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Relevant aspects to be considered in financing transactions and structuring of security packages in connection to the insolvency regime

There are several minimum legal aspects that must be taken into account by the parties to every financing transaction. Features such as currency of denomination and/or disbursement, applicable foreign exchange regime and tax matters, the existence of previous creditors, the loan agreement’s applicable law and jurisdiction and the security package are fundamental matters to be considered in the structuring of the transaction.

In relation to the latter, it is of the outmost importance to know, since the beginning of a transaction, the scope of each of the securities to be granted and its mode of enforcement not only upon the occurrence of an event of default but also what would happen if the debtor enters into an insolvency procedure.

Thus, we hereby bring up some relevant topics to be considered by debtors and lenders when structuring the security scheme within financing transaction in relation to the insolvency regime.

The effects of the insolvency regime over a trust granted as security within a project finance scheme

Trust schemes facilitate the design of financing structures, mostly those under a project finance mechanism in which the loan is granted to the project itself (and not to a specific debtor as in corporate finance) and debt service depends on the cashflows generated by the project. Thus, lenders will frequently request the creation of a trust in which they are designated as beneficiaries, they are granted a security over any of the project’s future cash flow and where a cashflow scheme for repayment is provided.

In relation to this scheme, the Superintendency of Corporations issued a decision within an insolvency procedure of a company that structured the financing of Bogotá’s Massive Transport System (SITP) under project finance and using a similar scheme to the one abovementioned [1] Decision No. 2019-01-075629 of March 26th, 2019 through which the request for reversal of a decision within the restructuring proceeding of Organización Suma SAS (Case No. 87584) . The debtor alleged that the trust to which all economic rights arising from the project should have the same restrictions included in article 17 of Law 1116 of 2006 that forbids the performance of several acts to dispose of the debtor’s assets [2] The practical effect of said provision seeks to prevent that the debtor performs several acts that may contravene the principle of preservation of the debtor’s assets. .

The Superintendency mentioned that said provision was not applicable as if a creditor seeks to satisfy payment of its obligations with assets that are not part of the debtor’s assets as its effects cannot be extended to third-party’s assets.

But most importantly for this article, the Superintendency pointed out the following clarifications in relation to the financing structure used in this case:

  • The income originated in the concession contract is not part of the debtor’s assets as the latter transferred its property to the trust.
  • All the structure for the financing of the project is based in the possibility that all cash flows enter into the trust and pass through the cash flow provided in the trust agreement. This is what grants confidence to lenders.
  • Dismissing the effects of the security package designed between the debtor and the lenders within the insolvency proceeding in this case could establish a wrong precedent and as a consequence the refusal to future lenders to these projects to grant this type of financing.

Thus, the Superintendency concludes that it would be wrongful for them to allow the debtor to make use of resources that were transferred to the trust and that are not part of its assets. This decision sets an important precedent for the project finance scheme in Colombia as it recognizes that the security package that was structured by the parties will be duly respected in an insolvency proceeding.

Measures adopted due to COVID-19 applicable to financing granted to companies in insolvency: impacts over existing securities

This year, as a result of the Economic, Social and Environmental Emergency declared due to the COVID-19 health crisis, the National Government issued Decree 560 of April 15 of 2020 which, among other things, includes certain incentives to provide financing to companies in insolvency affected by the COVID-19 [3] For more information on other measures included in this Decree, see the following article: https://cms.law/es/col/publication/medidas-transitorias-a-los-procesos-de-insolvencia-decreto-560-de-2020 .

Even though the measures adopted are intended to be provisional, this new regime will be in force for two years, so it is worth mentioning these novelties that should be taken into account not only by new lenders but also by the existing creditors of the insolvent debtors, since these measures will have a direct impact on their existing securities.

Under these measures, lenders interested in granting new loans to a company during and in an insolvency procedure may secure their loans with (i) first-degree securities on unencumbered assets, (ii) second-degree securities on previously encumbered assets in favor of other creditors, or (iii) first-degree securities on previously encumbered assets, provided that the consent of the secured creditor is obtained.  If the existing creditor does not approve, the insolvency judge may authorize the creation of the securities provided that the insolvent debtor demonstrates that the secured creditor continues to hold the security. 

In order to access these financing mechanisms, the debtor must demonstrate to the insolvency court (i) that it was not possible to obtain new financing for the ordinary course of its business; (ii) that the original secured creditor will enjoy reasonable protection of its seniority over the security; and (iii) that the unencumbered assets in the credit transactions are sufficient to ensure payment of the alimentary, pension, salary and other obligations arising from employment contracts, if any.

To that effect, the Superintendence of Companies has held that the reasonable protection of the position of the secured creditor referred to in the Decree means that, when the consent of the original secured creditor is not obtained, the priority of the first-degree security must be shared between the original secured creditor and the new creditor.

For new lenders, these measures are undoubtedly incentives to grant the financing, as they can secure their credits with securities over previously encumbered assets that will have payment preference, but that in other circumstances would not be available to be part of the securities package under the same conditions. 

Existing secured creditors are in a different position. Not only will they be affected by the shortfall in the debtor's cash flow, a normal circumstance that occurs in any insolvency process, but also by the displacement and subordination of their security, which can even lead to reducing the possibilities of repayment of their debt. Therefore, and as a mechanism of protection, the Decree grants them the possibility of presenting their own or any other third party financing proposals, under less burdensome conditions than those presented by the debtor, in order to avoid losing their priority over the security right. This creates a protection mechanism for these creditors but implies that they must design a new financing scheme for the preservation of their security in its original terms.  


Portrait of Daniel Rodríguez, LL.M.
Daniel Rodríguez, LL.M.
María Lucía Amador, LL.M.
Juanita Aguirre