Banking & Finance 2020

Last Updated October 05, 2020


Law and Practice


Mendoza Abogados is a boutique law firm located in Bogotá, Colombia, and highly specialised in transactional work in banking and finance. With a team comprised of lawyers knowledgeable in corporate finance and transactional law, the firm offers the value of specialised services to its clients. Since its establishment in March 2018, Mendoza Abogados has gained the trust of Colombian “blue-chips” and handles important local and cross-border financial transactions and agreements for Financiera de Desarrollo Nacional, Banco Davivienda, Bancolombia, Findeter, BTG Pactual, Grupo Argos, Celsia Colombia, Cubico Sustainable Investments, SoEnergy International, Avianca, Bodytech, Larrain Vial, and Recaudo Bogotá, among others. The firm is recognised in Colombia for its work on local and cross-border syndicated credit facilities, complex financial transactions involving restructurings of notes under Rule 144A Reg S, project finance and cross-border derivatives.

Colombia's economy has been deeply affected by the COVID-19 health emergency (see 1.2 Impact of the COVID-19 Pandemic). According to the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística or Dane), while monthly GDP growth for January and February was above 4%, GDP fell 4.9% in March, when measures to counteract the spread of the virus began. Broadly, the country's economic growth in the first quarter of 2020 was 1.1%, considerably lower than the 3.3% of the first quarter of 2019. In fact, according to the Federación Nacional de Desarrollo, it is expected that for the second quarter of 2020 there will be a contraction of the economy of 9.4%, and overall, the contraction for 2020 will be close to 15.7%.

This has had serious consequences for the Colombian labour market. According to Dane, unemployment stood at 20.3% in the second quarter of 2020, rising 10.2% compared to the same period in the previous year. The increase in unemployment is due both to shelter-in-place measures decreed by national and local government, as well as to the spread of the disease and the indirect effects of the restrictions imposed.

In terms of market risk, the local perception showed a deep plunge during the first quarter, with a small recovery in the second quarter, as a consequence of increases in consumer, industrial and commercial confidence. During the second quarter, public debt and equity markets showed positive performance, led by higher than expected indicators for manufacturing and retail sales. Despite this improvement, the country's credit rating was downgraded.

In the foreign exchange market, the Colombian peso has depreciated steeply since March 2020. For the first quarter, depreciation reached 23.7%, an historic high. This depreciation is partly explained by the shelter-in-place and other restrictions imposed and by the fiscal impacts of the sharp drop in oil prices. For the second quarter, as the US dollar weakened and hopes for a COVID-19 vaccine grew, the Colombian peso recovered somewhat. This improvement was also supported by the positive performance of oil prices and a significant inflow of dollars into the economy.

Central Bank Action

In this context, the Colombian Central Bank authorised various operations in the foreign exchange market to relieve monetary pressures. It allowed the sale of foreign currency through non-delivery forward contracts at market rates, under an auction mechanism. Additionally, the Colombian Central Bank decided to shorten the time frame to carry out repo transactions, in order to counteract a major liquidity crisis and to limit trading times to minimise speculation opportunities. Moreover, the Ministry of Finance was granted rights over 100% of the surplus liquidity of state entities that are currently being kept in banks.

The Colombian Central Bank is carrying out additional operations to guarantee liquidity in the market, reducing the required reserve banking percentages, and injecting close to COP9 billion in liquid assets to the economy. Temporary expansion operations were authorised for six months, with portfolio titles for COP6.3 billion. Additionally, public debt securities were issued for COP37.1 billion, enhancing the COP9.8 billion placed in the first quarter. Finally, Colombia's Fiscal Standards Committee increased the deficit margin from 2.2% of GDP to 4.9%.

Government Response

The government has also taken various measures to counteract the economy's slowdown and the growth of unemployment in the country. Gradually, through numerous decrees, it has promoted the economic reactivation of key productive sectors: infrastructure and construction, trade and professional, technical, and service activities in general.

Currently, there are large infrastructure plans in place such as the Bogotá Metro, the Regiotram de Occidente, and 4G road infrastructure projects; some of which made slight progress during the shelter-in-place. Additionally, the government is looking for means to finance a new wave of highway infrastructure projects, called 5G highways, divided into four large blocks that amount to a total capital expenditure of USD5.3 billion. Furthermore, the oil and gas sector has also had a significant reactivation with 31 new exploitation agreements. Lastly, in the Colombian coffee-growing region (Eje Cafetero), studies are being advanced for the construction of an airport in Caldas, which would generate approximately 8,000 additional jobs.

In general, Colombia is facing a recession due to the COVID-19 pandemic. However, the government and the Colombian Central Bank have taken important steps to counteract this economic environment, which have boosted the loan market and created an environment for the development of credit businesses.

The spread of COVID-19 in Colombia and the shelter-in-place measures issued by the National Government, including mandatory confinements, have generated a "sudden stop" in economic activity, loss of jobs and a deterioration in the income of households and companies in multiple industries in the country. In this context, banks have been forced to increase their loan-loss provisions by up to 200%, anticipating a deterioration in the quality of their credit portfolios and, therefore, reporting significant accounting losses during the first half of 2020.

To counteract the above, the government has implemented a series of effective measures that have kept the liquidity risk of the financial sector under control, while the banking efforts have focused on solving the particular needs of borrowers and injecting more credit into the economy.

