A Q&A guide to lending and taking security in Argentina. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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After Argentina failed to pay its sovereign debt in December 2001, lending business in the public and private sectors declined significantly and remained at a low level for the next nine years. The debt securities market started to grow by the end of 2010 and first months of 2011, but this upward trend ended when the stock markets fell as a result of the debt crisis in Europe.
Real estate includes:
Land (including chattels permanently attached to land).
Mines, which become real estate once certain conditions are met (including measuring the mine and publishing notices). Mine ownership rights and liens are recorded in a separate governmental registry. Mines do not include oil and gas reserves, which are not considered real estate.
The most common forms of security are:
Usufructs (the assignment of use and enjoyment of property).
Assignments in trust.
Mortgages, however, are used in nearly all real estate transactions.
Security over real estate is created by executing a deed between the title holder (borrower) and lender before a notary public. It is only enforceable against third parties when the deed is recorded with the real estate or mining registry of the local jurisdiction where the real estate is located.
Tangible movable property includes:
Trading goods or spare stock (inventory).
Aircrafts and ships.
Ordinary commercial pledges can be used over movable tangible assets. Otherwise, the form of security depends on the asset:
Vehicles, machinery and inventory. The forms of security taken are:
the registered pledge (prenda con registro), the most common form of pledge, which is only perfected when it is registered with the relevant governmental registry. The collateral does not have to be held by the creditor or a custodian for the creditor's account. Registered pledges can only be created for the benefit of certain lenders, including licensed financial institutions;
the floating pledge (prenda flotante) is a form of pledge over inventory, which allows the borrower to use the collateral. The pledge attaches to the inventory when a default or event of default occurs.
Aircraft and ships. There are special mortgages covering debt connected to aircrafts (hipoteca aeronautica) and ships weighing more than ten tons (hipoteca naval). The registered pledge is used as security over debt connected to ships weighing less than ten tons.
Ordinary commercial pledges over movable tangible assets are created and perfected as soon as the pledge agreement is executed and collateral is delivered to the creditor. No formality is required.
Registered pledges and special mortgages (see above, Common forms of security) are created and are binding once a security agreement between the borrower and lender is executed. Special mortgages can be in the form of either public deeds or documents with notarised signatures. However, for small ships, the registered pledge must be executed in a form supplied by the governmental registry and the signatures must be notarised. All special securities and registered pledges are perfected when they are recorded at the relevant registry (the vehicles and registered pledge registry, the naval registry or the aircraft registry).
The main financial instruments over which security is granted are share and debt securities (both in certificated and dematerialised form). In practice, the issuance, ownership rights and liens are recorded in a shares registry held by the issuer, or a third party. Shares cannot be issued in bearer form that is, where physical possession is the sole evidence of ownership.
Ordinary pledges are the most popular form of security (see Question 3, Common forms of security).
Pledges are created by executing a written agreement between the title holder of the collateral and the lender.
Pledges become enforceable against issuers and third parties once recorded with the share or debt security registry.
The most common types of claims and receivables over which security is granted are:
Debt rights under loan agreements or other contracts.
The most common forms of security granted over claims and receivables are:
Assignments in trust to a third party trustee or lender.
Pledges and assignments of receivables are created after all of the following occur:
Agreement between the claim holder and lender.
Documentation of the claim in an agreement or invoice.
Delivery of the document to the lender.
They are perfected when the creation of the security is notified in writing to the debtor. No formality is required for this notification, however, the security only becomes enforceable in respect of third parties if the notice to the debtor is made by means of a public act (acto público). A public act is usually regarded as (but not limited to) when a notice is made through a notary public.
The transfer of cheques or promissory notes for collateral purposes does not require notice to the payer, but only an endorsement on each cheque or promissory note.
The most common forms of security over cash deposits are:
Pledging the bank accounts of borrowers.
Depositing cash with a trustee for the benefit of the lender.
Intellectual property includes:
The most common form of security is a pledge.
A pledge is created through agreement between the title holder and lender and delivery of the title certificate issued by the relevant registry to the lender. Generally, no formality is required, but the national intellectual property registry requires notarised signatures. The pledge becomes enforceable against third parties as soon as it is recorded in the appropriate registry.
Future assets (except ships for which a construction contract has already been signed and recorded) cannot be pledged or mortgaged. However, they can be assigned to a trustee or lender for collateral purposes.
For the purposes of clarity, collateral must generally be precisely individualised to give certainty as to whether or not the asset is subject to security. This requirement is strictly applied for mortgages and pledges. The exception to this rule is the floating pledge on trading stock or inventory (see Question 3, Common forms of security).
Assets subject to public service licensees, which are essential for rendering the relevant public service to users, cannot be offered as security. Examples include:
Natural gas transmission firms or distributors.
Toll road operators.
Releases are generally completed and perfected according to the same formalities with which they were created. (For example, if the security was recorded with a registry, its release must also be recorded.) A termination agreement is usually required, especially by corporate borrowers.
