Alpha Latam Management, LLC – Latin American Low Income Consumer Lending Specialist Files for Bankruptcy after Accounting Irregularities Discovered at Mexican Affiliates, Lines Up $45mn of DIP Financing & Looks to Sell Colombian Assets

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August 1, 2021 – Alpha Latam Management, LLC and six affiliated Debtors (dba AlphaCredit, “Alpha Latam” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 21-11109 (Judge TBD). The Debtors, "a technology-enabled financial services company that have historically provided consumer lending products in Colombia," are represented by Mark D. Collins of Richards, Layton & Finger, P.A. Further board-authorized engagements include (i) White & Case LLP as general bankruptcy counsel, (ii) AlixPartners LLP as financial advisor, (iii) Rothschild & Co. as investment banker and (iv) Prime Clerk as claims agent. 

The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn ($768.4mn in third-party financial debt). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Bank of New York Mellon (as Trustee for $400.0mn of 9.000% Senior Notes due 2025, the "2025 Notes"), (ii) Bank of New York Mellon (as Trustee for $300.0mn of 10.000% Senior Notes due 2022, the "2022 Notes" and together with the 2025 Notes, the "Senior Notes") and (iii) Inter-American Investment Corporation ($23.0mn unsecured loan)

Highlights

  • Latin American (Mexican and Colombian operations) payday lender files for bankruptcy with $768.4mn of issued and/or guaranteed funded debt
  • Debtors specialize in providing loans (24.40% per annum interest) with repayment via payroll deduction (“PDLs”) to low income borrowers
  • Filing follows accounting irregularities at Mexican affiliates and subsequent (i) April 2021 announcement of intent to restate 2019 and 2019 financial statements, (ii) Senior Notes events of default, (iii) missed June Senior Notes interest payment and (iv) cessation of loan origination activities (no mention of COVID impact on borrowers and/or borrower default rates)
  • Debtors line up $45.0mn of DIP financing form holders of Senior Notes to fund sale of Colombian Assets (intentions for troubled Mexican Assets not specified)
  • Debtors expect to announce stalking horse(s) for Colombian Assets within days

In a press release announcing the filing, the Debtors advised that: “Alpha Holding [defined below] announced on April 20, 2021, that it would restate its financial statements for the years ended December 31, 2018, and 2019 (the 'Prior Period Financial Statements') to correct an error in Alpha Holding's accounting for its derivative positions.  Alpha Holding also identified additional accounting errors that it anticipates will result in a restatement of other assets and other accounts receivable in its financial statements for previous years, including the Prior Period Financial Statements, or a current write-down of other assets and other accounts receivable.  The accounting errors ultimately resulted in several defaults and events of default under the Company's funded debt obligations.  Though the Company endeavored to negotiate forbearance and waiver agreements with several of its lenders, such efforts were unsuccessful.  Given these events, the Company no longer had access to the new financing necessary to continue originating new loans, and accordingly has ceased its on-balance sheet origination activities. Today's actions became necessary despite the Company's best efforts to streamline the business by implementing significant cost-cutting measures. 

The Debtors' affiliates operating in Mexico, including Alpha Holding, S.A. de C.V. ('Alpha Holding'…) are not included in the chapter 11 filing.”

Goals of the Chapter 11 Filings

The Castellano Declaration (defined below) provides: "The success of  these Chapter 11 Cases depends upon the Debtors’ ability to preserve their operations while they conduct the sale process for the Colombian Assets….The Debtors continue to engage in due diligence and negotiate with potential buyers, and are optimistic they will be in a position to select a stalking horse bid and file a motion seeking approval of bidding procedures (including entry into a potential stalking horse agreement) within the first few days of these Chapter 11 Cases."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Castellano Declaration”), John Castellano, a Managing Director with the Debtors' financial advisors AlixPartners, detailed the events leading to Alpha Latam’s Chapter 11 filing. The Castellano Declaration provides: “In connection with an internal accounting review, the Company identified certain accounting errors with respect to the Mexican segment of its business, and on March 13, 2021, formally presented a preliminary report of such accounting errors to the board of managers of ALM (the 'ALM Board'). As a result, a special committee, comprised of non-management members of the ALM Board (the 'Special Committee'), was formed and hired independent counsel to provide advice in connection with the investigation of the accounting errors. The Special Committee’s legal counsel retained a forensic accounting firm to assist legal counsel in providing advice to the Special Committee. The Special Committee is chaired by the Board’s independent manager. 

On April 20, 2021, the Company publicly announced errors in the Company's accounting for its derivative positions and the need to restate its financial statements for the years ending 2018 and 2019. The Company also disclosed additional accounting errors relating to the Company’s: (i) allowance for loan losses; (ii) reserves for certain accounts receivables; and (iii) amortization of certain capitalized expenses. Shortly after the Company’s announcement, certain creditors sent notices of default to the Company for, among other things, failure to accurately report financial statements. Though the Company and its advisors tried to negotiate forbearance and waivers with these creditors, these efforts proved unsuccessful. As a result, the Company was unable to continue raising capital to continue to originate new Alpha Loans ["In Colombia, the Debtors have historically focused on providing PDLs to current and former governmental, union, and private sector employees, pensioners, and retirees (the 'Alpha Loans' and the borrowers thereunder, the 'Alpha Borrowers') using the Vive brand'.]"

