Chapter 11 Restructurings of Latin American Energy Companies

By Richard Cooper, Luke Barefoot, and Jack Massey (Cleary Gottlieb Steen & Hamilton LLP)

Recent volatility in the global energy market has affected firms across the energy industry, creating a need for many firms to restructure their obligations.  Particularly in Latin America, many such firms have looked to the chapter 11 process, which with minimal asset structuring can be available to nearly any company to effectuate a balance sheet restructuring – leaving the operations of their business intact while right-sizing their financial obligations.

While chapter 11 can be highly efficient means of accomplishing a restructuring under these circumstances, it also presents a unique set of challenges.  For one, the Bankruptcy Code’s safe harbors include certain traps for the unwary, including ambiguity around the definition of “forward contract merchant” and other categories of entities whose contracts permitted to exercise contractual insolvency-based defaults notwithstanding the automatic stay, as well as opacity from the perspective of the debtor regarding which contract counterparties may qualify for certain safe harbors (namely, the safe harbor available to “financial participants,” the definition of which depends on the total exposure of the counterparty, which information is not generally available in the absence of discovery).  For another, foreign debtors may be party to key contracts with counterparties that claim not to be subject to the jurisdiction of U.S. courts, and which may lack material assets in the U.S.—such that U.S. court orders will be difficult to enforce against those counterparties, particularly in those countries that have not adopted the UNCITRAL recognition framework.  One approach to this problem can be to permit a contract to “ride through” unaffected by a chapter 11 plan, which permits a balance sheet restructuring to take place without litigation in the United States over individual contracts; although the ride-through doctrine has certain pitfalls, such as continued applicability of ipso facto clauses and others.  Nevertheless, the courts consistently approve plans that permit contracts to ride through, and multiple circuit courts of appeals have adopted the ride-through doctrine or similar formulations.

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