For the assignment or pledge of receivables and other claims, if the claim remains outstanding, it is necessary to send a new notice to the debtor with the same formalities to perfect the release.
The form of security depends on the circumstances (such as the existence or not of a parent company guarantee). Taking security over the assets of an SPV is considered much less risky than a charge over shares. Creating security over specific assets is more expensive than creating charges on shares. In project finance, the lender takes security over the assets and shares of the project company.
Sale and leaseback is used very rarely in Argentina because:
Commercial real estate tenants can terminate leases early at any time and for any reason under public policy laws.
The cost is particularly high.
Factoring receivables is implemented through an assignment agreement. The main problems of factoring receivables on a large scale include:
Logistics (as formal notice must be given to each assigned debtor).
The process is time consuming.
Since factoring assignments need to be notified in writing to the debtor, they only become enforceable against third parties if notification is made by means of a public act (see Question 5, Formalities).
Securitisation structures do not require notification to the assigned debtor through a public act. However, the receivables subject to securitisation must meet certain conditions (for instance, assigned debtors must waive their statutory right to be notified in writing) and the securities must be both:
Registered with the Argentine Securities Regulator (Comisión Nacional de Valores).
Listed in an Argentinean stock exchange.
Cheques or promissory notes can be factored by means of an endorsement and no notice to the debtor is required. This is not a common practice because the lender will be unable to prove their claim against the borrower if the original cheque issuer becomes bankrupt, because the lender is not the holder of the claim underlying the cheque or the note.
Hire purchase is rarely practiced in Argentina for real estate transactions, but is sometimes used as an alternative form of financing for vehicle and machinery purchases. The lender must also ensure that the borrower has third party liability insurance.
Retention of title is very rarely used for unregistered tangible assets because, under Argentine civil laws, the holder of tangible property is the assumed owner. Proving otherwise in court takes time and is costly.
Guarantees are commonly used in Argentina. They are created by an agreement between the lender and the guarantor. No formalities are required.
There are no laws restricting financial assistance.
Although there is no clear corporate benefit test under Argentine law, corporate benefit principles set out in the Companies Act No. 19,550 must be carefully observed during the creation of security and guarantees.
For example, securities and guarantees created to secure obligations of affiliates, when the guarantor is not a parent of the affiliated obligor, will not usually meet the corporate benefit test and may not be enforceable.
Loans to directors must be consistent with ordinary corporate benefit principles (see above, Corporate benefit).
There are no specific statutes on usury. This area is governed by general principles of law and court precedents, which set limits on interest chargeable. The usual limits currently applied by the courts for local currency financings are 30% each year or 2.5 times the rate charged by state-owned banks.
Furthermore, application of the limits can vary depending on the identity of the borrower (retailer, corporate body and so on). Depending on the facts, corporations might be charged more than retail outlets.
Foreign exchange control laws, which are contained in the regulations of the Argentine Central Bank, must be carefully observed. For instance, Argentine non-bank guarantors are generally unable to wire-transfer payments abroad in connection with loans made to foreign entities.
A lender cannot be liable under environmental laws for the actions of a borrower, security provider or guarantor.
Contractual subordination of debt is possible and very common. It can be achieved by including a provision in the credit documentation stating:
A particular debt has a lower priority than one or more other obligations.
The circumstances in which the subordination will operate (such as bankruptcy liquidation).
Contractual subordinations are enforceable in bankruptcy liquidation proceedings.
Structural subordination is not common, but can be achieved through contractual subordination.
Terms in intercreditor arrangements are similar to those in syndicated loans or club deals in the UK and US. These arrangements can include, amongst others:
Share payment provisions.
Provisions that require the approval of majority of lenders (for the purpose of amendments, waivers, event of default declaration, enforcement, and so on).
Debt is traded in Argentina primarily by securitisation with institutional or public investors, or by assignment. Perfecting the transfer of securities and guarantees is generally costly and time consuming.
The agent concept is recognised in Argentina. A facility agent is entitled to enforce rights on behalf of other syndicate lenders in the Argentine courts.
The trust concept is recognised in Argentina. A security trustee created under the law of another country can enforce its rights in the Argentine courts.
There are no statutory rules governing the circumstances in which a lender can enforce its loan, guarantee or security interest. Events of default can include all kind of events, like:
Failure to make payments under a loan or other unrelated payments.
Technical defaults, except for filing requirements related to the petition and ruling of in-court re-organisation or bankruptcy liquidation proceedings (see Question 25).
The appropriate method of enforcement depends on the type of security interest. Enforcement is usually done by public or private auction, or private sale, depending on the collateral offered or the specific market available to place the relevant asset. The disposition must be made at a market or fair price, so the debtor's or guarantor's right to receive the balance of proceeds is not affected. Holders of a mortgage are prohibited from keeping, instead of selling, the collateral.
