Colombia: Central de Inversiones SA (CISA)

The Colombian government and Fogafín adopted separate strategies to assist the public and private financial sectors. Public credit institutions and banks were compelled by the government to transfer their NPLs to CISA as a prerequisite for recapitalization (Fogafín 2000). The public banks that transferred NPLs to CISA were recapitalized by Fogafín (Fogafín 2009).

Private-sector financial institutions were required to write off nonperforming assets that would lead to negative equity. The shareholders were required to recapitalize the bank, but because of the economic conditions at the time, this was considered to be infeasible in the short term. Fogafín thus provided credit lines and recapitalized the private financial institutions (Fogafín 2000). According to CISA’s former Vice President of Portfolio, Wilson Sánchez Hernández, Fogafín liquidated private banks that had not recovered and proceeded to transfer their remaining assets to CISA.

The Colombian government also passed the Economic Emergency Decree and Housing Law, a resolution and restructuring program to deal with “unviable entities” and other assistance programs for mortgage debtors and financial institutions (Fogafín 2009).

CISA was given immediate legal authority to acquire and manage NPLs when the Colombian legislature modified the banking law with Resolution 006 in June 1999. Apart from adopting closed-bank resolution measures to strengthen the stability of the financial sector, the amendment allowed CISA to facilitate the sales of foreclosed assets acquired from public banks (Resolution 006 1999). According to former CISA Vice President of Portfolio Sánchez Hernández, this legal designation was necessary because it allowed CISA to sell its assets at a discount using a predetermined cost-benefit analysis.   

Resolution 006 also provided authority for recapitalization and reorganization of private and public financial institutions (Fogafín 2000). The Colombian authorities also allowed CISA to streamline the contracting process for the management and disposition of assets with the issuance of Article 91 of Law 795 of 2003 on financial reform (Heenan et al. 2007). These changes were formalized in 2007 with the implementation of Decree 4819 (Decree 4819 2007).

The issuance of Article 91 of Law 795 of 2003 on financial reform again changed the legal framework under which CISA operated, allowing it to utilize a more efficient process for the management and disposition of assets. CISA thus began to operate under a private law regime, despite its status as a publicly owned entity (Heenan et al. 2007). The new law permitted it to use securitization to improve and accelerate disposal options. CISA was authorized to take on trustee functions in addition to the traditional asset management functions (World Bank 2002). These changes were formalized only with the implementation of Decree 4819 in 2007, under which the government assigned CISA the responsibility of acting as the Technical Secretariat of the Intersectoral Commission for the Management of Public Fixed Assets (Decree 4819 2007). This new title allowed CISA to implement commercial structures that would streamline the reallocation of assets between public entities and private investors (CONPES 2007).

In addition to managing and disposing of bad assets from distressed public banks, Colombian authorities empowered CISA to remove and manage government-owned NPLs, such as real estate owned by the Ministry of Trade. The ultimate purpose of the SPV, at least at the time of the 1990s financial crisis, was to monetize the assets and transfer them to the National Treasury (Villegas 2014).

CISA was created in 1975 as a subsidiary of Banco Central Hipotecario (BCH), a major state bank that had a monopoly in the mortgage sector (Fogafín 2001). BCH had been founded in 1932 with the purpose of purchasing bad loans from mortgage and commercial banks (Uribe 2000). Prior to the Fogafín acquisition, CISA had been carrying out similar resolution and recovery operations, but at a much smaller scale (Fogafín 2001).

In September 2000, Fogafín paid COP 6 billion to acquire 99.99% of shares in CISA from Compañia Central de Seguros SA and BCH (Fogafín 2009).

According to former CISA Vice President of Portfolio Sánchez Hernández, the SPV was administered by the Ministry of Finance and Public Credit but also reported to Fogafín, the latter of which was responsible for oversight (Fogafín 2001). Heenan et al. (2007) write that CISA was subject to a “permanent and necessary dependence” on the executive branch, ensuring that its objectives were in “constant alignment” with public banking system policy. For example, the president of Colombia was charged with the task of appointing the president of CISA (Heenan et al. 2007). CISA’s operational structure was set up such that it had a “Ministry” that would outsource work in order to respond immediately to changes in asset inventories. The Board of Directors was responsible for confirming and approving valuation models to price assets (CONPES 2007). According to Sánchez Hernández, the Minister of Finance and Public Credit, or a representative from the department, acted as the President of CISA; the rest of the Board comprised two Fogafín employees and two private sector members.

Prior to asset transfer, the Ministry of Finance and Public Credit required participating institutions to sign a management agreement that incorporated a standing evaluation system for ensuring the efficient and maximal recovery of assets (CONPES 2007).

Between 2001 and 2007, CISA purchased a total of COP 5.6 trillion in nonperforming assets from nine public banks and credit institutions (Fogafín 2009).

In October and November 2000, Fogafín capitalized CISA with COP 267 billion, which corresponded to 50% of the purchase value of the NPLs associated with the restructuring of Bancafé. A second capitalization of COP 253 billion followed in December, this time in connection with the cleanup of BCH (Fogafín 2001).

It appears that CISA was funded by a combination of public bank bonds issued by Fogafín, tax revenues, and resources from the Public Banking Reserve Fund and the Deposit Insurance Reserve Fund (Fogafín 2000; CONPES 2007).

Fogafín initially issued bonds worth COP 3 trillion in 1999. The bonds bore an interest rate equivalent to the 90-day DTF (benchmark) rate of 20% and carried maturities of two, four, six, eight, and 10 years (Fogafín 2000; Rowland 2006). They were used to fund the public financial sector restructuring program, which included recapitalization and the purchase of NPLs by CISA (Fogafín 2000). 

