Our senior associate in the Corporate and Business Group, Macarena Waidele, spoke with LexLatin about the implications, benefits, and challenges of the proposed capital markets and financing reform bill.
Chile is poised to undertake its most significant reform in 16 years with three specific objectives: to restore the liquidity and depth of its stock market, which were lost following pension withdrawals in the wake of the COVID-19 pandemic; to strengthen mortgage financing to facilitate access to housing; and to address the accumulated regulatory backlog, which has discouraged new issuances, initial public offerings, and investments.
With the capital markets and financing reform bill, also known as MK IV, the country aims to open up financing to small, medium-sized, and innovative companies through the capital markets—which are currently concentrated on large corporations—while reducing dependence on external financing and strengthening the Chilean economy’s capacity to absorb external shocks.
This initiative, which was preceded by other reforms (MK I, MK II, and MK III, from 2001, 2007, and 2010, respectively), enables the repo market for pension funds, making it easier for investors to obtain liquidity without being forced to liquidate assets during times of stress, in addition to creating a streamlined ecosystem for startups and a secondary market for mortgage financing.
Key Changes in MK IV
Roberto Guerrero, a corporate partner at Cuatrecasas in Santiago, states that the MK IV bill represents the most comprehensive reform of the Chilean capital markets since the MK I, MK II, and MK III initiatives, as it simultaneously addresses financial, corporate, tax, and market infrastructure issues.
In his view, the most significant aspects and changes in the reform bill are:
- The creation of the National Housing Fund (FONAVI), aimed at developing a secondary mortgage market to expand access to housing credit and improve its terms.
- The creation of the Voluntary Housing Savings Program (AVV), with a government subsidy designed to facilitate savings for a down payment on a first home.
- The modernization of the issuance and financing regime for medium-sized companies, including mini-bonds, specialized stock market segments for emerging companies, and regulatory simplifications for issuers.
- The relaxation of the tax regime applicable to bonds, stocks, and investment funds, eliminating requirements or barriers to liquidity and financing for smaller companies.
- The incorporation of the squeeze-out mechanism, the admission of multiple-voting shares, the relaxation of requirements for the repurchase of treasury stock, and the reduction of corporate quorums, bringing Chilean regulation in line with standards observed in several developed markets.
- Legal recognition of the business judgment rule regarding the liability of directors of corporations.
- Various measures to attract foreign investors and consolidate Chile’s position as a regional financial hub.
Referring to FONAVI, Macarena Waidele, a senior associate in az’s Corporate and Business Group, explains that by allowing originators to transfer mortgage loans to this agency, regulatory capital is freed up, which could expand their capacity to grant new loans.
In addition, FONAVI—which will be managed by BancoEstado—is expected to be able to acquire or finance mortgage assets and issue debt instruments, thereby attracting long-term private investment.
Capital Flows and Tax Incentives
The bill, which was submitted by the Executive Branch to the National Congress in September, seeks not only to stimulate investment but also to transform Chile into a cross-border hub capable of connecting global capital with local and regional assets through sophisticated financial instruments.
For Ignacio Delpino, a partner at DLA Piper – Chile, the most significant aspect is that MK IV allows capital flows to move in both directions.
“Foreign capital, products, and managers gain access to the Chilean market: Foreign ETFs could qualify under Article 107 of the Income Tax Law (LIR), and the relaxation of the maximum conventional tax rate opens the door to direct lending, subordinated debt, and mezzanine financing. At the same time, investment management and advisory services provided from Chile can compete regionally.”
The proposed amendment to Article 107 would replace, for certain shares, the requirement for listing on a stock exchange with a minimum free-float of 15 percent—that is, at least that percentage must be held by non-controlling shareholders. According to Waidele, the objective is to allow shares of less liquid companies to qualify for the higher tax treatment provided for in the law, without having to meet the transaction threshold.
Also with regard to taxation, the bill provides that Article 104 of the Income Tax Law would eliminate, for the instruments covered (bonds, debentures, and other publicly offered debt securities issued in Chile, including those registered under the simplified regime), the requirement for a minimum holding period of one year, replacing the statutory interest rate with a market rate and maintaining coupon payments at least once a year. In addition, it would eliminate the 4% withholding tax on interest, with different treatment for residents and nonresidents.
Chile as a Regional Investment Hub
Doing away with rules designed for traditional credit—which hinder sophisticated financing arrangements between professional parties—and ensuring that Chile participates effectively in international financial services networks are two of the structural issues Chile aims to resolve through the reform under discussion.
Jorge Timmermann, a partner at DLA Piper’s Santiago, Chile, office, believes that relaxing the maximum rate facilitates the entry of private credit funds, infrastructure funds, and international financiers, and allows Chilean companies and projects to access risk structures other than bank credit.
“MK IV recognizes that a fund can be managed in Chile, have a manager in New York, invest in Latin American assets, and be distributed to investors in multiple jurisdictions. The goal is for Chile to also serve as a platform from which regional investments can be structured, managed, and distributed.”
Regarding liquidity, the attorney highlights that MK IV enables transactions that are currently not possible—for example, allowing a bank to structure repos with pension funds using self-securitized bonds as collateral. However, he cautions that its implementation will require guidelines from the Superintendency of Pensions.
In terms of market depth, he notes that relaxing the maximum conventional rate broadens the risk spectrum that the market can finance. Thus, when the mezzanine rate is lower than the project’s return, the sponsor can allocate less of its own equity and finance more projects with the same amount of capital.
