Historically, subordinated debt has been widely used in infrastructure projects in Colombia as an instrument to inject sponsors' equity, and to avoid cash traps and other restrictions. However, existing sponsors are assessing how to obtain subordinated debt from non-affiliated parties, such as governmental entities and private equity funds. This represents a new feature in the Colombian landscape, as well as further challenges.
Subordinated debt is one of the instruments used by infrastructure projects sponsors to optimise the equity and debt structure. This instrument is ideal for investors willing to participate in a given project between equity and senior debt. The reasons for doing this include regulatory constraints, appetite for higher interest rates than senior loan rates, lower risk than pure equity investments and tax advantages.
From a Colombian law perspective, subordinated debt is a loan agreement with special repayment and security conditions, following two principles: (i) the protection of the senior lenders' payment rights; and, (ii) the restriction of payments to subordinated lenders. Typically, subordination is implemented through subordination agreements and turnover agreements that modify the par conditio creditoris principle. In some jurisdictions, such as Colombia, that modification might be construed as contrary to public order, especially in insolvency proceedings, rendering the agreements invalid.
However, there are some legislative precedents allowing contractual subordination to avoid restrictive interpretations. Sponsors, senior lenders and subordinated lenders should find other structural and contractual ways to implement sound subordination, supplementing first and second rank security structure.
The alternatives (pledges over subordinated loans and the transfer of economic rights of the subordinated loans to security trusts) are in favour of the senior lenders, and can offer solutions. In any case, it is necessary to carefully craft the documents to avoid not only the potential regulatory restrictions but also to create solutions applicable to insolvency scenarios.
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