Filed pursuant to Rule 424(b)(2)
Registration No. 333-142898

(To Prospectus dated May 14, 2007)

 

US$400,000,000

 

 

 

Bancolombia S.A.

 

          % Subordinated Notes due 2017

 

We are offering US$400,000,000 of our  % subordinated notes due 2017. The notes will mature on          , 2017. Interest is fixed at an annual rate of  % and is payable every six months on           and           of each year, beginning          , 2007. The notes will not be subject to any redemption prior to the maturity date.

 

The notes will be our unsecured subordinated obligations and will rank junior to all of our existing and future senior obligations and will rank senior only to our capital stock and any other instrument that may qualify as Regulatory Capital-Tier One Capital for purposes of Colombian Banking Laws, if any, and which is expressly or effectively subordinated to the notes. The notes will not be guaranteed by our subsidiaries and will not be entitled to any sinking fund.

 

We have applied to list the notes on the New York Stock Exchange (the “NYSE”). Currently, there is no public market for the notes.

 

Investment in the notes involves risks. See “Risk factors” beginning on page S-11 of this prospectus supplement to read about certain risk factors you should consider before investing in the notes.

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus supplement and accompanying prospectus. Any representation to the contrary is a criminal offense.

 

THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS CONSIDERED ESSENTIAL IN ORDER TO ALLOW AN ADEQUATE EVALUATION OF THE INVESTMENT BY POTENTIAL INVESTORS. THE NOTES HAVE BEEN AUTOMATICALLY REGISTERED IN THE REGISTRO NACIONAL DE VALORES Y EMISORES (THE COLOMBIAN NATIONAL REGISTRY OF SECURITIES AND ISSUERS). SUCH REGISTRATION DOES NOT CONSTITUTE AN OPINION OF THE SUPERINTENDENCIA FINANCIERA DE COLOMBIA (THE COLOMBIAN “SUPERINTENDENCY OF FINANCE” OR “SFC”) WITH RESPECT TO APPROVAL OF THE QUALITY OF THE NOTES OR OUR SOLVENCY. THE NOTES MAY NOT BE PUBLICLY OFFERED OR SOLD IN THE REPUBLIC OF COLOMBIA (“COLOMBIA”).

 

 

We expect that delivery of the notes will be made to purchasers in book-entry form through The Depository Trust Company on or about          , 2007.

 

Sole Global Coordinator

UBS Investment Bank

 

 

Joint Book-Running Managers

 

Prospectus Supplement dated          , 2007

 

 

 

TABLE OF CONTENTS

 

Prospectus Supplement

 

 

 

Prospectus

 

 

 

i

 

This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering. The second part is the accompanying prospectus, which describes more general information, some of which may not apply to this offering. If the description of the offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement.

 

You should rely only on the information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus and in any free writing prospectus filed with the Securities and Exchange Commission (the “SEC”). This prospectus supplement contains the terms of this offering. This prospectus supplement, or the information incorporated by reference in the accompanying prospectus, may add, update or change information in the accompanying prospectus. If information in this prospectus supplement, or the information incorporated by reference in the accompanying prospectus, is inconsistent with the accompanying prospectus, this prospectus supplement, or the information incorporated by reference in the accompanying prospectus, will apply and will supersede that information in the accompanying prospectus.

 

In this prospectus supplement and the accompanying prospectus, unless the context otherwise requires, references to “Bancolombia,” the “Bank,” “we,” “us” or “our” mean Bancolombia S.A. and its consolidated subsidiaries taken as a whole. In addition, all references in this prospectus supplement and the accompanying prospectus to “pesos” and “Ps” are to the currency of Colombia and references to “U.S. dollars” and “US$” are to the currency of the United States of America. Also, as used herein, the term “billion” means one thousand million, or 1,000,000,000.

 

No dealer, salesperson or other individual has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this prospectus supplement or the accompanying prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by Bancolombia, the underwriters or any other person. Neither the delivery of this prospectus supplement and the accompanying prospectus nor any sale made hereunder or thereunder shall under any circumstances create an implication that there has been no change in the affairs of Bancolombia since the date hereof or thereof or that the information contained herein or therein is correct as of any time subsequent to its date. Our business, financial condition, results of operation and/or prospects may have changed since those dates.