For example, the Colombian Financial Superintendence (Superintendencia Financiera de Colombia or SFC) issued a series of measures ordering commercial banks to promote policies and procedures aimed at identifying clients that are in need of relief measures, emphasising those sectors believed to be at particular risk by the national government (eg, tourism, entertainment, transportation, manufacturing and construction). These measures include grace periods, which have averaged between three and four months, to address the particular situation of borrowers without causing alterations in their risk rating, increasing interest rates or the accrual of compound interest.

Likewise, the national government issued several measures through the National Guarantee Fund (Fondo Nacional de Garantías) that will secure a portion of the credit granted by financial institutions to small, medium and large companies operating in the sectors most affected by the crisis, in order to cover their working capital expenditure.

Additionally, during the first quarter of the year the national government created the Emergency Mitigation Fund (FOME) a fund that will manage up to USD1.5 billion and is intended, among other things, to mitigate the adverse effects generated by COVID-19 that affect productive activity, employment and economic growth. It will do this through:

  • temporary transfers of securities and time deposits in credit institutions; and
  • capital contributions to the National Guarantee Fund (Fondo Nacional de Garantías) for the provision of direct financing to, or through investment in equity and debt instruments issued by, small and medium-sized private or public companies most affected by the crisis.

The financial sector will also benefit from resources granted through loans disbursed by second tier financial institutions such as Findeter, which has taken out various lines of credit for up to USD187 million to address the liquidity problems of companies in the real sector. Likewise, Bancoldex obtained, in the first quarter of the year, a loan for USD400 million to meet the liquidity needs of companies through direct and indirect loans.

The high-yield market has not yet reached a peak of development in Colombia and thus its effects on the loan market are still uncertain. The local loan market is still largely comprised of traditional loans offered by local banks and originated to investment grade borrowers and clients. Likewise, the bond market has usually seen offerings of investment grade issuers and securities, particularly because the large institutional investors’ investment regimes, such as those of pension and severance payment funds, require them to invest in investment grade securities.

However, infrastructure financings have seen new players in the market, such as debt funds, that have increased their tickets in large toll road projects. Because of their source of funding, debt funds have adopted “no call” or “hard call” periods requiring the payment of a make-whole amount in case of voluntary prepayments. Some other players, such as Financiera de Desarrollo Nacional, a state-owned financing corporation, have developed mezzanine and covenant-lite products designed particularly for large-scale infrastructure and energy projects; nowadays, these are also being implemented in the transportation industry. Although traditional banks are still reluctant to develop similar products, some new players are appearing in the high-yield market.

As a result of COVID-19, however, most of corporate refinancing deals taking place in the Colombian market could be considered high-yield where certain trends have been evidenced. On those loans, traditional banks are focusing more on maintenance covenants than incurrence tests. In corporate finance deals, traditional banks have also been reluctant to take long-term tenors and, interestingly, in some extreme cases banks are adopting the structure of mini-perms – designed to finance capital expenditure in project finance deals – in corporate refinancing deals, requiring borrowers to take the refinancing risk upon overcoming the effects of the pandemic crisis.

In the last decade, Colombia has been an increase of debt funds investing, for regulatory reasons, in registered debt securities with minor impact on the financing terms of debt securities issued by Colombian issuers. However, the needs of financing the large-scale infrastructure projects of the so-called 4G programme, which required investments in toll road projects in Colombia of more than USD20 billion, resulted in the creation of new debt funds investing in infrastructure loans with tenors between 15 and 20 years. These funds are reluctant to make voluntary prepayments because their funding is usually formed by long-term commitments. As a result, debt funds usually require a make-whole payment in case of voluntary prepayments. In addition, these loans are structured as bullet loans, shifting the amortisation schedule of long-term loans in the local loan market. Those bullet structures have brought many benefits to concessionaires of infrastructure projects in Colombia, particularly easing the compliance with debt service coverage ratios, and thus increasing the debt sizing of certain projects, while introducing cash sweep mechanisms when large payments by the government come into the project.

Alongside debt funds, and as response to the pandemic crisis, state-owned financial entities are playing a significant role in the loan market. The government has created several guarantee lines to be issued to financial institutions and debt issuers in the capital markets; giving access to credit to small, medium-sized and large companies affected by COVID-19. These guarantees are administered and issued by the Fondo Nacional de Garantias, a governmental entity. Because the loans are partially backstopped by the Fondo Nacional de Garantías, the market has recently seen corporate financing structures with multiple tranches where a tranche is backstopped by the guarantees issued by the Fondo Nacional de Garantias. Other government entities, such as Findeter and Bancoldex, are gaining importance in the market by structuring lines of credit particularly designed to mitigate the effects of COVID-19 in different industries. As a result, financing terms may shift to recovery loans rather than using traditional corporate loans structures.

Large-scale projects financed in the last years in Colombia have seen multisourced financings involving commercial banks, export credit agencies, development banks and, in most cases, tranches denominated in both foreign and local currencies, requiring the involvement of currencies and interest rate hedge providers in the structure.

With these additional players gaining traction in the market, new financing structures for mezzanine and subordinate loans are bound to arise. For instance, term loans with debt funds usually include make-whole provisions that may prevent prepayments thereunder, which are likely to pervade the loans granted by traditional financial entities with more flexibility in the amortization schedules of term loans. Other players in the market have created products specifically designed to take liquidity risks in infrastructure and energy projects or to take first-loss risks in debt capital markets issuances.

