know, and why that's such an important thing to understand for businesses, lenders, investors, advisors, I think that'd be really helpful here.
Samuel Suchowiecky
Sure, Steve, I think you have two different categories of investors that act within this landscape. And they are obviously quite different in and of themselves as well. You have your typical investors in bonds, generally, that will invest in Mexican bonds, like they would in any other other jurisdiction, and really look for you know, what bondholders, typically, you know, look for, which is a return in terms of possibly, you know, the interest that they're getting, and then in the arbitrage, that they can gain in the price of the bonds themselves. Typically, these type of investors do not have a necessarily a local presence, and a really, you know, traders, they're buying a position to hold it and liquidated in a period of time. The second category of investors that you often find within this landscape are what I would call your typical lenders right. And in particular, you have lenders who are using a solid A B L type structure, who hold their assets, their collateral, mainly assets of the company, which may be accounts receivables, or hard assets in a bankruptcy, bankruptcy, remote structure that is typically a trust. So, both of these have different objectives and are faced with different issues when they when when things get complicated, and a company is undergoing a restructure or bankruptcy or even a liquidation. As we have talked in the past, in in the last cup few years, largely coming out of COVID there has been significant bankruptcies in particular in the in the finance area, or sector in Mexico, with companies such as Alpha credit credit, L'Oreal, Nephin, and perhaps others announcing restructures liquidations or bankruptcies, different types, of course, most borrowers and most issuers in Mexico continue to make payments when due. But when you have these special circumstances, the the situation changes and the intricacies of the Mexican system, the Mexican jurisdiction and the Mexican legal system come into play. As you know, we have quite a significant presence in this area, because one of our businesses is Hillcoat, there are terracotta which is a leading service or Mexico.
Steve Katz
Yeah, right. And we have talked about that before. So I think it would be helpful to talk a little bit about what Hilco terracotta does, what makes it makes it's so specialized in the market. And then maybe you could talk you mentioned a few companies that are maybe there's one of those companies that you've worked with that you could use to illustrate the type of work that has been Successful yeah and in, in recent times.
Samuel Suchowiecky
Sure, Steve, I think that would be helpful. And, you know, to be honest, we have been involved in in most of the high profile bankruptcy and liquidation procedures in Mexico in the last couple of years. But if I had to choose one, I would speak about Alpha holding an alpha credit. That was a very public situation, which began really, when Deloitte alphas auditor discovered certain inaccuracies in the company's financial statements, which triggered then a series of events from their investors and lenders that eventually led to a bankruptcy and, and the liquidation of the company itself. Now, the way we got involved in the Alpha credit situation was through our affiliate, he'll go to record that, he'll get the record that provides backup primary and master servicer services in the Mexico community. And we were already working with alpha credit, and some of their lenders as master services. within that structure, we were designated in one of their securitizations as backup servicer. And the bondholders in that securitization voted to remove alpha as as primary servicer, and to ask us to step up and take over that position. That was both an opportunity and the challenge, because the collection of accounts receivables, such as the ones that outlook credit generated, is quite complex in Mexico. Alpha credit was primarily a payroll lender. And getting into collecting payroll loans in Mexico was particularly challenging because of both the legal framework and the practical issues surrounding these collections. Nevertheless, we again, were able to work with the lenders, and with the Alfa credit principles that already trusted us, they trusted said enough to engage us as master servicer in the first place. So that we then proceeded to make a number of practical decisions to effectively collect in full the sector decision within a period of 10 to 11 months. So I want to stress this, Steve, within 11 months from our designation, the investors walked out of that situation and walked out of that secured decision with 100% of their money 100% of their interest. And we're able to then move on to the to the next deal, if you will.
Steve Katz
Yeah. Which I would imagine, was not necessarily the expected outcome, particularly when they had the the first little stumble there. So So you're saying, I think you're saying and from my understanding of how the servicing arrangement works, that there's an implicit benefit in in the continuity of having a master servicer continue on as a substitute servicer during a liquidation? Is that Is that correct?
