Country Writer: Mr Carlos Fradique Mendez

cfradique@brigardurrutia.com.co

Brigard & Urrutia

Tel:+ (57) 1  540 5433 
www.brigardurrutia.com

SECURITIZATION LAWYERS AT THIS FIRM

FIRM PROFILE

Founded in 1934, Brigard & Urrutia, one of the oldest and largest law firms in Colombia,  provides multi-disciplinary business law advice and representation. In an increasingly complex global environment, the firm is at the forefront of the legal profession in Colombia, as it is widely recognized for its understanding of the business markets and its expertise in traditional fields of practice as well as in cutting-edge transactions and landmark cases. We have been described by Latin Lawyer as a ñleading blue chip firmî with a ñremarkably strong international profileî.

Our firm serves a worldwide client base, including leading local and international industrial and commercial companies, banks and other financial institutions, insurance companies, service firms and local and foreign governmental authorities.

Brigard & Urrutia is currently comprised of eight partners, more than thirty associates and paralegals, and an administrative team of over fifty members. Most of our attorneys have earned graduate degrees from leading American or European universities, and a number of them have practiced overseas with prominent international law firms. Members of the firm regularly participate in academic and community activities and are often lecturers in professional and academic forums.

Brigard & Urrutia is a member of some of the most important international legal associations. We actively participate in Lex Mundi, a worldwide association of over 100 independent law firms, Club de Abogados, an international club of European and Latin American law firms, The Bomchil Group, an association of Latin American law firms, and the Pacific Rim Advisory Council ¿ PRAC, a unique alliance of thirty top-rated independent law firms with substantial dealings across the Pacific Rim. 

SECURITIZATION MARKET STATEMENT

Resolution 400 of 1995, Decree 1495 of 1996, Law 546 of 1999 and External Regulation100 of 1995 of the Banking Superintendency are the provisions applicable to securitisation in Colombia.

Colombian law provides for two basic structures for securitisations; namely: (i) The trust and (ii) The ordinary common funds (“fondos comunes ordinarios”). Under the trust, the originator transfers an asset to a trust (“SPV”) administered by a management agent and the trust issues the securities and collects the money from the investors. An administrator, that could be the originator, manages the securitised assets.

Pursuant to Regulation 400 of 1995 it is possible to securitise (i) public debt, (ii) securities registered in the National Securities and Intermediaries Registry, (iii) credit portfolio, (iv) debt receivables, (v) agricultural products, (vi) agribusiness products, (vii) cash flow determined in accordance with statistics of the three previous years or projections of the following three years , (viii) real state and (ix) any other asset if the Superintendency of Securities (the “Superintendency”) considers it appropriate. Securities may have the form of debt instruments or equity instruments such as in the case of real estate funds.

Since the early 1990’s, the Colombian experience in securitisation has focused on real estate, construction projects, real estate funds, leasing, credit portfolio, mortgage, agricultural products, securities funds and credit receivables. Securitisation of mortgages occupies the leading position in the market with 24%, then real state and credit portfolio with 16% and 14%, respectively. Securitisation to finance infrastructure projects and public services has not been widely developed, but may be an important tool to be used by future governments to promote sustainable development in Colombia.

This special asset-backed finance mechanism offers advantages for the originator and the investors. Among the advantages, the originator (i) has the opportunity of raising funds at a lower cost than traditional financial techniques, affecting only the securitised assets and avoiding strict covenants, (ii) may use the securitisation for accounting, financial or regulatory purposes, (iii) obtain liquidity and make a profit, and (iv) has access to international capital markets.

For investors, these securities offer an attractive alternative for investment as the credit risk is lower than the risk in other debt instruments. Furthermore, depending on the type of securitisation, the investor is protected by liquidity support and credit enhancement techniques such as subordinated loans, over-collateralisation, reserve account, replacement of portfolio, liquidity facilities, guarantees, pool insurance policy, credit insurance, irrevocable trust contracts and letters of credits.

If investors were non resident in Colombia the acquisition of securities derived from securitisation processes would be deemed external debt not subject to income tax.

This asset-backed financing technique has shown positive results in Colombia. Around 100 securitisations have been launched through the offer of new securities in the market involving an amount of approximately US$ 1,300 million.

The Colombian government announced that it will finance its housing policy through securitisation of Col$6 billion out of its Col$9 billion residential mortgage portfolio. This is not surprising since the enactment of Law 546 of 1999 (“Law 546”), the securitisation of residential mortgages has been strongly promoted and certain financial entities are entitled to convert its residential mortgages into securities to raise funds in the capital markets, either directly or transferring them to a SPV such as securitisation companies (“sociedades titularizadoras”) or trust companies (“sociedades fiduciarias”) .

The first residential mortgage securitisation was launched in May 2002, and the results were satisfactory according to local analysts. In fact the demand of securities exceeded in nine times the offered amount .

Law 546 expressly states that the securities issued by virtue of residential mortgage securitisations are isolated from the originator’s insolvency. Additionally, investors are exempted from income tax over interest if the term of the securities is at least of 5 years. Arguably, these securities will offer an attractive investment opportunity for investors.

In general terms, we have witnessed encouraging results and other countries like Peru, Ecuador and Bolivia have followed the Colombian case as a model to structure this financial tool in their local markets.