Finally, the appearance in the market of the Indicador Bancario de Referencia (IBR), which is an interest rate in Colombian pesos that reflects the price at which Colombian banks offer short-term interbank loans, has created a significant shift in the commercial loan market. Previously, commercial loans were based on the Depósito a Término Fijo (DTF) interest rate, which reflects the funding cost of commercial banks and other financial institutions with deposit certificates in the short term. Nowadays, commercial loans are usually based on the IBR which has given rise to the use of yield-protection provisions in commercial term loans.

The Ministry of Finance issued, earlier this year, new regulation seeking to make the investment regimes for Colombian pension funds more flexible. Changes include, among others, an increase in the thresholds for investments in the secondary market (qualified institutional buyer market) and for currency investment in spot markets as well as through derivative instruments. In addition, the government implemented relevant changes in the investment regulation applicable to private equity funds, allowing for the structuring of investments in higher-yield markets.

Moreover, a new tax reform issued in December 2019, known as the “Growth Bill” (Ley de Crecimiento), entered into force as of 1 January 2020. The tax reform includes, among others:

  • a VAT exemption for brokerage services for reinsurance contracts;
  • a 32% income tax applicable to legal entities in 2020, which will be progressively reduced to 31% in 2021 and 30% in 2022 (although, as a consequence of the COVID-19 crisis, it is expected that new tax reforms will be passed within the coming years to fund the crisis and its response); and
  • a reduction in the presumptive income tax applicable to legal entities, from 1.5% to 0.5% for 2020, and 0% as of 2021.

Also, with regard to dividend taxes, the rate applicable for non-resident natural persons and foreign legal entities was increased from 7.5% to 10%, whilst for resident natural persons, the dividend tax rate was reduced from 15% to 10%.

Furthermore, in June 2020, the Ministry of Finance issued Decree 829 of 2020 to incentivise the development of unconventional renewable energy projects. This decree introduced amendments to clarify the scope of certain tax incentives initially set forth in Law 1715 of 2014, which are further explained in 4.2 Other Taxes, Duties, Charges or Tax Considerations.

Generally, the granting of credit in Colombia is not a regulated activity and can be performed by any person. However, the funding of any entity (including loans) with more than 20 obligations with different persons, or more than 50 obligations, in either case constituting borrowed money, and representing more than 50% of that person’s net equity, constitutes a criminal offence if that funding is undertaken without a banking licence or without a public offering registration. Moreover, entities that perform financing activities (eg, commercial banks, financial corporations, and financing companies) are subject to the supervision of the SFC and must meet certain requirements in order to obtain the corresponding licence, such as demonstrating certain levels of liquidity and credit-based capital adequacy and having in place corporate governance controls.

Loans granted by non-residents to Colombian residents must be made through the foreign exchange market, as described in 3.1 Restrictions on Foreign Lenders Granting Loans.

There are no restrictions for foreign lenders on granting loans in Colombia except in the event that such a foreign lender is an individual, in which case that individual may only grant loans for certain special purposes set forth in Colombian foreign exchange regulations. In addition to the foregoing, pursuant to the Colombian foreign exchange regulations, the foreign lender must be registered before the Colombian Central Bank. This registration may be carried out easily at the time the loan is informed to the Colombian Central Bank.

There are no restrictions in Colombian law in respect of the granting of security or guarantees to foreign lenders. Foreign lenders obtain in Colombia the same treatment and rights that local lenders may have under local laws. However, for practical reasons, in some large financings it is usual to see the participation of local collateral agents administering any security or guarantee on behalf of local lenders, they are also responsible for enforcing any collateral governed by Colombian laws. Upon enforcing any guarantee or security granted in connection with loans obtained by Colombian debtors from foreign lenders, the Colombian debtor has to report that enforcement to the Colombian Central Bank.

Colombia has a controlled foreign exchange market, although no particular restrictions exist as of the date of this report in connection with the convertibility of Colombian pesos into US dollars or any other hard currency or recognised currency. Notwithstanding the foregoing, certain transactions are deemed “controlled transactions”, such as loans obtained by Colombian residents with foreign lenders, cross-border derivative transactions, guarantees of cross-border loans or obligations with foreign creditors, foreign investments, imports and exports.

Two main obligations arise for Colombian residents in connection with those controlled transactions:

  • the obligation to report the transaction to the Colombian Central Bank; and
  • the obligation to use the Colombian foreign exchange market for any purpose in connection with the foreign currency arising out of such controlled transactions.

In order to use the foreign exchange market, Colombian residents may covert foreign currency into Colombian pesos by selling such foreign currency to authorised foreign exchange intermediaries (such as credit institutions), or use banking accounts opened abroad in foreign banks to the extent such accounts are reported to the Colombian Central Bank. Anytime Colombian residents use the foreign market in connection with a controlled transaction, the foreign currency received or transferred has to be reported to the Colombian Central Bank. Such reports are straightforward obligations, although different circumstances may require different analysis to complete some reports with the Colombian Central Bank.

As a general rule, there are no restrictions on the borrower’s use of proceeds from loans or debt securities in Colombia, provided that such proceeds are used to fund legal activities in Colombia or abroad.

Both agent and trust concepts are recognised in Colombia. However, in financing structures, trusts are deemed commercial or mercantile trusts which can only be created by entering into a trust agreement with a trust company licensed to operate in Colombia. Trust structures are very common in medium-size and large corporate financings and almost required in project finance deals. Given the flexibility and benefits of setting up trusts in Colombia by means of a private agreement with a trust company, the market has not developed alternative structures. 

