Banks Request Guidance on Restructuring Loans

On December 31 1999 the president sanctioned Law 550 of 1999. The law embodies the congressional and governmental aim to promote the recovery of financially viable companies, as well as the recovery of certain provinces and municipalities, damaged by the recession that has affected the country since 1998.

The procedures established by Law 550 are faster and more flexible than those previously established for the reorganization of companies. The provisions of Law 550 represent a better alternative for companies experiencing financial difficulties.

Following the enactment of the new law, the Colombian Bankers Association requested the issuance of a set of rules that would help to regulate and guide financial institutions that had granted loans to companies undergoing a Law 550 debt restructuring. As a result, the Superintendency of Banks issued Circular 026 on April 5 2000 and Circular 070 on October 5 2000. Pursuant to these circulars, once a company or public entity has entered Law 550 proceedings, financial institutions must stop charging interest on any loans granted to the company involved, although they may keep the loans in the same category as before the proceedings began.

In order for financial institutions to start accruing interest again or to reclassify the loans in a higher category, certain strict requirements must be fulfilled (under a Law 550 restructuring agreement). These include establishing a repayment term of no longer than seven years and requiring the debtor to repay at least 30% of principal during the first half of the repayment term.

Financial institutions must follow up on the debtor's compliance with the agreement, evidence of which must be submitted to the Superintendency of Banks upon its request.

For further information on this topic please contact Juan Carlos Duran at Holguin Neira y Pombo Abogados by telephone (+57 1 312 2473) or by fax (+57 1 312 2513) or by e-mail ([email protected]).