Trends and regulatory climate

Trends
What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?

Several new bills have been enacted in recent years which have had a favourable impact on the Dominican lending market.

Law 189-11 was enacted in July 2011 and took effect in early 2012, once the executive decrees, norms and regulations necessary to implement its provisions were drafted. The law:

  • introduced the legal instrument of trusts, including warranty trusts;
  • provided the lending market with greater flexibility and expedited foreclosure procedures;
  • introduced a better framework for the securitisation of mortgage loans; and
  • gave the lending market greater versatility by allowing investment funds to use investment trusts.

Together, these improvements have boosted the confidence of potential local and international investors.

More recently, a new Bankruptcy and Restructuring Law was enacted which will also facilitate the development of the Dominican lending market by offering a clearer, more equitable path for companies in distress and giving lenders greater confidence in the economic stability of local companies and the national economy.

Finally, a bill on moveable securities that is currently before Congress would:

  • standardise the process for the creation of securities over all forms of moveable property;
  • centralise the administration of such securities through a national database of moveable property; and
  • provide better access to financial services and allow for alternative methods of enforcement of collateral instead of conventional judicially administered foreclosure proceedings.

The Dominican lending market is thus benefiting from a clearer, more agile legal framework, which should continue to attract the participation of foreign lending players.

Regulatory activity
Is secured lending a regulated activity in your jurisdiction?

Secured lending is not a regulated activity in the Dominican Republic. Any individual or entity can undertake such activities by observing the corresponding legal provisions, which will vary depending on the collateral.

For instance, a conventional mortgage over real estate is governed by the general provisions set forth in the Civil Code (Articles 2114 and following) and by the Real Property Registration Law (108-05).

On the other hand, various types of pledge may be established over moveable property (eg, motor vehicles, boats, aircraft, machinery, equipment, inventory, existing and future agricultural crops, goods) pursuant to local laws:

  • Civil pledges are governed by the Civil Code;
  • Standard commercial pledges are governed by the Commerce Code;
  • Chattel pledges – commonly used to secure vehicles, machinery, inventory and other moveable assets – are governed by Law 6186;
  • All security agreements over aircraft and ships are governed by the National Institute of Civil Aviation, the Mercantile Marine Agency and the Naval Office, respectively;
  • Pledges over intellectual and industrial property rights (eg, patents, industrial designs, trademarks, trade names) are governed by Law 20-00;
  • Pledges over public company shares are governed by the Company Law (479-08); and
  • Pledges over financial instruments and securities (eg, bank accounts, investments, certificates of deposit, shares, bonds, income derived from securities) are governed by the Monetary and Finance Code, the Stock Exchange Law and similar regulation.

Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?

If the borrower operates in a regulated industry (eg, banking, insurance, free zones, telecommunications, transportation, energy), special laws governing that industry will apply to the lending transaction as long as the collateral is within the scope of the regulated activity.

Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?

Regulatory issues will arise if the lender operates in a regulated industry (eg, banking, insurance, free zones, telecommunications, transportation, energy). By contrast, if the lender operates in a non-regulated industry, lending transactions will be swifter and less burdensome.The lender should also seek counsel in the Dominican Republic, since for each type of security strict local formalities must be observed in order to effectively register the security and protect the collateral from third parties.

Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?

A new Bankruptcy and Restructuring Law was enacted in August 2015 and will take full effect in February 2017.

Structuring a lending transaction

General
Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

International and local commercial banks, savings and credit banks, savings and credit associations and credit corporations are the standard investors in bank loan financings. Several state-owned financial institutions also provide dedicated lending to sectors such as exports (BANDEX) and agricultural and agroforestry activities (Banco Agrícola). Finally, multilateral financial institutions have been actively involved in secured financing in the Dominican Republic for decades, mostly for large infrastructure projects.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

Generally, all deals are negotiated between the parties on a case-by-case basis. However, the big players in the financial industry have developed their own templates for secured lending transactions. The formalities for the registration of securities will vary depending on the type of security in question.

Syndication
Are syndicated secured loan facilities typical in your jurisdiction?

