Lawsuit Against Mexican Network Operator

Several holders of Mexico's Grupo Iusacell Celular 10% Senior Secured Notes due 2004 have filed a complaint in the Supreme Court of the State of New York today against Grupo Iusacell Celular, its subsidiaries, and a syndicate of holders of Iusacell bank debt currently led by Marathon Asset Management.

The complaint seeks to recover all amounts due under the US$150 million 10% Notes, prevent Grupo Iusacell Celular and the current holders of the bank debt from pursuing further restructuring talks that may be prejudicial to the Noteholders, and to assign to the Noteholders security interests improperly granted to the bank debt holders. Iusacell failed to make a scheduled interest payment on the 10% Notes due July 15, 2003, and the 10% Notes were subsequently declared due and payable on Sept. 11, 2003.

Defendants have approximately a month to respond to the complaint.

The complaint was prompted by the failure of Iusacell's controlling shareholder, Grupo Salinas, headed by Mexican businessman Ricardo Salinas Pliego, to respond to the Noteholders' efforts to engage in good faith restructuring talks. While most market analysts agree that Iusacell appears to have too much debt, the problem is a result of the US$350 million of bonds at the holding company level, and not the amount of debt sustained at the operating subsidiaries that are the obligors of the 10% Notes and the bank debt. The debt at the operating company level resulted in a comfortable leverage ratio of around 2.6x as of June 30, 2003, prior to the purchase of Iusacell by the Salinas Group from Verizon and Vodafone at the end of July 2003. Nonetheless, the Salinas Group has insisted that holders of the 10% Notes agree to a restructuring that provides a material amount of principal forgiveness without any consideration.

Furthermore, the Noteholders are concerned that Grupo Salinas representatives have indicated that they are pursuing a restructuring with the bank debt holders that may compromise the rights of the Noteholders. This concern is exacerbated since Iusacell continues to pay interest under the bank debt, including interest on portions of the debt publicly acknowledged as having equal standing with the Notes.

The Noteholders' say that their action was in part prompted by concerns raised by recent public revelations of potentially improper practices by Ricardo Salinas Pliego and Grupo Salinas in the restructuring of the debt of their other wireless telephone venture, Unefon, and the failure to disclose such practices in apparent violation of the new Sarbanes-Oxley U.S. securities law. The Noteholders have become increasingly concerned that Grupo Salinas has little intention to maintain Grupo Iusacell as an independent, going concern, as evidenced by the recent decision to terminate 500,000 subscribers, or 25% of its customers. Creditor and minority shareholder rights of Grupo Iusacell might also be undermined by informal or undisclosed arrangements with other Grupo Salinas enterprises including retailer Grupo Elektra, broadcaster Grupo Azteca, and Unefon.

"It is disturbing that, in modern Mexico today, aggressive shareholders like Ricardo Salinas Pliego are still able to act with such impunity against the interests of creditors and minority shareholders," stated Robert L. Rauch, Managing Director at Gramercy Advisors LLC. Many market analysts have stated that Unefon -- in which Grupo Salinas has a controlling interest -- would likely benefit from the removal of a competitor in the event Grupo Iusacell fails to restructure and is liquidated.

"Our discussions with representatives of Grupo Salinas to this point have resulted in no progress, and it is increasingly apparent that the new controlling shareholder of the company, who paid only US$7.4 million for its stake, has little interest in pursuing a mutually beneficial restructuring," said Mark Christensen, Senior Vice President at TCW Asset Management Company. He added, "Our preliminary due-diligence has revealed that the current holders of the bank debt have certain collateral which prior management may have improperly granted in violation of the indenture governing the 10% Notes."

Posted to the site on 15th January 2004