There is a statutory out of court re-organisation proceeding known as an out of court preventative agreement (acuerdo preventivo extrajudicial) (APE). The debtor and a majority of unsecured creditors must first agree on a payment plan. Once the court confirms that this agreement complies with the law, the payment plan is binding on all unsecured creditors (including lenders). The APE is not binding on secured lenders (or lenders secured by third party guarantees) and does not prevent them from enforcing their interests. Interest usually continues to accrue on debts subject to re-organisation procedures.
The filing of in-court re-organisation proceedings (concurso preventivo) by a debtor automatically stays all claims from unsecured creditors, including lenders under a loan. Payment plans agreed in the context of these proceedings are binding to all unsecured creditors. All interests stop accruing from the date of filing, except when the debt is secured with a mortgage or a pledge. Payment plans are neither binding nor affect lenders under loans secured with security interests granted by the borrower, except:
Any foreclosure process is stayed by the re-organisation proceeding's filing.
The claim and its security interests must be proved.
The foreclosure process may continue once the claim has been proved.
A bankruptcy liquidation (quiebra) ruling automatically stays all claims from unsecured creditors, including lenders under a loan. All interests stop accruing from the date of the ruling, except when the debt is secured with a mortgage or a pledge. Regarding loans secured with security interests granted by the borrower:
Any foreclosure process is stayed by the bankruptcy ruling.
The claim and its security interests must be proved.
The foreclosure process may continue once the claim has been proved.
Certain transactions that occurred during the suspension period (período de sospecha) may be considered unenforceable regarding the bankruptcy and creditors by the bankruptcy court. Transactions subject to this rule are:
Businesses concluded without consideration to the debtor.
Pre-payments made while the original payment dates were scheduled to occur on or after the bankruptcy ruling.
Mortgages, pledges or other payment priority created or conceded in respect of obligations, which are either:
not yet due;
originally unsecured; or
without this kind of priority.
Transactions that caused a loss to the creditors when the relevant counterparty knew that the debtor had already became insolvent.
The suspension period starts on the date that the debtor became insolvent and ends on the date of the bankruptcy ruling. The starting date of the period may not exceed two years prior to the ruling.
Creditors are generally paid in the following order once the borrower becomes insolvent:
Creditors holding a security interest. This priority applies to the proceeds from the disposition of the collateral, subject to certain statutory claims including:
constructors of the collateral otherwise known as "builders' lien";
employees (only with respect to inventory of trading goods and raw materials and equipment); and
taxes and tariffs payable in connection with the collateral.
Costs in connection with:
the conservation, administration and liquidation of the assets of the bankruptcy; and
fees and costs associated with the bankruptcy proceedings (like receivers and counsel fees).
Statutory claims, which mainly includes:
certain employee-related claims;
social security contributions; and
taxes or tariffs owed to the government.
This kind of situation rarely arises due to the practice in Argentina. In the unlikely event that lenders holding the same security interest over the collateral do not agree on the priority, the remaining proceeds would be distributed proportionally among them.
If a security interest has not been validly perfected, the security holder will be treated as an unsecured creditor for all purposes.
There are generally no restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders, except for a strict foreign exchange controls regime (see Question 31).
The controls on the disbursement of proceeds (inflows) and principal and interest payments (outflows) include:
All amounts drawn must be transferred to Argentina and converted to local currency.
Principal payments are prohibited during the first year from each disbursement.
Generally, no principal pre-payments can be made, except within one year preceding the original payment date.
Generally, only bank guarantors are able to make payments from Argentina when they are securing the debt of foreign parties which are not established in Argentina.
Loans must meet certain conditions, which depend on:
the identity of the lender. (Certain export agencies, development banks and multilateral credit organisations are exempted from the 30% retention on disbursements mentioned below);
the purpose of the loan; and
the maturity of the loan.
If they do not meet these conditions:
30% of the disbursement must be retained by a local bank for one year;
no use can be made of these funds; and
the borrower is not entitled to interest during this period.
The amount of stamp duty payable is prescribed by each local authority. The rate in the City of Buenos Aires is 0.8% on the principal sum loaned. If tax has been paid for the loan agreement, then estimated fees, guarantees and promissory notes are not subject to stamp duty.
Registration fees only apply to the registration of a security interest (such as a mortgage on real estate property) and vary depending on the registry.
Notaries are only required for the execution or registration of a security interest (such as a mortgage on real estate property). There are no fixed tariffs, so fees can be bargained freely.
Enforcement requires the payment of an upfront fee before the filing of a complaint. In the City of Buenos Aires this fee is 3% of the claimed amount.
Loan agreements, security interests and guarantees may be legally documented without paying stamp duty.
However, this cannot be used for promissory notes and security interest documents requiring governmental registration such as a mortgage or registered pledge and is of very limited use in finance transactions.
There are no relevant proposals in this field.
Professional qualifications. Argentina, 1995
Areas of practice. Banking; securities; corporate.