Loan transfers in the local market usually take place by transferring the title of the lender’s interest in the loan and the security package, which usually also comes with an endorsement of the promissory notes instrumenting amounts payable under the loans. However, the selling of participation rights under a loan is not yet a common practice in the market. 

In order to perfect a transfer of title of the interests in a loan agreement, the law provides that, unless the agreement specifies otherwise, the lender may transfer its interest by giving notice to the borrower. The same rule applies in connection with the transfer of the security package, although when the security package is collateralised with moveable assets or real estate, the transfer will become enforceable against third parties and other creditors only upon registering the transfer with a public registration office.

Debt buy-back by a borrower or sponsor is possible under Colombian law. In the issuance of debt securities trading in the local market it is common to see repurchase options by the issuer. On loan agreements, it is a common practice to include and negotiate voluntary prepayments, but in some cases such prepayments come with a prepayment penalty.

Rules applying to public acquisition finance transactions undertaken in the Colombian market (ie, Decree 2555 of 2010) require the buyer, the stock broker acting on behalf of the buyer, or any party acting as the buyer’s guarantor to give the Colombian stock market adequate assurances that guarantee its payment obligations in connection therewith. As per Decree 2555, such guarantees may include cash deposits, bank guarantees, standby letters of credit, insurance policies and debt securities issued or guaranteed by the Republic of Colombia. However, with respect to non-public acquisition finance transactions, the market has not yet developed a standard. Large acquisitions usually require “certain funds” provisions, or similar provisions evidencing that the buyer has secured sufficient funding to satisfy its payment obligation, on closing while medium-size and small business acquisitions do not usually contain such provisions. With respect to large acquisitions, usually buyers have secured bridging loans that they refinance with long-term loans after closing. 

Payment of interest to foreign lenders is subject to a 15% withholding tax rate if the term of the loan is equal to, or greater than, one year, and a 20% witholding tax rate if the term of the loan is less than one year. Interest payments on loans granted for a term equal to or greater than eight years to finance infrastructure projects under public-private partnership schemes are subject to a withholding tax rate applicable of 5%.

The application of withholding taxes also depends on the existence of double-tax treaties entered into by the Colombian government and ratified by the Congress of the Republic of Colombia. In Colombia there is also a financial transactions tax equivalent to 0.04%, retained by financial institutions whenever funds deposited in banking accounts are disposed to make payments. Certain exemptions apply, including the disposal of funds by credit institutions in Colombia when making the disbursement of loans.   

The registration of security interests or mortgages on real estate requires payment of notarisation and registration rights and taxes. The final amount payable depends on the specifics of each transaction, but it may vary between 2% and 2.5% of the loan commitment. The registration of security interests on chattels require payment of registration rights that usually do not exceed USD500 in large transactions.

Additionally, Law 1715 of 2014 establishes certain tax incentives to promote the development and use of non-conventional and renewable energy sources (ie, solar, wind, biomass, geothermal, wave and tidal, and nuclear), these now include co-generation and self-generation power projects due to recent amendments introduced by Decree 829 of 2020, as mentioned in 1.6 Legal, Tax, Regulatory or Other Developments.

Law 1715 of 2014 and Decree 829 of 2020 set forth, among other things (and subject to further regulatory requirements):

  • an income tax deduction applicable to up to 50% of the value of the total investments made in non-conventional renewable energy projects (either greenfield or brownfield) within a period of fifteen years, as of the date the project enters the operating stage;
  • a VAT exemption for renewable energy equipment and services in connection with the construction, operation, expansion of qualifying projects or research and development in connection with non-conventional renewable energy sources;
  • tariff exemptions for the import of renewable energy equipment not produced in Colombia; and
  • an accelerated depreciation regime that enables the taxpayer to deduct up to 20% per year of the acquisition costs of machinery, equipment, and construction assets necessary for the pre-investment, investment, and operation stages of non-conventional renewable energy projects.

Colombian laws foresee usury laws limiting the amount of interest chargeable on loans. There are different usury rates applicable to commercial loans and microcredit loans. Commercial usury laws specify that the usury rate is 1.5 times the weighted average of the interest rate that credit institutions (banks, financing corporations and financing companies) charge to their commercial clients, while microcredit usury interest rates are higher because the base of the calculation is formed using the (higher) microcredit loan rates. The SFC calculates and reports, monthly, the applicable usury rates.

Under Colombian law, collateral can be created over rights and all types of privately owned assets, including real estate and present and future chattels, including moveable property and goods, contractual and economic rights, shares, receivables, intellectual property, and cash deposited in bank accounts.

Security interests on chattels can be instrumented and perfected by means of pledge agreements. Moreover, as per Law 1676 of 2016, such security interests can be granted with or without the creditor’s physical possession of the secured assets. Non-possessory pledges involve assets or goods considered necessary for, or destined to end up in, the commercial operation of a company. In addition, under Colombian law it is possible to grant non-possessory pledges over “commercial establishments”, which include present and future tangible and intangible assets such as commercial names, trademarks, patents, inventories, credits, movable property and facilities, lease contracts, and all other rights and obligations of the guarantor derived therefrom.

Pledge agreements over movable assets may be registered in the National Movable Asset Registry for purposes of publicity and priority among other lien holders. Registration can be made online easily and does not entail significant costs. Not registering the pledge agreements does not affect their enforceability or validity.

In some specific cases (such as mortgages over real estate property or pledges over vehicles) the perfection of the guarantee is subject to other registration formalities. In the case of mortgages, registration fees are based on the loan value or the loan commitment. 

