Fitch: COFAC Resumes Activities Following Central Bank Suspension.

NEW YORK -- The reopening of Cooperativa Nacional de Ahorro y Credito (COFAC) on March 15 marked a milestone for the Uruguayan financial system. The entity's operations were suspended for only seven days, during which time it formulated a capitalization plan that obtained acceptance from 75% of its depositors with balances over US$15,000.

Following the suspension of COFAC on March 4, Fitch downgraded its international long-term rating to 'D' and its national long-term rating to 'D(ury)'. Fitch will revise those ratings in the short term following a thorough analysis of COFAC's financial profile and prospects following the capitalization and restructuring of its liabilities. It is likely that COFAC will suffer a reduction in the size of its operations in the near term as a result of the suspension, and its ability to rebuild its business over time will depend to a large extent on the loyalty of its members.

The brief suspension period was the result of the prompt collaborative efforts of both the Central Bank of Uruguay (BCU) and the Parliament, as well as the support of COFAC by its shareholders. BCU allowed COFAC to reopen, although it imposed new, more stringent regulatory requirements on the institution. At the same time, the Parliament approved a law that allowed COFAC to quickly reach an agreement with its depositors. The orderly and transparent handling of the intervention limited the potential contagion on other cooperatives, which is notable given the still fragile state of the Uruguayan financial system following the last crisis.

COFAC proposed a capitalization plan to its depositors with the prior approval from its regulators that called for the compulsory capitalization of a portion of deposits over US$15,000, excluding checking account balances, as follows: 12% of deposits between US$15,000 and US$25,000 and 26% of deposits over US$25,000. In addition, the uncapitalized portion of these deposits was restructured with gradually increasing quarterly amortizations. The measure affected nearly 4,000, mainly institutional investors, a relatively small proportion of COFAC's total depositor base (122,000 clients).

COFAC has been allowed to operate without changes in its license but will be subject to greater supervision. The new requirements imposed on COFAC include a capital injection of US$40 million, achieved through the capitalization of deposits, maintenance of a 15% risk-weighted capital ratio, additional liquidity reserves, and sizable reductions in its cost structure and personnel. The latter has already been agreed upon with the union. COFAC has also agreed to increase the activities carried out in local currency (Uruguayan pesos) as opposed to the U.S. dollar.