Compania de Alimentos Fargo bondholders file involuntary Chapter 11 case to protect creditor interests

By Caroline Salls

Pittsburgh, Sept. 11 - Compania de Alimentos Fargo SA bondholders made an involuntary Chapter 11 filing against the company Monday in the U.S. Bankruptcy Court for the Southern District of New York in a bid to protect the bondholders' interests as the largest creditor base.

The bondholders, Rainbow Global High Yield Fund, Argo Capital Investors Fund SPC, The Star Fund and The Rainmac Fund, hold more than 65% of Fargo's 13¼ senior notes due 2008, which are governed by New York law.

According to a bondholder news release, the move highlights "deep tensions between international investors and Argentinian law."

The release said the filing follows the effective exclusion of the bondholders from earlier concurso bankruptcy proceedings in Argentina, following an Argentine court decision in March 2005 to disallow bondholders from voting the principal amount of their claims.

According to the release, the concurso ruling effectively enabled Fargo to ignore the bondholders, marking a dangerous development for international bond investors abroad.

Concurrently, the bondholders have asked the bankruptcy court to authorize examinations of Fargo and associated joint owners Grupo Bimbo SA de CV and Fernando Chico Pardo in connection with their activities in the concurso proceeding.

By initiating the Chapter 11 proceedings, the bondholders said they aim to preserve value for creditors and ultimately secure a fair restructuring of the company.

"We believe Bimbo is attempting to control the industry and use any means necessary to get this business as cheap as they can," Ian McCall of Rainbow Advisers said in the release.

"We want to be treated fairly and get priority treatment in the capital structure over equity."

Fargo entered into concurso bankruptcy proceedings in Argentina in 2002.

In response to a loan default, Deutsche Bank enforced its security and sold its equity interest in Fargo and a $30 million loan to entities controlled by Mexican businessman Chico Pardo.

In turn, the release said Pardo disposed of 30% of the interests to Bimbo, Fargo's closest competitor in the Argentine bread market.

These transactions have allowed control of the concurso process to lie in the hands of Bimbo and Pardo to the detriment of the general creditor body, the release said.

In March 2005, an Argentine court agreed to prevent any bondholders from voting the principal face amount of their bonds in the concurso proposal submitted by Fargo.

"The ruling contravenes predominant concurso case law in Argentina and goes against general principles of Argentine concurso matters," Matias Zaefferer, legal counsel for the funds in Argentina, said in the release.

The bondholders said they hope that the involuntary Chapter 11 filing will deter other non-US entities that have availed themselves of the U.S. capital markets from subsequently manipulating equity and secured debt positions in local insolvency proceedings in order to negate the rights of international bondholders.

"In Mexico, there have been similar problems for bondholders disenfranchised from bankruptcy processes," McCall said in the release.

"Mexican law favors equity holders and we believe the shareholders want the same result in Argentina."

"This unusual decision by the Argentine courts has disenfranchised 90% of the company's creditors from the restructuring process," David Eaton, partner at Kirkland & Ellis LLP and legal counsel to the funds in the United States, said in the release.

"It means a company could borrow an untold amount of money in the U.S. capital markets and then file a concurso proceeding in Argentina, and be able to pass through a restructuring that negatively impacts bondholders, without them being allowed to vote on it.

"It is a major adverse precedent for U.S. bond investors and threatens the sanctity of the U.S. capital markets."

Compania de Alimentos Fargo is a Buenos Aires, Argentina-based producer and distributor of packaged bread and bakery products in Argentina. Its Chapter 11 case number is 06-12128.

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