In addition, as stated above, security trusts are often used as collateral instruments and/or debt-service or payment mechanisms in financing transactions.

The granting of liens over present and future assets is permitted under Colombian law and must be structured under a non-possessory pledge, under which future assets will automatically become part of the corresponding collateral. Typically, the pledge over commercial establishments, explained in 5.1 Assets and Forms of Security, serves this purpose.

Downstream, upstream and cross-stream guarantees are allowed in Colombia, provided that the related party (be it a parent company or a subsidiary) has established in its bylaws the possibility to do so, and that such a guarantee is related to the development of the guarantor's corporate purpose. Downstream guarantees are common in project finance deals and are usually instrumented by pledging the guarantors’ shares in the borrower. In order to avoid structural subordination, upstream guarantees are more common in corporate finance deals, and particularly in cross-border deals, by way of entering into a guarantee agreement, which is sometimes also collateralised with the guarantor’s assets or a pledge on its commercial establishment. 

For the acquisition of its own shares, a target cannot grant guarantees or any kind of financial assistance, and payment of the consideration for said acquisition must be made with the target’s retained earnings.

There are no additional restrictions in connection with, or consents required to approve the grant of, security or guarantees under Colombian law, except for those assets that are of public use or intended for public policy, which cannot be seized (bienes inembargables) pursuant to Article 594 of the Colombian General Procedural Code (Código General del Proceso or CGP).

Security is released when the secured obligation is duly paid, discharged or otherwise terminated (whether by mutual consent, novation, set-off, or another method). In addition, the release of securities registered in the Movable Asset National Registry requires the online filing of a termination form, and the securities over real estate require the reversal of the applicable constitutional formalities.

Pursuant to Law 1676, registration before the National Registry for Security Interests over movable assets (Registro Nacional de Garantías Mobiliarias) allows, among other things, the enforceability of security interests against third parties, and grants preferential rights to the secured party with respect to other creditors in a foreclosure or bankruptcy proceeding. Therefore, all security interests registered before the Registro Nacional de Garantías Mobiliarias will be subject to the rules and the priority set forth in Law 1676, which establishes that the guarantees and security interests first registered shall have priority over those registered subsequently.

In addition to this, the general rules on priority of payment are established in the Colombian Civil Code and cannot be contractually varied. This ranking for creditors within an insolvency, bankruptcy or foreclosure process is set forth in Articles 2488 to 2511 of the Colombian Civil Code, as follows:

  • First class claims – employment-related obligations and special tax-related obligations.
  • Second class claims – creditors who have a pledge granted in their favour.
  • Third class claims – creditors who have a mortgage granted in their favour.
  • Fourth class claims – other tax-related obligations and strategic suppliers to the business.
  • Fifth class claims – all other creditors who have a valid title to repayment, such as a promissory note or contract, which is unsecured.

All other credits with related companies are subordinated and paid after the fifth class.

Finally, after the external creditors have been paid in full, the shareholders will be paid proportionally with their participation in the capital of the debtor. The holders of preferred shares with minimum dividend and without voting rights may have priority of payment over ordinary shareholders.

Law 1676 of 2013 entails a series of mechanisms that facilitate the enforcement of securities, such as:

  • direct payment, in which the creditor collects the debt in full or in part, with the pledged assets;
  • judicial auction, whereby the assets are publicly auctioned and the proceeds are used to pay the outstanding debt; and
  • a special extrajudicial proceeding for the enforcement of the collateral that can be carried out in its early stages before a Notary Public, or before the Chambers of Commerce.

These procedures are more expedite than a traditional judicial enforcement process and, if the pledge agreement is timely registered in the Movable Asset Guarantee Registry, a priority is given to the first registered lender. No stamp tax is due regarding the execution of a non-possessory pledge agreement.

In addition, security enforcement is very simple in the case of guarantee trust agreements. The agreement should contain specific instructions to the trustee as to how to proceed with the assets or rights if an event of default occurs (eg, sell the assets and pay the secured party with the proceeds, or transfer the assets or rights to the secured party).

In the case of mortgages, there are strict rules under Colombian law that forbid any action that leads to a secured creditor gaining direct access to mortgaged assets. A proceeding before a Colombian court needs to be initiated, because of which the mortgaged assets must be sold at auction, and the secured party paid with the proceeds thereof. The lenders may participate as buyers in any auction.

Pursuant to Article 869 of the Colombian Code of Commerce (Código de Comercio), as a general rule, agreements over obligations which are to be performed in Colombia must be governed by Colombian law. However, in connection with cross-border loans where payment obligations of Colombian borrowers are to be made outside Colombia in foreign currency, the limitation set forth in Article 860 of the Colombian Code of Commerce does not apply and therefore such loan agreements may be validly governed by foreign laws. In addition, Articles 1.101 and 62(c) of the CGP and Article 62 of Law 1563 of 2012 provide that the parties to an agreement may determine if it will be governed by foreign law and establish an international arbitration clause, in the event such contract:

  • affects the interests of international commerce;
  • is executed by parties domiciled abroad; and
  • a substantial portion of the obligations thereof are to be performed abroad.

Trust agreements and security documents over assets located in Colombia must be governed by Colombian law.