Yes – financing through syndicated credit facilities is very common in the Dominican Republic.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

The arranger of syndicated bank loan facilities can act on behalf of banking syndicate members. Its responsibilities include the following:

  • collection of payments;
  • distribution of payments to other creditors;
  • compliance supervision;
  • collateral agents;
  • administration of the operation (correspondence); and
  • pursuit of legal actions.

Fees and commissions vary. The standard industry average is 0.2%, while investors charge 0.25% of their participation.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

Yes – this has been allowed since the enactment of the Trust Law in 2011.

Special purpose vehicle financing
Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

This will depend on the type of transaction. Normally, SPVs are used only in highly specialised transactions.

Interest
Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

Under Dominican law, the parties may freely agree on the applicable interest rate (eg, percentage, fixed, floating). For loan transactions in dollars, LIBOR is regularly used as the reference.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

There are no regulatory restrictions on the interest rate that can be charged on bank loans. The parties to a loan agreement can freely agree on the interest rate.

Use and creation of guarantees
Are guarantees used in your jurisdiction?

Yes – Dominican banks usually ask for at least one guarantee or co-signer to any loan, sometimes more. This means that the borrower must demonstrate collateral or at least have one or more co-signors when applying for a loan.

What is the procedure for their creation?

The procedures to create and perfect a guarantee depend on the nature of the collateral. Multiple legal provisions may apply.

For instance, a conventional mortgage over real estate is governed by the general provisions set forth in the Civil Code (Articles 2114 and following) and by the Real Property Registration Law (108-05).

On the other hand, various types of pledge may be established over moveable property (eg, vehicles, boats, aircraft, machinery, equipment, inventory, existing and future agricultural crops, goods) pursuant to local laws:

  • Civil pledges are governed by the Civil Code;
  • Standard commercial pledges are governed by the Commerce Code;
  • Chattel pledges – commonly used to secure vehicles, machinery, inventory and other moveable assets – are governed by Law 6186;
  • All security agreements over aircraft and ships are governed by the National Institute of Civil Aviation, the Mercantile Marine Agency and the Naval Office, respectively;
  • Pledges over intellectual and industrial property rights (eg, patents, industrial designs, trademarks, trade names) are governed by Law 20-00;
  • Pledges over public company shares are governed by the Company Law (479-08); and
  • Pledges over financial instruments and securities (eg, bank accounts, investments, certificates of deposit, shares, bonds, income derived from securities) are governed by the Monetary and Finance Code, the Stock Exchange Law and similar regulation.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

The procedures for creating and enforcing guarantees depend on the type of collateral involved. Under the new Bankruptcy and Restructuring Law, in the event of the commencement of bankruptcy proceedings, the enforceability of collateral and foreclosure proceedings will be suspended. However, as the new law is not yet fully in force, the exact particularities of this suspension remain to be determined.

Finally, other special provisions may apply in regulated sectors.

Subordination and priority
Describe the most common methods of structuring the priority of debts and security.

The most common methods of structuring the priority of debts and security are via liens or mortgages and pledge agreements (eg, shares, financial instruments, moveable assets, receivables and contractual rights). The methods for establishing priority and the conditions for perfecting the security will depend on the nature of the collateral. The creditor must also take into account the established privileges set forth in the Civil Code. In most cases the initial lender explicitly prohibits the borrower from pledging the assets to additional lenders without its express authorisation. In syndicated loans, intercreditor agreements may define the terms and details of priorities and subordination. In general, creditors may privately negotiate and agree the priority and subordination of each other’s claims.

Documentary taxes and stamp duty
Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

The perfection of security or collateral is subject to fees which will vary depending on the type of security. For instance:

  • mortgage securities incur a 2% tax on the secured amount;
  • for pledges over shares, minimum registration fees must be paid at the Mercantile Registry Office;
  • for chattel pledges, minimum registration fees must be paid at the corresponding peace court (the lowest-ranked court, designated by law as the registrar of such securities);
  • for IP pledges, government fees must be paid at the Dominican Intellectual Property Office;
  • for certain types of civil pledge, registry office taxes must be paid, which amount to RD$5 for each RD$1,000, plus 12%, plus RD$2; and
  • electronic wire transfers are subject to 0.15% on the value of the transferred amount.