Samuel Suchowiecky
That's absolutely true. Nevertheless, to be honest, we have doubt taken this a bit further. And we're working with most of our clients to really, you know, reassess, what is it that they want? Do they want master servicing? Or do they want a backup service or from the beginning, and the difference is quite quite significant. Under a typical master servicing arrangement, you're really providing the investors or lenders with a series of reports and detailed information of how the collateral is performing. As a backup servicer, you have the same information that the primary service servicer has in your systems, if something goes wrong, if the primary servicer is not playing ball with their investors or with their lenders, you have an alternative to obtain information firsthand from somebody who has been following the collateral throughout the arrangement. So we have now taken this to heart. And, you know, we advise our clients to really think about what is the appropriate situation, more and more, our clients are choosing a backup servicer, you know, and there's different ways to make this work. So that transition when and if necessary, happens as seamlessly as possible.
Steve Katz
Is the backup servicer Along the way, running checks and balances against the master service stores just when when called upon, you know, in the situation they have that they have the data and the information to sort of pick up and move forward?
Samuel Suchowiecky
Well, well, in our engagements, we provide really both services within our backup servicing arrangement. In most cases, again, we work with each client and with each situation, according to what they may need. But it makes a lot of sense, particularly today, in a complicated environment, worldwide, really, for lenders and investors to go into a transaction as protected as possible. And in this, in these cases, having somebody who can then act upon the collateral quickly becomes very, very important, as everybody knows, time is an enemy of value. So once, you know, things take, you know, a long time, in the end, the assets that are serving as collateral will depreciate in value. It's also important to understand that all of this, both master servicing backup servicing arrangements are common have been in place in Mexico for at least about 20 years, and are really supported by the Mexican regulatory framework, and gives the, you know, both the investors and the company and added strength and confidence when dealing with investors and lenders.
Steve Katz
Yeah, certainly seems very logical. And, you know, relatively quick and simple decision to make, obviously, there's some cost associated with it. But from me, you know, limiting downside risk potential, it seems that it would be money, well, well, well spent. And also from the standpoint of losing valuable time, as you mentioned, I think it's also will be money well spent. I'm sure that can be, you know, really difficult period for companies filled with not easy decisions. Any other thoughts on what you know, what companies should be doing to put those types of additional cautionary procedures in place or what you know, when they should be doing it? And any last thoughts on the topic as we've moved towards the end of this discussion?
Samuel Suchowiecky
Sure. We often have conversations very early on with our clients, particularly lenders, who are acting within Mexico, as they are structuring a transaction, we can really provide a lot of value in terms of practical knowledge in terms of how to structure the transaction to facilitate, facilitate a transition, or even facilitate, you know, obtaining accurate and timely information. So I would say as the last thought, the earlier an investor or lender reaches out to us, the better that we can help them in terms of really strengthening their position in case of a future situation, such as what we've discussed. Yep.
Steve Katz
Makes sense. Earlier is usually usually better, right? That's just the way it works. All right. Well, we are out of time now. So thanks, Sammy, for joining us again today. Really appreciate the second part of the discussion. And I'm sure some of our listeners, bond investors, ABL lenders and others may want to connect with you about their specific situations or questions that they have about this master substitute service or structure. How should they go about getting a hold of you?
Samuel Suchowiecky
Well, my email is Sams sams@hilcoglobal.mx. And they can always reach me at my phone in Mexico + 5255 59 80 82 20.
Steve Katz
All right, Sammy, thanks again, really appreciate it. Always great to have you on and we look forward to having you back soon. And listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you could put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And lastly, as I mentioned, at the top of our discussion today, please remember to check out part one of this two part series if you haven't already. It was really informative, great discussion with Sammy focused on liquidations in Mexico and the importance of finding the right partner for those activities as well. And like all of our podcasts, you can find that one in this one at Hilcoglobal.com forward slash smarter dash perspectives or on your favorite podcast platform. Thanks again for being here till next time for Hilco global. I'm Steve Katz