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?

The Peruvian economy has grown significantly in the last 10 years and as a result financing needs have increased exponentially. Peruvian companies can obtain bank financing on a cross-border basis without restriction, so competition between domestic banks and foreign banks has intensified. Banks have been active in trade finance, acquisition finance and project finance, participating both individually and in syndicates. Nevertheless, over the past year there has been a decline in capital market transactions and in the infrastructure pipeline.

A new trend that has emerged over the last 12 months is the strengthening of the US dollar and associated volatility in the exchange rate, which has prompted local entities with income in Peruvian sol to seek to limit their exposure to dollar-denominated debt. Liability management has also increased.

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

No.

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

No.

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

No, other than the maximum interest rate limitations. Non-banking entities (including international banks that are not licensed to operate in Peru) may not charge compensatory or default interest in excess of the maximum rates established by the Peruvian Central Bank (currently 40.7% for compensatory interest and 6.1% for default interest for obligations in Peruvian sol, and 11.5% for compensatory interest and 2.3% for default interest for obligations in foreign currency; in each case per annum).

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

Not to our knowledge. 

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)?

The most active providers of secured finance in Peru are banks. No licence or similar authorisation is required; as a result, international banks (ie, banks that are not licensed to perform banking activities in Peru) and, to a lesser degree, non-financial institutions also provide secured finance in Peru.

The only applicable limitations are those regarding the maximum interest rate. Non-banking entities (including international banks that are not licensed to operate in Peru) may not charge compensatory or default interest in excess of the maximum rates established by the Peruvian Central Bank (currently 40.7% for compensatory interest and 6.1% for default interest for obligations in Peruvian sol, and 11.5% for compensatory interest and 2.3% for default interest for obligations in foreign currency; in each case per annum).

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

There is a relatively well-established market standard with respect to local security documents; however, the forms of local loan agreements are considerably more varied.

Syndication
Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated secured loan facilities are most commonly used for large-scale financings of acquisitions or infrastructure projects; however, they are also used in other scenarios. 

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?

To the extent that syndicated facilities are commonly used in Peru with respect to large-scale financings by international banks, such facilities are usually structured in accordance with international market standards pursuant to documentation governed by foreign law (ie, through the execution of inter-creditor, agency, security and similar agreements among the syndicate members). Peruvian law does not require the appointment of a facility agent to act on behalf of other syndicate members; in the case of the financing of certain public infrastructure projects, this concept is expressly acknowledged in the relevant concession agreements.

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.

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?

Although SPVs may be used in Peru, it is more common for a trust to be established in order to hold the assets being financed. Pursuant to Peruvian law, a trust is an autonomous estate which is separate and independent from the borrower’s estate, and which must be administered by a trustee in strict accordance with the terms and conditions of the trust agreement. This legal instrument may be used in order to hold in trust, for the benefit of the lenders, any assets such as credit and collection rights, cash flows, real estate, moveable assets (eg, vehicles, equipment, machinery, inventory), intellectual property and others. Thus, a trust may be used in connection with a finance transaction both as means of holding assets as security and as a means of payment of the secured obligations. A security is usually granted over both the shares of the company or SPV and the assets being financed.

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?

This will depend on the specific transaction and whether it is a cross-border transaction. However, interest is most commonly calculated by reference to a market standard variable reference rate (with LIBOR being the usual reference rate).

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

Financial institutions such as banks that are licensed to operate by the Superintendency of Banking, Insurance and Private Pension Fund Administrators are subject to no restrictions on the rate of interest that they may charge on loans. However, non-banking entities (including international banks that are not licensed to operate in Peru) may not charge compensatory or default interest in excess of the maximum rates established by the Peruvian Central Bank (currently 40.7% for compensatory interest and 6.1% for default interest for obligations in Peruvian sol, and 11.5% for compensatory interest and 2.3% for default interest for obligations in foreign currency; in each case per annum).

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

Yes.

What is the procedure for their creation?

Guarantees may take the form of either a general corporate guarantee or a bond. In each case, the guarantee is created through execution of a private document or agreement. This document may also be executed as a public deed before a notary public in order to give the guarantee added value as evidence in the event of enforcement or foreclosure; however, this is not necessary for the purposes of the validity of the guarantee.

Additionally, guarantees such as stand-by letters of credit and insurance policy certificates are recognised under the local regulations and may be issued by authorised financial institutions and insurers, respectively, as guarantees for the performance of obligations.

