Uruguayan Non-Performing Portfolio Purchase Scheme

The CBU purchased non-performing loans from five small- to medium-sized banks that had failed, with the issuance of bonds and write-off of previous financial assistance, and then assisted in the sale of the banks to foreign financial institutions (Pérez-Campanero and Leone 1998). This operation is the focus of this case study, as it was intended to remove problematic loans from the banking sector to prevent financial instability.

A second type of operation, which is not the focus of this case study, functioned instead as a solution to the CBU’s shortage of foreign reserves. Under this operation, the CBU used promissory notes to purchase portfolios with at least two-thirds of the loans classified as good quality and, in return, banks lent foreign reserves to the CBU.^FThe CBU could have potentially raised foreign reserves through a sale of its gold, but it appears that foreign banks, specifically Citibank and Bank of America, pushed for the implemented operation. Citibank and Bank of America were also negotiating Uruguay’s external debt at the same time, which Pérez-Campanero and Leone point out as suspicious and possibly the reason for the structure of this operation (Pérez-Campanero and Leone 1998). Although the CBU bought portfolios with some non-performing loans, that was not the sole purpose of this operation, but rather a bargaining chip. Foreign banks, specifically Citibank and Bank of America, were the primary sellers of these portfolios, at a disproportionate rate to their involvement in the Uruguayan banking sector (Pérez-Campanero and Leone 1998).

Vaz (1988) states that the CBU utilized Decreto-Ley No. 15322, passed in September 1982, as ex post facto justification for the portfolio purchase scheme, since the first bank intervention occurred in April 1982. In this new law on financial regulation, the CBU is allowed to sell bonds as well as promissory notes to financial institutions under its lender-of-last-resort authority (Asamblea General de Uruguay 1982).

The Parliament, comptroller, and the courts all initiated investigations into the legality of the portfolio purchase scheme. The CBU’s lawyers claimed that the pre-existing law was vague on purpose, which encouraged the CBU to enjoy widespread powers (Vaz 1988). It is unclear if the investigations resulted in any tangible results or punishments.

Since the CBU assumed the non-performing loan portfolios onto its balance sheet rather than create a separate asset management company, there do not appear to be any special powers involved in this scheme.

The CBU struggled to recover a significant portion of the non-performing assets likely as a result of this lack of special powers to address delinquency. However, as loan recovery stagnated and debt burdens increased, the Uruguayan government responded with the Domestic Debt Refinancing Law in November 1985, which sought to alleviate the debt burdens of viable firms and allow for the rescheduling of debt to allow for more borrowing. The law created the Financial Analysis Commission, which served as the authority in classifying and evaluating debtors under the new law. The commission had the power to liquidate assets if the debtor became delinquent for over six months, as well as the ability to halt dividends until the debt was reduced by two-thirds. The commission also determined if a debtor qualified as a viable firm and was thus eligible for the automatic refinancing provisions included in the Domestic Debt Refinancing Law (Pérez-Campanero and Leone 1998).

The CBU intended the non-performing portfolio purchase scheme as a method to avoid a direct intervention into the failed banks (Pérez-Campanero and Leone 1998).

Many of the newspapers and magazines reporting on the portfolio purchase scheme are no longer in publication and do not have available digitized archives. However, Pérez-Campanero and Leone (1998) cite heavily from local newspapers, which seemed to report detailed information on the announcement of the scheme and its progress. Pérez-Campanero and Leone note that the CBU stopped releasing data on loan recovery efforts on November 11, 1984. Since the CBU simply took the non-performing portfolios onto its balance sheet, there is a lack of transparency into the accounting for individual loans and recovery process.

The CBU preferred the structure of the portfolio purchase paired with the sale of the failed banks to direct interventions by the central bank. The chosen approach allowed the CBU to maintain some level of control and prevent further panic because the sales happened on a case-by-case basis, rather than having to schedule the direct intervention of the banks at the same time. Additionally, this strategy allowed the CBU to spread out the losses of the intervention across several years on its balance sheet, as well as recoup the financial assistance provided to the insolvent banks prior to the intervention (Pérez-Campanero and Leone 1998).