However, he believes that, from a comprehensive perspective, market depth should not be measured solely by the volume of trading in Chile, but rather by the ability to connect local risk with international capital and for intermediaries based in the country to participate in cross-border transactions.
In Guerrero’s view, if they function as expected, measures such as greater participation by foreign investors through the elimination of tax and administrative barriers, deeper liquidity in the stock market by making it easier to acquire shares for one’s own portfolio, and the development of a more efficient secondary market for negotiable mortgage-backed securities, among other financial instruments, should increase both the trading volume in the capital market and the diversity of issuers and investors participating in it.
The Corporate Dimension of the Reform
MK IV brings Chile into alignment with the standards of the Organization for Economic Cooperation and Development (OECD) and, at the same time, opens an essential doctrinal debate regarding corporate governance.
The initiative incorporates the business judgment rule (BJR), as well as concepts such as squeeze-outs and multiple-voting shares, which provide greater flexibility in control structures and strategies for the exit of shareholders.
“Some of the corporate measures, especially those related to multiple voting rights and the relaxation of quorum requirements, will likely spark a doctrinal debate on the balance between market efficiency and the protection of minority shareholders,” warns Roberto Guerrero, a partner at Cuatrecasas in Santiago.
For his part, Delpino sees two dimensions:
- In market practices: enabling repo transactions between banks and pension funds using self-securitized bonds brings Chile closer to standards where collateral circulates efficiently among institutional counterparties. “The same applies to the distinction between loans that require strong legal protection and transactions between sophisticated counterparties, where mezzanine debt serves a specific economic function,” he notes.
- In regulatory architecture: modern financial activity is cross-border and modular; the administrator, portfolio manager, custodian, distributor, investor, and assets may be located in different jurisdictions—as is the case, for example, in Luxembourg and Ireland, which have built global fund industries based on this logic. “As proposed, MK IV could allow a Chilean asset management firm to use specialized international managers, creating efficient platform and sub-advisory models,” the specialist maintains.
Now then, how can the local market be made more competitive?
“The focus is on combining supervisory adjustments with regulatory simplifications aimed at reducing access costs, along with measures to facilitate foreign investor participation, such as simplifying the process for obtaining a RUT and providing VAT exemptions for certain financial services provided to non-residents,” emphasizes the senior associate at az.
Authorization for Pension Funds
There are several beneficiaries of the reform:
- those seeking to finance a first home, as well as lenders and investors participating in the mortgage market;
- startups and innovative early-stage companies;
- junior mining exploration projects, whose stage of development may prevent them from meeting financial and operational requirements designed for mature companies or make compliance disproportionately costly;
- medium-sized companies that could use the simplified debt regime;
- local and foreign investors, for whom the tax changes and improved access to financial instruments are intended.
Guerrero refers to fund managers and the financial industry, noting the reduction of certain regulatory burdens, greater operational flexibility, and openness to new international financial services markets. In addition, he highlights foreign investors—due to the simplification of tax and administrative requirements for investing in Chile—and the equity capital market—given the incentives for controlling shareholders to admit new shareholders to the shareholder base of publicly traded companies and to acquire shares issued by the company itself.
Pension funds deserve special attention due to their central role in the Chilean capital market, whose liquidity was affected by the three extraordinary withdrawals of pension savings approved between 2020 and 2021.
The proposed legislation would allow them to engage in repo transactions (the sale of instruments under a repurchase agreement to obtain temporary liquidity) and reverse repo transactions (the purchase of instruments under a resale agreement to invest excess cash using those instruments as collateral).
In addition, they could invest in funds linked to housing finance.
“However, the bill would limit repurchase agreement transactions to highly liquid debt instruments with low credit risk, subject to other safeguards,” Waidele notes.
Chile’s Challenge
Providing medium-sized companies with access to the stock market—as other countries in the region have done—stands out as one of the most transformative aspects of the bill, according to the Cuatrecasas partner:
“Currently, the Chilean market is heavily concentrated on large companies, while medium-sized companies rely primarily on banks.”
Hence, the intention is for companies that today can only finance themselves through bank loans to also be able to access institutional savings and the stock market, thereby reducing their financing costs and expanding their growth options.
“As part of the proposal, the bill amends the Securities Market Law so that an offering can be made without registration in the Securities Registry, through an entry in a special registry. At the same time, the information required is limited to the minimum necessary to assess risk and return,” explains the senior associate at az.
Both this provision and the one regarding the creation of a junior segment for innovative companies and mining exploration firms—with simplified requirements and tax benefits for certain investors—will depend on the regulations issued by the CMF, the stock exchange’s bylaws, and the other rules set forth in the bill. And, in particular, on whether the cost savings will be sufficient for these companies to view the securities market as a real alternative to bank credit, as the attorney points out.
Delpino asserts that MK IV can build a more continuous financing ladder, but the most interesting aspect is cross-border.
“The goal should not only be for a medium-sized Chilean company to issue debt more cheaply in Chile, but also to access capital options beyond the domestic market: regional debt funds, international managers, and family offices can significantly expand the financing base.”
As an example, he refers to mini-bonds, which, in his view, are more likely to gain traction if they are acquired by specialized funds that are part of regional private credit strategies managed from Chile or other jurisdictions.
“I believe the real challenge will be for Chile not merely to open its market to the outside world, but to use that openness to integrate Chilean assets and companies into international capital markets,” he says.