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

Under Peruvian law, in certain circumstances companies are restricted from guaranteeing the borrowings of one or more members of their corporate group. Article 106 of the Corporate Act prohibits Peruvian corporations from making loans, granting guarantees or creating security interests on their assets to fund the acquisition of their own shares. In this regard, a company is prohibited from guaranteeing or granting security in order to secure borrowings incurred in order to finance or refinance the direct or indirect acquisition of its shares. A corporate resolution granting security in breach of this prohibition may be declared null and void (any interested party, including the obligor, may file a judicial claim within one year of adoption of the resolution), and the directors approving the transaction may be subject to liability. However, there is no case law on this matter and it is thus uncertain how a Peruvian court would rule on such claim. 

There are no restrictions in other scenarios. However, the granting of a guarantee to secure obligations of a related company or a third party could make directors or managers liable if it is outside the corporate purpose of the company (ie, it is ultra vires) or has no economic benefit for the company.

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

The subordination of debt in Peru is usually performed through a private agreement whether through a provision in the relevant credit agreement, execution of a debt subordination agreement with the intervention of the creditors or the issuance of subordinated debt obligations. However, although these type of structure are common (in both the international and, more recently, the local market), Peruvian insolvency law does not acknowledge the existence, priority in payment, subordination of rights or any other aspect relating to contractually subordinated obligations. In that sense, in case of the borrower’s insolvency, the subordination arrangements will not be enforceable with respect to the Peruvian insolvency authority (INDECOPI) and creditors (subordinated and senior) shall be subject to the statutory ranking of claims.

Regarding the priority of security interests, Peruvian law recognises the priority of a specific security against third parties to the extent that such security has been registered before the rights of such third parties. Therefore, a security interest that has been registered before others in relation to the same collateral enjoys priority in using the proceeds from disposing of the collateral to satisfy obligations secured by the security interest. 

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?

For the purposes of this analysis, it is assumed that the foreign lender does not have a permanent establishment in Peru. Otherwise, the tax consequences may vary.

Interest payments to domestic lenders (domiciled entities or individuals) are not subject to withholding income tax.

Conversely, in the case of loans granted by foreign lenders (non-domiciled entities or individuals) to local borrowers, interest is subject to withholding of Peruvian income tax.  In this case, if the Peruvian borrower assumes the economic burden of the withholding tax, it can deduct this amount as an expense in its income tax determination.

Income tax: Interest paid to foreign lenders qualifies as Peruvian-source income and is thus subject to Peruvian income tax whenever the loan proceeds are placed or economically used in Peru or where the payer of such interest is domiciled in Peru. 

The withholding tax rate applicable to interest paid to non-domiciled entities is 4.99%, provided that the following conditions are met:

  • In case of cash loans, the foreign currency proceeds enter Peru (ie, they are deposited in a bank account in Peru);
  • The borrower uses the proceeds of the loan in the ordinary course of business or to refinance existing loans;
  • The loan does not accrue annual interest exceeding LIBOR +7 (any excess thereof will be subject to the 30% income tax withholding); and
  • The borrower and lender are not deemed to be related parties (the operation cannot be structured as a back-to-back loan). 
     

For this purpose, the definition of ‘interest’ includes expenses, commissions, premiums and any other additional fees agreed.

If these conditions are not met, the applicable withholding tax rate will be 30%.

The withholding tax rate applicable to interest paid to non-domiciled individuals is also 4.99%, unless the borrower and the lender qualify as related parties or the loan qualifies as a transaction made from or through a tax haven. In this case the rate will be 30%.

If the foreign lender is domiciled in a jurisdiction that is deemed to be a tax haven, the borrower must prepare, for income tax purposes, a transfer pricing analysis on the terms and conditions of the loan in order to determine that the interest meets the arm’s-length principle, pursuant to the transfer pricing rules.

Value-added tax: Interest paid to the lender will be exempt from value-added tax (VAT), provided that the lender is a financial institution (ie, a local or foreign bank).

If the lender is not a financial institution, the interest to be paid by the domestic borrower will be subject to VAT at a rate of 18% for the use of the financial service in Peru. For this purpose, the taxpayer is the borrower; it can offset the VAT paid against its debit or output VAT.