In the event of a proceeding, pursuant to Article 177 of the CGP, evidence of the law sought to be applied must be provided by means of

  • a copy of that law issued by the competent foreign authority;
  • an opinion or report rendered by an expert in that law;
  • when a written law does not exist, through the deposition or affidavit of two or more admitted lawyers regarding such applicable law; and
  • exclusively in the case of the CGP, through an opinion or report rendered by an expert in such law.

In order to enforce a foreign judgment in Colombia, the interested party must carry out the exequatur proceeding set out in the CGP before the Supreme Court of Justice, provided that, either diplomatic or legislative reciprocity exists between the courts of Colombia and the courts of the relevant foreign jurisdiction. In addition, in order for a foreign judgment to be enforceable in Colombia:

  • the foreign judgment shall not relate to "in rem" rights vested in assets located in Colombia at the moment of the initiation of the proceeding where the decision was rendered;
  • the foreign judgment shall not conflict with the public policy of Colombia;
  • the foreign judgment shall be deemed as final under the laws of the country in which it was issued and shall be in full force and effect (res judicata);
  • the matter that was decided shall not be of the exclusive jurisdiction of Colombian courts;
  • there shall be no pending proceedings in Colombia in connection with the same cause of action, and no final judgment shall have been rendered by a Colombian court over the same subject; and
  • the proceedings leading to the foreign judgment shall have been conducted in a manner that allowed the defendant to present its case as per the procedural rules of the foreign country.

Under Colombian law, the enforceability of any agreement may be limited by applicable bankruptcy, restructuring, insolvency, liquidation, fraudulent conveyance, takeover or similar laws, now or hereafter in effect, which affect creditor rights generally, including without limitation Law 1116 of 2006, Law 1676 of 2013, Decree 663 of 1993, and their respective regulatory decrees, as described in 7 Bankruptcy and Insolvency. As a general rule, contractual provisions setting out early termination or acceleration rights, enforcement of collateral, or set-off rights upon the commencement of a restructuring or takeover proceeding in connection with the debtor are not enforceable. If the lender or creditor tries to enforce such rights in violation of the law, the judge may cancel any security interest or mortgage created for the benefit of that lender and subordinate the lender payment rights to any other creditor of the debtor. 

The Colombian insolvency regime provides the possibility to execute a written extrajudicial agreement that will have the same effect as a restructuring agreement, to a group of creditors representing more than half of the outstanding amount to be claimed in the possible restructuring proceeding. This agreement will not need any additional authorisations to be binding. However, the parties may request that the authority that would otherwise have been competent to carry out the insolvency proceeding, validate the procedure to verify:

  • the percentages required to endorse the agreement;
  • that the publicity requirements were followed and that every creditor was notified thereof;
  • that the agreement grants equal recognition to all creditors in the same credit class;
  • that any illegal or abusive clause in the agreement is excluded; and
  • that any and all legal requirements are fulfilled.

Validation from the competent authority in the terms above will grant the agreement the same rights as if it were reached within a restructuring proceeding and, in the event of a breach thereof, the remedies available under a restructuring proceeding will apply.

Under the Insolvency Law (Law 1116 of 2006), when filing a restructuring proceeding request, the applicable company must classify the assets that are necessary for its economic activity. In addition, upon filing a request, no amendments to the debtor’s by-laws may be perfected nor transferring of any assets, offsetting of amounts with the debtor, or entering into conciliations or payment agreements, are permitted. Upon admission to an insolvency or restructuring proceeding, an automatic stay applies and all legal proceedings with respect to borrowed or owed money against the debtor will be transferred and added to the corresponding restructuring proceeding. If the assets provided as collateral are deemed as necessary for its operation, the enforcement of collateral rights over said assets cannot start or continue. Please refer to the prohibition described in 6.4 A Foreign Lender’s Ability to Enforce Its Rights with respect to the enforcement of contractual provisions triggering termination, acceleration or enforcement rights upon the commencement of a restructuring or takeover proceeding against the debtor.

Insolvency proceedings involving a Colombian company are binding for both local and foreign creditors, and all the assets of the borrower are deemed as part of the insolvency process.

As an exemption to the foregoing limitations, hedge providers may terminate hedges early, enforce collateral and offset amounts owed with amounts payable to the debtor if the debtor requests or is admitted to a restructuring, insolvency or takeover proceeding to the extent the hedge was registered in accordance with applicable Colombian laws. 

Law 1116 of 2016 recognises five different classes of creditors:

  • holders of labour claims;
  • public entities and social security entities;
  • local financial institutions subject to the surveillance of the SFC and foreign financial institutions;
  • internal creditors (ie, shareholders); and
  • general creditors.

Note that if any party provides financing to the debtor and the proceeds are used to satisfy existent pension liabilities, the claims arising out of such financing will rank pari passu with labour claims.

As per Article 41 of Law 1116, the legal priority of claims foreseen under Colombian law may be changed to the extent the following conditions are met:

  • the decision is approved by a number of votes representing no less than 60% of the admitted votes in the proceeding;
  • such modification is aimed at facilitating the purpose of the restructuring plan;
  • such modification does not downgrade the class to which other claims pertain, but rather improves or enhances the class or priority of the creditors contributing funds to the debtor or that in general undertake conduct aimed at improving the working capital and the recovery of the debtor; and
  • such modification does not affect labour and other related claims without the express consent of the affected person.

Challenges to a Restructuring

As per Article 74 of Law 1116, the trustee or any creditor of a liquidation or restructuring proceeding is entitled to challenge suspicious or simulated acts or agreements, if as a result thereof the plaintiff was adversely affected, or evidences that a change in the priority of claims foreseen under Colombian law occurred, provided further that the remaining assets of the debtor were or are insufficient to cover all of its outstanding liabilities.