 

Bancolombia accepts responsibility for the information contained in this prospectus supplement and the accompanying prospectus.

 

The distribution of this prospectus supplement and the accompanying prospectus and the offer or sale of the notes in some jurisdictions may be restricted by law. Persons into whose possession this prospectus supplement and the accompanying prospectus come are required by us and the underwriters to inform themselves about and to observe any applicable restrictions. This prospectus supplement and the accompanying prospectus do not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.

 

ii

 

This prospectus supplement and the accompanying prospectus are part of a registration statement on Form F-3 filed by us with the SEC under the U.S. Securities Act of 1933, as amended (the “Securities Act”). We are also subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), applicable to a foreign private issuer and, accordingly, file or furnish reports, including annual reports on Form 20-F, reports on Form 6-K, and other information with the SEC. You may read and copy any documents filed by us at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings with the SEC are also available to the public through the SEC’s Internet site at http://www.sec.gov and through the NYSE located at 20 Broad Street, New York, New York 10005.

 

The SEC’s rules allow us to “incorporate by reference” information into this prospectus supplement. This means that we can disclose important information to you by referring you to another document that has also been filed with the SEC. Any information referred to in this way is considered part of this prospectus supplement from the date we file the document incorporated by reference with the SEC. Any reports filed by us with the SEC after the date of this prospectus supplement and before the date that the offering of the securities by means of this prospectus supplement is completed or terminated will be incorporated by reference into this prospectus supplement and will automatically update and, where applicable, supersede any information contained in this prospectus supplement or incorporated by reference in this prospectus supplement (other than, in each case, documents or information deemed to have been furnished and not filed in accordance with SEC rules).

 

We incorporate by reference into this prospectus supplement the following documents or information filed by us with the SEC:

 

 

The preceding list supersedes and replaces the documents listed in the accompanying prospectus under the heading “Incorporation of certain information by reference.”

 

We will provide without charge to each person, including any beneficial owner, to whom this prospectus supplement is delivered, upon his or her written or oral request, a copy of any or all documents referred to above which have been or may be incorporated by reference into this prospectus supplement.

 

You may request a copy of these filings by writing or telephoning us at our principal executive offices at the following address:

 

Bancolombia S.A.

Calle 50 No. 51-66

Medellin, Colombia

Attention: General Secretary

Telephone Number: (574) 510-8896

 

or at the address of the trustee of the notes:

 

The Bank of New York

101 Barclay Street, 4E

New York, New York

Attention: Global Finance Americas

 

iii

 

This prospectus supplement translates certain peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. The Federal Reserve Bank of New York does not report a rate for pesos. Unless otherwise indicated, such peso amounts have been translated at the rate of Ps 2,238.79 per US$ 1.00, which corresponds to the tasa representativa del mercado (“representative market rate”) calculated on December 29, 2006, the last business day of the year. The representative market rate is computed and certified by the Superintendency of Finance on a daily basis and represents the weighted average of the buy/sell foreign exchange rates negotiated on the previous day by certain financial institutions authorized to engage in foreign exchange transactions (including us). The Superintendency of Finance also calculates and certifies the average representative market rate for each month for purposes of preparing financial statements, and converting amounts in foreign currency to pesos. Such conversion should not be construed as a representation that the peso amounts correspond to, or have been or could be converted into, U.S. dollars at that rate or any other rate.

 

On April 30, 2007, the representative market rate was Ps 2,104.16 per US$ 1.00. On May 11, 2007, the representative market rate was Ps 2,041.39 per US$ 1.00.

 

The following table sets forth the high and low peso per U.S. dollar exchange rates for the last six months:

 

Recent exchange rates of U.S. Dollars per Peso

 

 

Source:  Superintendency of Finance.

 

The following table sets forth the average peso/ U.S. dollar representative market rate for each of the five most recent financial years, calculated by using the average of the exchange rates on the last day of each month during the period.

 

Peso/U.S.$1.00 Representative Market Rate

 

 

Source:  Superintendency of Finance.