In regulated sectors, additional costs may be incurred for the registration of pledges.

Cross-border lending

Governing law
Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?

Cross-border lending transactions are usually governed by New York law, although registration of the collateral is subject to the local laws of the place where the collateral is located – in this case, the Dominican law applicable to the relevant type of security.

Restrictions
Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?

No. Local law normally applies to collateral located in the Dominican Republic; however, the parties are free to choose the governing law pursuant to the new International Private Law (544-14). Nonetheless, local laws always apply to real estate.

Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

No, as long as the parties have expressly agreed on the currency of the credit in the corresponding agreement. If not, pursuant to the Monetary and Financial Law (183-02), the local currency will be considered applicable.

Security – general

Security agreements
Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?

Blanket liens or pledges, in which a security is automatically registered against all assets of the debtor, are not allowed in the Dominican Republic. Nevertheless, depending on the types of asset involved, different agreements may be required to perfect such securities. Mortgages, pledge agreements, financial instruments, moveable assets, receivables and contractual rights and so on all require different steps to be perfected.

Release of security
What are the formalities for releasing security over the most common forms of assets?

The formalities will depend on the type of security.

For instance, to release a mortgage, the following documentation is required:

  • the release agreement;
  • identification of the parties;
  • a certificate of good standing from the Dominican tax authorities;
  • the owner’s certificate of title;
  • the original creditor’s certificate;
  • identification of the person who is depositing the file; and
  • confirmation of payment of filing taxes and stamp duty.

To release a chattel pledge, the following documentation is required:

  • the original pledge agreement certificate,
  • a total or partial release agreement;
  • identification of the moveable assets to be released; and
  • a formal request deposited with the peace court (the lowest-ranked court, designated by law as the registrar of such securities).

The parties are free to agree on a partial release of security under certain conditions agreed in the credit agreement. Normally, in the case of bank loans, financial institutions release no collateral until the principal has been paid. This is reinforced by the fact that almost all government institutions require a release receipt as part of their formalities.

Asset classes used as collateral for security

Real estate
Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Mortgages over real estate are created by the execution of a mortgage agreement between the owner of the property or its representative and the creditor. The mortgage is subject to local law and must be recorded with the registrar of title; however, the underlying credit agreement may be subject to foreign law and executed abroad. Priority and enforcement rights regarding third parties are perfected by filing the corresponding documentation with the registrar of title where the property is located. The first creditor that files its mortgage security obtains a first-ranked security through the issuance of a creditor’s registration certificate, which enables the creditor to collect its debt through foreclosure of the collateral, before any other lower-ranked registered mortgage creditors.

The following documentation is required:

  • the mortgage agreement, authenticated by a Dominican notary domiciled at the place where the property is located (including evidence of the authority of the signatories) (the notary must also have a certification of legal status of the property issue by the registrar of title, according to the new Notary Law);
  • the owner’s certificate of title;
  • certification confirming that the owner is up to date with payment of the corresponding property tax or asset tax, as applicable; and
  • receipt of payment of 2% mortgage registration taxes.

Machinery and equipment
Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Various pledges over moveable assets may be established under local laws. For instance, in order for a civil pledge to be valid, the debtor must hand over possession of the asset to the creditor or to a designated third party. Chattel mortgages created under the Agricultural Promotion Law (6186) are commonly used to secure machinery, inventory and other moveable assets. This type of pledge allows the debtor to keep possession of the asset while the security is in place. In this case, the pledge agreement must be governed by local law, even though the financing agreement itself may be governed by foreign law.

In both cases, the assets cannot be pledged to more than one creditor at the same time.

In the case of chattel mortgages, registration is undertaken by filing the documents with the corresponding peace court (the lowest-ranked court, designated by law as the registrar of such securities). On the other hand, civil pledges are registered with the Civil Registry Office.

With respect to motor vehicles, creditors may file a transfer opposition with the Department of Motor Vehicles and the Internal Revenue Office to further secure the pledge and make it effectively enforceable against third parties.