To resolve ongoing liquidity issues in connection with these bonds, Fogafín’s Board of Directors also approved repurchase operations for the public banks, with an initial quota of COP 250 billion and a final quota of COP 350 billion (Fogafín 2001).

Additional funding for the public-sector restructuring came with the passage of Decree 2514 in December 1999, as the government was able to allocate to Fogafín COP 600 billion in funds collected under the Financial Transaction Tax (Fogafín 2000).

Because CISA was funded in part by resources from the Public Banking Reserve Fund and the Deposit Insurance Reserve Fund (administered by Fogafín), it was not authorized to handle the NPLs of private institutions or nonfinancial public-sector entities. Participation was therefore limited to public credit institutions, the deposit guarantee fund Fogafín, the Ministry of Finance and Public Credit, and the cooperative entities guarantee fund Fogacoop (CONPES 2007). According to former CISA Vice President of Portfolio Sánchez Hernández, private banks that needed assistance with their NPLs or nonperforming real estate assets (such as Bancafé and Granahorrar) were nationalized by the government prior to transfer.

Additionally, public financial institutions were required to certify that they were carrying out the “necessary steps for recovery,” including the initiation of “administrative actions against the officials who caused such deterioration” (CONPES 2007).

The Board of Directors of Fogafín was responsible for selecting eligible assets. The determination was based on the assets of the most recent balance sheet submitted to the Banking Superintendency. CISA was not restricted to specific loan types, as it acquired consumer, commercial, and mortgage loans (Gonzalez 2000). These loans had ratings of C, D, or E, all of which indicated that the debtors were delinquent and that the loans were of the lowest quality (Resolution 006 1999; Gonzalez 2000). According to former CISA Vice President of Portfolio Sánchez Hernández, these ratings were based on the Basel Accords.

To further strengthen the balance sheets of public entities, NPLs could also be written off in accordance with the criteria defined in Resolution 006 of 1999 (Fogafín 2001).

A separate management commission was responsible for dealing with assets that were more difficult to transfer and manage due to “their characteristics or the nature of the entity” (CONPES 2007). For example, Fogafín was unable to transfer nonproductive assets in the form of convertible bonds during the complicated liquidation of Banestado (World Bank 2002).

In exchange for the NPLs, CISA immediately paid 50% of the balance in public banking capitalization bonds issued by Fogafín; the remaining 50% was paid at a later date using proceeds from the recovery of those same assets (Fogafín 2001).

Unproductive assets were either written off in accordance with Resolution 006 of 1999 or transferred to CISA for management and disposal (Fogafín 2001). Fogafín also retained a number of international auditing firms to determine the parameters of NPL transfer (Fogafín 2000).

The Board of Directors of CISA was required to ensure that the pricing methodology aligned with the general guidelines issued by the Ministry of Finance and Public Credit (CONPES 2007).

It is not clear if CISA applied a uniform valuation and pricing method to the acquisition of assets from each public financial institution. For example, CISA purchased assets from Bancafé at 66% of book value, or COP 600 billion, as the book value of Bancafé’s nonperforming assets was COP 900 billion. Bancafé was required to provide for the remaining 33% of the transferred portfolio. After the transfer, Fogafín recapitalized Bancafé, provided a capital guarantee, and allowed it to access the repurchase agreement operation (Fogafín 2001).

Law 795 on Financial Reform, passed by the legislature in 2003, empowered CISA to engage in “enhanced” asset management procedures and exercise trustee functions when administering contracts (World Bank 2003).

Prior to disposal, CISA required financial institutions to certify that they carried out all necessary steps for recovery and, if necessary, that they had initiated appropriate administrative actions against all parties responsible for the deterioration in asset quality (CONPES 2007).

CISA reached agreements with the debtors of Bancafé, Granahorrar, BCH, and Banco del Estado in order to resolve their credit situations. For some debtors, CISA attempted to arrange a debt restructuring based on the debtor’s ability to pay. The restructuring arrangements varied across debtors, as CISA could offer a debtor the opportunity to deliver a property with a lower value than that of the outstanding loan. However, CISA did not have a one-size-fits-all formula for debt restructuring, and debtors that did not comply with debt restructuring or repayment faced more severe legal proceedings or saw their properties repossessed. Once those loans were managed through debt restructuring plans that corresponded to the debtors’ payment ability, CISA offered them for private sale or to investors who specialized in distressed debt (Gonzalez 2000).  

CISA auctioned the last of the NPL portfolios on June 15, 2007, for a nominal amount of COP 2.6 trillion. The auction was conducted as a one-offer, winner-take-all event at which the minimum base price for the NPLs was determined by the possibility of recovery (BNA 2007; Dow Jones 2007). The government would decline to sell if the offers did not reach this reference price (Dow Jones 2007). A number of global investment banks, including Lehman Brothers, Morgan Stanley, Deutsche Bank, and a consortium made up of Citigroup and Merrill Lynch, presented offers (Reuters 2007).

CISA continues to operate as of the writing of this case, though its mandate and objectives are no longer focused on resolving bad debt from the 1998–1999 financial crisis. In a report published in 2007, the National Council for Economic and Social Policy (CONPES) recommended that CISA transfer its profits to Fogafín by October 2007 and restructure under the Ministry of Finance and Public Credit by December of that same year. CONPES also requested that the Ministry of Finance and Public Credit establish an “adequate” corporate governance structure under which CISA could continue to operate after its crisis operations wound down, beginning in the first quarter of 2008 (CONPES 2007).