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The Role of Debt Contracts in Chilean Corporate Governance

The Role of Debt Contracts in Chilean Corporate Governance

On 10 March 2017, Franco Acchiardo Olivos, partner of our Corporate Law/M&A area, together with co-author Tomás Kubick Orrego, attorney of the law firm Guerrero Olivos, presented before the Evaluation Commission of the Center for Corporate Governance of the Pontifical Catholic University of Chile, Faculty of Law, the advances of their project The Role of Debt Contracts in Chilean Corporate Governance in the framework of the competitive funding of 2015 granted by the referred Center.

In the referred research, the authors explore the distinct ways in which the positive and negative obligations, called covenants in Anglo-Saxon practice and locally present in debt contract related to bonds issuances, are used in Chile as a tool to help creditors and debtor companies manage the agency conflict created as a consequence of the company financing. This conflict is explained by comparing the interests of the parties: on one hand, the creditor is seeking that its resources are employed efficiently for the development of the corporate purpose, assuring the payment of the sum loaned with interest, and on the other hand, the debtor seeks the greatest degree of discretionality and autonomy for the use and destination of funds.

In the opinion of the co-authors, covenants, loan interest and real and personal guarantees, direct and by third persons – all normal clauses in debt contracts – have been converted over years of Chilean corporate governance practice into tools that permit the parties to channel the referred agency conflict, maximizing the interests at play, without meddling excessively in the financed entity, thereby avoiding any adverse effects on corporate governance.

Through the empirical analysis of debt contracts entered into by public corporations listed in the Securities Registry of the Superintendency of Securities and Insurance (Superintendencia de Valores y Seguros (“SVS”)) and the SVS General Rule N° 30, of 10 November 1989, the authors seek to determine which are the clauses that identify the most used covenants in Chile, how such agreements are reflected in transaction costs and financial indicators or ratios of the financed companies, and finally, what are the effects on Chilean corporate governance looking at comparative experience.