This content is from: Local Insights

Colombia: Search for collateral structures

Carlos Fradique-MéndezDavid Lopez
Foreign financial institutions granting loans to Colombian financial institutions are increasingly concerned about the feasibility of securing such indebtedness with collateral granted by the Colombian borrower. This is because new international financial regulations demanding larger liquidity from financial institutions, imposing more stringent capital requirements and requiring additional collateral for specific transactions have entered into force. This allows the foreign lender to abide with regulations demanding collateral and to ameliorate the risk-adjustment value of such loans with admissible collateral.

This regulatory and business need poses an interesting challenge under Colombian law. As a general rule, Colombian financial institutions may not grant collateral (or any type of lien that restricts its right to transfer assets) as security to a transaction unless an explicit exception applies.

The main exceptions relate to purchase-money security interest liens, liens required by the Colombian Central Bank or clearing houses, liens granted to secure repo and other securities markets transactions and liens granted to secure derivatives transactions.

Given these restrictions, in principle, debt-funding through simple loans or lines of credit would not qualify as the type of transaction that may be secured by a Colombian financial institution with collateral. Further, the other types of transactions in which the granting of collateral is admissible may not be, from a regulatory and from a business and financial point of view, the most efficient methods for a Colombian financial institution to obtain funding. In fact, such transactions may have additional limitations related to amount, term, tax effects, currency exchange regulations and finality that may not align perfectly with the funding needs of the Colombian financial institution.

This dichotomy between the desires or needs of foreign financial institutions and the general framework described above makes it necessary to implement innovative and creative solutions when structuring secured loans to Colombian financial institutions. Possible structures could involve hybrids between loans and derivatives transactions, a loan accompanied by a securities transaction, or sales or participations to the foreign bank of Colombian loans with repurchase covenants by the Colombian borrower. The workability of these structures will depend on the specific conditions of the underlying transactions and of the parties involved. In any case, such structures will require case-specific analysis and documentation that exceed what is customary for secured lending transactions among banks.

Carlos Fradique-Méndez and David Lopez

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