Garrigues behind covid-19 Central Bank credit programme in Chile
Garrigues (Chile) has helped the country’s Central Bank create a new credit package worth some US$24 billion to help commercial banks strengthen their liquidity and to continue to grant loans to companies during the covid-19 pandemic.
Garrigues worked with the Central Bank to design the credit programme to make it easily accessible for banks seeking the funding. This involved choosing the best financial instrument through which to grant the credit to banks, such as bonds or loans. The deal closed on 6 May.
The credit package consists of two parts. The first is a special credit line designed to increase the banks’ ability to lend to companies (referred to as FCIC). Commercial banks that want to benefit from the credit line can borrow up to 3% of their base capital – which is the value of a bank’s assets once their debts are deducted.
The second part is a liquidity credit line (referred to as LCL). With this, banks are entitled to borrow no more than the value of their Chilean pesos reserves. The credit enables commercial banks to increase their liquidity, allowing them to meet their financial obligations, such as outstanding debts or regular payments, on time.
Both parts of the credit programme can be accessible for up to four years, depending on demand from banks, and whether banks intend to grant loans to small and medium-sized enterprises (SMEs). Each credit line is given to banks at a 0.5% interest rate. “The more money banks lend, the more they can get from the Central Bank facility,” says Garrigues partner Pedro García Morales, who advised the Central Bank.
García says that the credit line has been created at a pinnacle time for the Chilean economy, which is facing a hard time due to the covid-19 pandemic. “It’s a critical time for the economy in Chile, and Chilean firms and businesses, both now and after the pandemic, will need enormous resources,” he says. “The effects of the outbreak are seismic, so this work was really essential.”
The credit line is one of several measures issued by the Chilean and many other central banks in the region to provide liquidity and support lending, as the global economy takes a hit due to the outbreak of covid-19, which has shut down businesses and left many unemployed. Earlier this month, the Chilean Central Bank requested a US$23.8 billion credit facility from the IMF. It also announced it intended to extend its services to financial institutions other than banks – such as insurance firms and venture capital businesses – to better manage and mitigate the financial impact of covid-19.
Counsel to Central Bank
In-house - Juan Pablo Araya, Mauricio Álvarez and Andrés Söchting
Partner Pedro Garcia and associates Antonio Morales, Daniel Hernandez and Esteban Orhanovic