With respect to aircraft, security agreements must be drafted before a notary public and executed and filed before the Civil Registry Office and the National Institute of Civil Aviation.

Security over ships must be registered with the Mercantile Marine Agency and the Navy.

The following documentation is required:

  • the pledge agreement, duly executed and notarised;
  • an inventory of assets; and
  • the original copy of the ownership certificate, for aircraft, ships and vehicles; otherwise, a list of the assets that are subject to the pledge will suffice.

Receivables
Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Receivables are collateralised through the execution of a pledge agreement, notification to the corresponding debtors and registration with the Civil Registry Office. Receivables cannot be pledged more than once. To guarantee its enforceability against third parties, the pledge agreement must be notified via a bailiff’s act (a document notified by an officer of the court) and registered as detailed above.

The following documentation is required:

  • the pledge agreement; and
  • the bailiff’s act.

Financial instruments and cash
Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Various pledges over financial instruments and securities may be established under local laws. For instance, a pledge over financial instruments must be performed through a notarised agreement between the parties and must be duly notified to the financial entity where the instrument is held.

With regard to the endorsement of certificates of deposit and insurance policies, the agreement must be notified to the issuing institution for its final approval (if necessary) and formal registration.

The following documentation is required:

  • the pledge agreement, duly notarised;
  • the original certificate of deposit; and
  • the original insurance policy certificate.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Article 91 of the Commercial Code allows lenders to secure transactions using cash deposits as security. A separate security/pledge agreement must be signed between the parties; this kind of agreement is usually referred to as a ‘fiduciary cession’ and entails transfer of the credit to the bank upon the occurrence of certain events, such default of obligations or breach of contract. This agreement must be notified to the financial institution where the deposits are held. The agreement must also be registered by the lender. A cash deposit can also be held in escrow with instructions on how to proceed in the event of default.

Intellectual property
Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

IP rights are collateralised through the execution of a pledge agreement and its registration with the National Office of Intellectual Property.

The following documentation is required:

  • the pledge agreement, duly notarised; and
  • the original certificate of registration of the corresponding IP right.

Enforcement

Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?

The lender and borrower negotiate the events of default that will trigger enforcement of the collateral. Normally, these can include failure to make timely payments, if the borrower is subject to a foreclosure proceeding against any of its assets, breach of contract and so on. The borrower must waive its right on the term of the loan for the lender to be able to legally enforce the security; such waivers are found in almost all commercial contracts.

Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

Where foreclosure is the appropriate course of action, the steps will vary depending on the type of collateral, but all of them involve:

  • notice to the debtor through a bailiff’s act (a document notified by an officer of the court) indicating the existence of an event of default;
  • a request for foreclosure of the assets granted as security (filed either before the court or extra-judicially, depending on the asset); and
  • the sale of the assets at a public auction; in the absence of third-party bidders, the lenders will automatically receive the asset in full as payment of the debt.

These processes are carried out in the local currency of the Dominican Republic. The proceeds of sale may be converted into foreign currency without restriction and can be transferred abroad as desired.

The private disposition of collateralised assets, enabling a creditor to take control of them without undergoing a public process, is prohibited under Dominican law. Creditors can call for a bid on the assets or request the court overseeing the process to assign them the assets for the amount of the debt.

Law 189-11 established an accelerated foreclosure proceeding for mortgages granted to secure a bank loan.

Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?

Bankruptcy proceedings are regulated by the Commercial Code, but are seldom commenced or completed due to their complexity and length. Secured creditors, regardless of nationality, are not affected by the initiation or continuation of bankruptcy proceedings. They still maintain their priority rights over the collateral granted to them, although labour debts and tax obligations are generally privileged claims and thus, upon collection, precede other claims; however, there are exceptions to this rule. A secured creditor may voluntarily release its collateral during the process and be entitled to pro rata distributions as an unsecured creditor upon the debtor’s liquidation.

The new Bankruptcy and Restructuring Law (141-15) enacted in 2015 will take effect in February 2017. Under the new law, there are three types of claim:

  • guaranteed or privileged claims;
  • unsecured claims; and
  • subordinated claims.

Labour claims (salary and severance) are privileged over all other claims.