Financial transactions tax: A financial transactions tax is levied at a rate of 0.005% on any debit or credit made using an account opened with a Peruvian bank or any other financial institution, whether in national or foreign currency. Hence, if the loan is disbursed and deposited in a Peruvian bank account, the transaction will be taxed at the corresponding rate. Likewise, interest and principal paid from or deposited in a Peruvian bank account will also be subject to the financial transactions tax. The taxpayer is the holder of the Peruvian bank account.

Other costs and fees
The costs payable in connection with the granting of security usually comprise notary public fees (to execute the security document as a public deed) and public registry fees (to register the security). Notary public fees will vary depending on the designated notary public and are usually calculated on the basis of the secured amount (in a range from $500 to $5,000). 

In the case of mortgages, registration fees are set at 0.75/1,000 over the total secured amount for sums of up to approximately $10,000 and 1.5/1,000 over the total secured amount for sums in excess of approximately $10,000, up to a limit of one referential tax unit (currently S3,950, equivalent to approximately $1,200). An additional S31 (equivalent to approximately $9) qualification fee is payable.

The costs of registering a pledge over moveable assets likewise depend on the secured amount. At the time of writing, registration fees are set at 1.5/1,000 of the total secured amount, up to a limit of one referential tax unit. An additional S10 (equivalent to approximately $3) qualification fee is payable.

Finally, the costs of enforcing the security will include the fees of the common representative (in the case of pledges) and the costs of court proceedings (in the case of mortgages).

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)?

This will depend on the specific transaction, but in the case of foreign lenders the finance documents (eg, the facility agreement and related documents) are commonly governed by New York or English law. However, with respect to any collateral granted over local assets, the relevant security documents are governed by Peruvian law.

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

No.

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

No.

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?

Yes – as long as the relevant security agreement complies with all formalities required for the granting of security for each type of asset, as outlined below. 

In Peru, the following types of collateral are primarily used to secure lending obligations:

  • pledges over moveable property, such as inventory, vehicles, ships, shares, credits, accounts, rights and generally all moveable assets (except for specific exceptions);
  • mortgages over immoveable property such as real estate, as well as exploitation concessions (mining, transportation, electric and public utility concessions); and
  • guaranty trusts.

Although separate agreements are commonly used, in the case of assets comprising a production unit, the obligor may grant a special type of mortgage known as a ‘production unit mortgage’, under which a group of different assets, both moveable and immoveable (eg, buildings, in rem rights, equipment, machinery), can be included under a single mortgage and through execution of a single mortgage agreement) as long as they all pertain to a single production unit. Where a collateral package is structured to include a production unit mortgage, the parties can still agree to have separate security documents (ie, pledges and mortgages) for all assets that are not included under the relevant production unit.

Likewise, a single trust agreement may be executed in order to create a guarantee trust that includes all relevant assets and rights of the borrower, to the extent permitted by law (eg, real estate, accounts, moveable assets, contracts, concessions, shares). This mechanism may be combined with the execution, in parallel, of independent security agreements over other assets not included in the trust, taking into account the nature of each asset. All assets and rights subject to security will be part of the trust and administered by a designated trustee on behalf and for the benefit of the secured creditors. The trust agreement must be executed by the obligor(s) and the trustee as a private document and as a public deed before a notary public, and subsequently registered in the public registers.

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

Security will be released in accordance with the provisions of the relevant security document and any inter-creditor or collateral agency agreements, typically once all secured obligations have been performed in full to the creditor’s satisfaction. Usual formalities include the execution of a private document between the creditor and the security provider agreeing to release the security and subsequent registration of such release in the relevant public registers.

In the case of guaranty trusts, once all secured obligations have been paid in full, the trust estate must be liquidated by the trustee in accordance with the terms of the relevant trust agreement and the applicable regulation, following which termination of the trust will be registered in the public register.

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?

Yes. Mortgages are created through the execution of a private document and a public deed (before a notary public) between the obligor and the lender (or the corresponding security agent or trustee, as applicable), and are valid and perfected once registered. (While pledges must be registered only for perfection/enforceability, mortgages must be registered to be valid). Security interests over land and buildings must be registered in the relevant section of the Immoveable Property Register. Security interests over concessions must be registered in the Public Register of Concessions for the Exploitation of Public Services or, in the case of mining concessions, in the Mining Rights Register.

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?