The following acts are deemed “suspicious”:

  • The termination of any obligation, payments in kind or any other act the result of which is the transfer, disposition, constitution or cancellation of security interests or property rights of the debtor; or lease agreements or bail agreements producing an adverse effect on the bankruptcy proceeding, that in either case were undertaken within 18 months prior to the commencement of the restructuring or liquidation proceeding, provided further that the petitioner evidences a lack of good faith in connection therewith.
  • Gratuitous acts within 24 months prior to the commencement of the restructuring or liquidation proceeding.
  • Amendments to the by-laws aimed at reducing the company’s patrimony to the detriment of its creditors or changing the shareholders’ liabilities, agreed upon within six months prior to the commencement of the restructuring or liquidation proceeding.

Colombian insolvency regulations provide that contractual provisions that directly or indirectly prevent or create obstacles to the commencement and implementation of insolvency proceedings in Colombia, including early termination of agreements or acceleration of contractual obligations upon the initiation of an insolvency proceeding, are deemed void. Any attempt by creditors to enforce such provisions may result in the rights of those creditors being subordinated to the payment of all external liabilities of the borrower. In addition, in this case, the insolvency court may also order the cancellation of all the securities that have been granted by the borrower in connection with the provisions declared void.

As per Colombian law, trust assets are understood as independent and isolated from the assets of the trustor and the trust company. However, there is recent precedent from the insolvency courts stating that, for the purposes of insolvency proceedings, the assets administered by a trust (which includes security trusts) are deemed to be part of the assets of the borrower/trustor and therefore, the insolvency court shall review if the trusted assets are necessary for the operation of the borrower/trustor in order to define if they will become part of the bankruptcy estate within an insolvency proceeding.

During the last decade, Colombia has experienced an increase in infrastructure and project finance. The 4G programme for the generation of 42 toll road projects, aimed at building approximately 7,000km of roads and with an estimated investment of USD20 billion, is currently in development.

This 4G programme was of such strategic importance, that the Colombian government recently launched the 5G programme at an estimated cost of USD5.3 billion, comprised of toll roads, airports and the development of rail and inland waterway projects.

Law 1508 of 2012 established the legal framework for public-private partnerships (PPPs) in Colombia, along with Law 1882 of 2018, which amended certain provisions of the infrastructure regime regarding public procurement contracts, such as the inclusion of mandatory standard documents in public procurement bidding and the structure of public tenders. These projects are led, structured and tendered by the National Infrastructure Agency (ANI).

In addition to the 4G and 5G programmes, and regardless of the recession caused by COVID-19, Colombia has a considerable pipeline of infrastructure projects, which include the first line of the Bogotá metro project (23.96 km), which entails investments in the region of approximately USD6 billion by Chinese investors.

In fact, the Colombian government has issued a new timetable for the tender with respect to the design, construction and operation under a build, own and operate scheme, of the LNG regasification facility in Buenaventura and the pipeline to transport gas from this facility to Valle del Cauca. This project has an estimated value of USD700 million and it is part of the government’s strategy to enhance its gas supply infrastructure by providing for a second port of entry that would complement the existing LNG import terminal in Cartagena.

Law 1508 of 2012 sets forth the legal framework for PPPs in Colombia, with the purpose of incorporating a mechanism that increases incentives for foreign investors and reaches a greater level of competitiveness than within other developing countries.

Public-private partnerships were further regulated by Resolution 3656 of 2012, Regulatory Decree 1082 of 2015, Law 1882 of 2018, among others, which established specific dispositions such as:

  • regulations on the bidders in PPP projects;
  • availability, service levels and quality standards required in the projects;
  • public contributions in public initiatives;
  • regulations for public and private initiatives for the development of projects;
  • availability payments from the government; and
  • top-up payments in the event of lower-than-projected toll revenue, all of which reduce investor risk.

PPP projects were not unknown in Colombia prior to the enactment of Law 1508 and public-private concessions were still in place. However, PPPs as we now know them facilitate the provision and maintenance of infrastructure within certain verifiable parameters of availability and quality of service and extend the regulation to other sectors in which infrastructure and its related services are required.

Some of the aforementioned parameters, from a financing standpoint, include

  • a regulatory regime applicable to unsolicited proposals;
  • a proper risk analysis guideline to justify the implementation of the projects and the allocation of risks between the government and the sponsors; and
  • the concept of payments – and reductions thereof, related to the availability and level of service.

On the eight-year anniversary of the enactment of Law 1508, these structures face important challenges: to seek alternative sources of funding, which will make them more bankable and profitable, and hence, more competitive for foreign investors.

No government approvals, fees or taxes are required to carry out project finance transactions in Colombia other than compliance with foreign exchange requirements applicable to foreign lenders.

The main authorities in respect to the oil and gas, power and mining sectors are the Ministry of Mines and Energy, the National Hydrocarbons Agency (ANH), the National Mining Agency (ANM), the Energy and Gas Regulatory Commission (CREG), the Mining and Energy Planning Unit (UPME) and the Superintendence of Public Utilities.