The portfolios involved in this operation routinely changed hands within the government, since the CBU did not have the manpower or technical ability to deal with such large and complex portfolios. The CBU transferred the administration of its private sector loan portfolio, including the purchased non-performing assets, to the BROU, a state-owned bank, in 1988. Parliamentary and judicial investigations into the takeover deals occurred due to “irregularities” and the unique structure of the program; however, the outcome of such investigations was unclear (Pérez-Campanero and Leone 1998).

The portfolio purchase scheme did not limit the amount of assets that the CBU could assume, since the CBU assumed the entire non-performing portfolios of the banks on a case-by-case basis. In total, the CBU assumed $416 million in loan portfolios from the five failed banks (Pérez-Campanero and Leone 1998).

The CBU funded the portfolio purchase scheme through the issuance of bonds and promissory notes. Additionally, the CBU wrote off previous financial assistance provided to the failed banks in the form of loans (Pérez-Campanero and Leone 1998).

The five failed commercial banks did not comprise a significant share of the banking sector, which explains why the CBU did not believe the situation warranted a direct intervention (Banda 1990). See Appendix A for information on each bank intervention.

The CBU purchased the non-performing portfolios from the five failed local banks prior to their sale and did not appear to define what they considered eligible to be included in the non-performing portfolios (Pérez-Campanero and Leone 1998). There does not appear to be further information on the makeup and composition of the loan portfolios bought by the CBU.

The CBU issued bonds and promissory notes, denominated in U.S. dollars, to pay for the acquired portfolios. The bonds issued by the CBU had a seven-year maturity, two-year grace period, and an interest rate of one and a half points above LIBOR. Additionally, the CBU wrote off $105 million in outstanding loans it had previously provided the failed local banks in an attempt to resolve their insolvency (Pérez-Campanero and Leone 1998).

The CBU used long-term dollar debt to purchase portfolios of non-performing loans partially denominated in pesos, which the CBU defended this decision by claiming that allowed the CBU to spread the monetary effects over several years and that banks refused to hold long-term peso debt. The president of the CBU said that offering a cash payment instead of long-term dollar debt would have just led to widespread purchase of dollars (Pérez-Campanero and Leone 1998).

It is unclear how the CBU determined the pricing of the portfolios purchased from the failed banks (Pérez-Campanero and Leone 1998).

The CBU did not anticipate having as much difficulty recovering the loans in the portfolio as it did, which led to greater costs to the CBU. Several measures were taken in April 1984 to improve the recovery of assets in the loan portfolios. The government established the National Office of Asset Recovery to streamline the recovery process. Additionally, borrowers, regardless of which currency the debts were denominated in, were split into two categorizations: high-standard and low-standard borrowers. In order to be classified as a high-standard borrower, a borrower had to have paid at least 60% of interest accrued in six months of 1983 and would have paid 60% of the interest for the whole year of 1983 by May 15, 1984 (Pérez-Campanero and Leone 1998).

High-standard borrowers received several benefits, with the first being a write-off of 20% (for local currency borrowers) and 40% (for foreign currency borrowers) of interest accrued in 1983. Second, the maturity periods were extended. Third, high-standard borrowers in local currency could convert their outstanding debt into indexed debt at a four percent interest rate, with the adjustment factor being the lower of the change in exchange rate or inflation rate. Finally, high-standard borrowers in foreign currency could similarly convert their outstanding debts into local-currency indexed debt, under the same conditions as the borrowers in local currency (Pérez-Campanero and Leone 1998).

All borrowers that made a payment 180 days before the due date, if this occurred before September 30, 1984, were eligible to receive a write-off equivalent to the prepayment amount, for up to 25% of the debt outstanding before the prepayment. If the prepayment occurred after September 30, 1984, borrowers were eligible for a similar benefit, except the write-off could only equal 15% of the debt outstanding (Pérez-Campanero and Leone 1998).

Although in-depth public data was not available on individual loan recovery, Pérez-Campanero and Leone (1998) state that it is likely the CBU wrote off a sizeable portion of the loan portfolio every year as an operating loss.

The CBU did not announce an intended end date for the disposal of the portfolios acquired from the five failed local banks.