Yes. The Pledge Law expressly allows for the creation of pledges over machinery and equipment. A pledge is created through execution of a private agreement between the obligor and the lender (or the corresponding security agent). In order to register the pledge (which, although not necessary for validity, is nonetheless advisable for the purposes of enforcement), it must have been executed and granted as a public deed before a notary public. Perfection of the pledge and a higher level of publicity against third parties can be achieved through registration.

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?

Yes. The Pledge Law expressly allows for the creation of pledges over receivables. A pledge is created through execution of a private agreement between the obligor and the lender (or the corresponding security agent). In order to register the pledge (which, although not necessary for validity, is nonetheless advisable for the purposes of enforcement), it must have been executed and granted as a public deed before a notary public. Perfection of the pledge and a higher level of publicity against third parties can be achieved through registration.

Alternatively, security may be granted over receivables through the execution between the obligor and the lender (or the corresponding security agent) of a conditional assignment of rights agreement, under which the rights will be assigned in favour of the lender should an enforcement trigger occur. This type of security may also be registered to achieve a higher level of publicity against third parties (in which case the agreement must be executed as a public deed before a notary public). For the purposes of enforceability, notice of the conditional assignment must also be issued to the assigned debtors.

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?

Yes. The Pledge Law expressly allows for the creation of pledges over financial instruments (excluding cheques). A pledge is created through execution of a private agreement between the obligor and the lender (or the corresponding security agent). In order to register the pledge (which, although not necessary for validity, is nonetheless advisable for the purposes of enforcement), it must have been executed and granted as a public deed before a notary public. Perfection of the pledge and a higher level of publicity against third parties can be achieved through registration.

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?

Yes. The Pledge Law expressly allows for the creation of pledges over cash deposits. A pledge is created through execution of a private agreement between the obligor and the lender (or the corresponding security agent). In order to register the pledge (which, although not necessary for validity, is nonetheless advisable for the purposes of enforcement), it must have been executed and granted as a public deed before a notary public. Perfection of the pledge and a higher level of publicity against third parties can be achieved through registration. 

For enforceability purposes, notice of the pledge should also be given to the financial institution in which the cash deposits are held.

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?

Yes. The Pledge Law expressly allows for the creation of pledges over intellectual property (eg, patents, author rights, invention rights, brands, commercial names). A pledge is created through execution of a private agreement between the obligor and the lender (or the corresponding security agent). However, in order to register the pledge (which, although not necessary for validity, is nonetheless advisable for the purposes of enforcement), it must have been executed and granted as a public deed before a notary public. Perfection of the pledge and a higher level of publicity against third parties can be achieved through registration.

Enforcement

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

The enforcement triggers should be clearly specified in the relevant finance and security documents. A common enforcement trigger is the occurrence of an event of default under the documents which govern the secured obligations (usually the loan agreement) and subsequent delivery of a notice of enforcement by the secured creditor (or security agent, as applicable), usually in a format included as an exhibit to the relevant security document. 

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

Different types of security are subject to different regimes.

Mortgages on real estate must be enforced judicially through a public auction carried out pursuant to court proceedings. However, mortgages on concessions granted by the state on infrastructure or public services may be foreclosed through an out-of court procedure. 

On agreement between the obligor and the beneficiary, pledges over moveable assets may provide for foreclosure through an out-of-court procedure. To this end, the parties must designate a ‘common representative’, through which the foreclosure procedure will be performed. Out-of-court enforcement is usually much faster than judicial enforcement, given that enforcement can take place either:

  • through sale of the relevant assets; or
  • through direct allocation of the relevant assets in favour of the beneficiary.

In the case of guaranty trusts, the security may also be enforced out of court by the trustee, which will act in accordance with the terms and conditions of the relevant trust agreement.

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

If the borrower is declared insolvent, a creditors’ meeting will be established. The creditors’ meeting has the power to:

  • decide whether the debtor should enter into reorganisation or liquidation proceedings; and
  • approve the management of the debtor or appoint a liquidator, as the case may be.

If the creditors’ meeting decides on reorganisation, a reorganisation plan must be approved and the creditors will be paid in the order approved in the plan. If the creditors’ meeting decides on liquidation, claims will be paid in the following order:

  • labour claims (including pension claims);
  • alimony claims (applicable only where the insolvent is an individual);
  • secured claims, including attachments and seizures;
  • tax claims; and
  • unsecured claims.