The oil and gas primary laws and regulations include, among others, Decree 1073 of 2015, Decree 2100 of 2011 and Resolutions 164 of 2015, 40048 of 2015, 49396 of 2015 issued by the ANH. The power sector and public utilities main laws and regulations include, among others, Laws 142 and 143 of 1994, Law 1715 of 2014 and resolutions issued by CREG in connection with the activities of power generation, transmission, distribution, and commercialisation. The main laws and regulations of the mining sector include, among others, the National Mining Code (Law 685 of 2001, as further regulated by Decree 2691 of 2014 and compiled by Decree 1073 of 2015), Law 530 of 2012, Law 141 of 1994, and Decree 1666 of 2016.

In structuring project finance deals, an initial risk assessment considering the estimated revenues, the currency in which such revenues are to be denominated, the creditworthiness of the off-taker and the sponsors, the availability of raw materials and long-term supply agreements in the market, environmental licensing, permits and risks, the effects of the project on communities and whether or not indigenous or Afro-Colombian communities are affected by the project, risks associated with land acquisition, the bankability of the project documents (eg, concession agreements, construction, EPC, BOT, BOMT, O&M and off-take agreements), and corporate governance issues, must be identified through an initial due diligence.

Once the above are determined, this risk assessment must become the roadmap throughout the negotiation in order to properly address issues such as covenants, payments, the security package, and conditions precedent.

The particular structure of the transaction, including the legal form of the special purpose vehicle, will depend mostly on the tax analysis and the flow of funds within the project. In many cases, separate trusts are formed to receive the revenues hold the security and guarantees, as well as to avoid conflicts of interest and triggering change-of-control provisions in agreements related to the specific project.

Further note that the structuring must also closely consider the tax and foreign exchange regulations as provided for in 3.3 Restrictions and Controls on Foreign Currency Exchange and 4.1 Withholding Tax.

The typical financing sources in Colombian project finance are commercial banks, development banks and institutions, multilateral institutions, export credit agencies and in lesser proportion debt funds. There is a relatively novel, but increasing, tendency towards the use of bonds and other structured securities, which have important growth potential among local and international pension funds and insurance company investors. The typical structure for project financing in Colombia involves one or more credit agreements, collateral agreements (such as non-possessory pledges), letters of credit (guaranteeing debt reserves and non-rated sponsors capital contributions), promissory notes, customary conditions precedent, financing models, the appointment of independent consultants (technical and insurance) and a security trust to serve both as the funding vehicle of the project and collateral agents.

Colombian regulations allow the acquisition and export of natural resources, provided that the following general requirements are followed:

  • payment of royalties to the competent governmental agency;
  • registering before the competent governmental agency as a frequent buyer and exporter of natural resources; and
  • requesting and possessing a valid permit issued by the Ministry of Foreign Trade through the VUCE (Ventanilla Única de Comercio Exterior) pursuant to Decree 4149 of 2004.

Furthermore, Law 1819 of 2016 introduced tax incentives to increase investment in the hydrocarbon and mining sectors, and even though Colombia's account deficit widened in 2019, due to a larger trade deficit in the context of lower fuel and extractive exports and higher imports, this is a tendency that should not change strongly in in 2020.

The main environmental authorities are :

  • the Ministry of Environment and Sustainable Development, which is in charge of defining the environmental policies and promoting the recovery, conservation, protection, management, use and exploitation of renewable natural resources;
  • the Autonomous Regional Corporations (CAR), which are responsible for the control and sustainable development of the natural renewable resources within their jurisdiction; and
  • the National Authority of Environmental Licences (ANLA).

Environmental laws applicable to projects include, among others, the Code of Renewable Resources (Decree 2811 of 1974), as amended and complemented by Decree 1076 of 2015, and several international environmental regulatory instruments adopted and ratified by Colombia, such as the Amazon Co-operation Treaty, United Nations Framework Convention on Climate Change, the Rio Declaration on Environment and Development, and the Kyoto Protocol.

Depending on the importance, location, and impact of a certain project, it is required to obtain an environmental licence authorising the performance of activities, civil works and disposal of residual waste. These environmental licences are granted by ANLA, or the applicable CAR and require the licensee to comply with specific prevention, mitigation, correction, and compensation obligations in respect to the environmental effects arising from the licensed activities.

Additionally, a prior consultation process with indigenous communities must be carried out every time public or private ventures are going to be decided, adopted or implemented, if they may directly affect the lifestyles and systems or the ethnic, cultural, spiritual, social and economic integrity of such indigenous communities. This participation mechanism is a collective constitutional right, as well as a special public and mandatory process that must be carried out prior to any measure being implemented. The prior consultation process is regulated in the Political Constitution, Decree 1320 of 1998 and Presidential Directive 01 of 2010, among others.

Mendoza Abogados

Calle 81 # 11-55, Piso 9

(+57 1) 650 00 77
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Law and Practice


Mendoza Abogados is a boutique law firm located in Bogotá, Colombia, and highly specialised in transactional work in banking and finance. With a team comprised of lawyers knowledgeable in corporate finance and transactional law, the firm offers the value of specialised services to its clients. Since its establishment in March 2018, Mendoza Abogados has gained the trust of Colombian “blue-chips” and handles important local and cross-border financial transactions and agreements for Financiera de Desarrollo Nacional, Banco Davivienda, Bancolombia, Findeter, BTG Pactual, Grupo Argos, Celsia Colombia, Cubico Sustainable Investments, SoEnergy International, Avianca, Bodytech, Larrain Vial, and Recaudo Bogotá, among others. The firm is recognised in Colombia for its work on local and cross-border syndicated credit facilities, complex financial transactions involving restructurings of notes under Rule 144A Reg S, project finance and cross-border derivatives.

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