The Company’s advisors also began analyzing the Company’s liquidity position. As part of that process, the Company determined that due to several factors, including the variability in loan collections, it needed to preserve cash. As a consequence, the Company, based on advice from its advisors and with a view toward maximizing value in the best interests of the Company and all relevant stakeholders, determined that the Company would cease making any new loan originations and would elect to exercise the grace period under the Senior Notes…by not making the June 19, 2021 interest payment.

Starting in May 2021, with Rothschild’s assistance, the Company began to market the Company’s unencumbered Colombian loan portfolio (the “Colombian Assets”) in an effort to bolster its cash position. As the Company’s liquidity position tightened, and negotiations with key stakeholders progressed, it became evident that the best path for a restructuring of the Company was a sale of substantially all of the Debtors’ Colombian Assets pursuant to section 363 of title 11 of the United States Code (the “Bankruptcy Code”). To that end, the Company began preparing for the commencement of these Chapter 11 Cases in parallel with negotiating a stalking horse bid and soliciting a $45 million debtor-in-possession financing (“DIP Financing”) to provide the bridge necessary for the Debtors to effectuate a sale of the Colombian Assets.”

DIP Financing

The Debtors have obtained debtor-in-possession ("DIP") financing commitments for a senior secured superpriority facility of $45.0mn to be provided by holders of its Senior Notes pursuant to a Secured Super-priority Debtor-in-Possession Note Purchase Agreement (the “DIP Note Purchase Agreement”). Under the DIP Note Purchase Agreement, the DIP Financing will be secured by first priority senior liens on substantially all of the Debtors’ unencumbered assets (including the Debtors’ rights under the Intercompany Facility) and junior liens on assets subject to prior liens. The Debtors will use a portion of the proceeds of the DIP Financing to fund their Mexican Affiliates pursuant to the Intercompany Facility, which Intercompany Facility is secured by first liens on the Mexican Affiliates’ unencumbered loan portfolios, government receivables, and other assets.

Prepetition Indebtedness

As at filing, the Debtors were either borrowers/issuers or guarantors of approximately $768.4mn in third-party financial debt obligations as summarized below:

Facility

Debtor Borrower(s)

Debtor Guarantors

Principal Amount Outstanding

MS Loan

– Alpha Capital

  • ACSA
  • Vive Créditos
  • AC Latam

$18.5mn

IDB Loan

– Alpha Capital

  • ACSA,
  • Vive Créditos
  • AC Latam

$24.0mn

2022 Notes

– N/A

  • Alpha Capital
  • ACSA
  • Vive Créditos
  • AC Latam
  • AC Sud

$300.0mn

2025 Notes

– N/A

  • Alpha Capital
  • ACSA
  • Vive Créditos
  • AC Latam
  • AC Sud

$400.0mn

CS Loan

– N/A

  • AC Latam

$9.0mn

2019 ResponsAbility Notes

– N/A

  • Alpha Capital 
  • ACSA
  • Vive Créditos

$11.3mn

2020 ResponsAbility Notes

– N/A

  • Alpha Capital
  • ACSA
  • Vive Créditos

$5.6mn

TOTAL

 

 

$768.4mn

About the Debtors

According to the Castellano Declaration : “The Debtors, together with their Mexican non-Debtor affiliates (the 'Mexican Affiliates') and certain other affiliated non-Debtors…operate a specialty finance business that offers consumer and small business lending services to underserved communities in Mexico and Colombia. 

The Company was founded in 2011 with the mission of improving the quality of life of individuals in the low-income segment of the population and promoting the growth of small and midsize enterprises ('SMEs') in Mexico by offering these populations greater access to credit. The Company began its consumer lending operations by providing loans with repayment via payroll deduction, or 'PDLs,' to federal and state government employees in Mexico and, over the next ten years, grew into a leading financial technology company. In 2015, the Company expanded its operations into the Colombian marketplace with creation of the Vive brand, a platform providing PDLs, and acquired TotalCredit, a Mexico-based PDL lender that partners with various employers across Mexico. In 2016, the Company launched Alcanza Capital, a leasing and factoring initiative and also acquired Crediamigo, a pioneer in the discount credit industry utilizing income advancement for government employees. In 2018, the Company expanded its technological platforms by launching its first mobile application, AXS, to offer instant loans to its customers. In 2019, the Company launched Bontu, a credit platform for SMEs based on new internet sales models, and completed the 100% digitization of the business for its consumers from origination to collection of each loan.

The Debtors’ target borrowers have a monthly gross income ranging from COP 700,000 to COP 10,000,000 ($181 to $2,591 USD) and ages ranging from 31 to 84. On average, a PDL has an initial term of approximately 108.9 months and an initial principal amount of COP 18.03 million or $4,900 USD. The average interest rates for PDLs is 24.40% per annum, which complies with Colombian interest rate regulations. As of May 31, 2021, the Debtors had approximately 36,800 PDLs outstanding with an aggregate principal amount of COPs 647.8 billion or $174.4 million USD."

Corporate Structure Chart

 

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