 

iv

 

This prospectus supplement and the accompanying prospectus (including the documents incorporated by reference) contain statements which may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Words such as “anticipate,” “believe,” “estimate,” “approximate,” “expect,” “may,” “intend,” “plan,” “predict,” “target”, “forecast,” “guideline,” “should,” “project” and similar words and expressions are intended to identify forward-looking statements. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements.

 

Information regarding important factors that could cause our actual results to differ, perhaps materially, from those in our forward-looking statements appear in a number of places in this prospectus supplement and the documents incorporated in this prospectus supplement by reference and include, but are not limited to:

 

 

Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or revise any forward-looking statements after the date on which they are made in light of new information, future events and other factors.

 

v

 

We are a Colombian company, a majority of our directors and management and certain of the experts named in this prospectus are residents of Colombia, and a substantial portion of their respective assets are located in Colombia.

 

We have been advised by Gómez-Pinzón Linares Samper Suárez Villamil Abogados S.A. that Colombian courts determine whether to enforce a U.S. judgment predicated on the U.S. securities laws through a procedural system known under Colombian law as exequatur. Colombian courts will enforce a foreign judgment, without reconsideration of the merits, only if the judgment satisfies the requirements of Articles 693 and 694 of Colombia’s Código de Procedimiento Civil (Code of Civil Procedure), which provides that the foreign judgment will be enforced if:

 

 

The United States and Colombia do not have a bilateral treaty providing for automatic reciprocal recognition and enforcement of judgments in civil and commercial matters. The Colombian Supreme Court has generally accepted that reciprocity exists when it has been proven that either a U.S. court has enforced a Colombian judgment or that a U.S. court would enforce a foreign judgment, including a judgment issued by a Colombian court. However, such enforceability decisions are considered by Colombian courts on a case-by-case basis.

 

vi

 

Summary

Ø	Ps 36,462,754 million in total assets;
Ø	Ps 24,869,858 million in total net loans and financial leases;
Ø	Ps 24,237,791 million in deposits; and
Ø	Ps 3,420,985 million in shareholders’ equity.

 

S-1

 

S-2

 

S-3

 

S-4

		For the year ended
		December 31, 2006
		(in thousands of US$)
CONSOLIDATED INCOME STATEMENT DATA
Net income		US$	63,560
CONSOLIDATED BALANCE SHEET DATA
Total assets		US$	3,687,067
Loan portfolio, net			2,443,781
Deposits from clients			2,362,080
Total shareholders’ equity			431,709

 

S-5

Issuer		Bancolombia S.A.
Securities offered		US$400,000,000 in an aggregate principal amount of  % subordinated notes due 2017.
Maturity		, 2017.
Interest		% payable semi-annually on           and           of each year, beginning on          , 2007.
Ranking		The notes will be unsecured subordinated obligations. In the event of our bankruptcy, liquidation, or dissolution under Colombian law, the notes will rank:
		Ø junior in right of payment to the payment of all our present or future senior indebtedness;
		Ø pari passu with all our other present or future subordinated indebtedness; and
		Ø senior in right of payment only to our capital stock and to any other instruments that may qualify as Regulatory Capital-Tier One Capital for purposes of Colombian Banking Laws, if any, and which is expressly or effectively subordinated to the notes.
Optional Redemption		None.
Merger and Sales of Assets		The indenture governing the notes will contain a covenant that limits our ability to merge or consolidate with another entity or sell, lease or transfer substantially all of our properties or assets to another entity. See “Description of the notes—Mergers, Consolidations, Etc.”
No Acceleration of Notes		If we fail to make payment of principal of or interest on the additional amounts, if any, on the notes (and, in the case of payment of principal, such failure to pay continues for seven days or, in the case of payment of interest or additional amounts, such failure to pay continues for 30 days), each holder of the notes has the right to demand and collect under the indenture, and we will pay to the holders of the notes the applicable amount of such due and payable principal, accrued interest and additional amounts, if any, on the notes; provided, however, that to the extent that the Superintendency of Finance has taken possession of us in order to administer or liquidate us, under the Colombian bankruptcy laws, the holders of the notes would not be able to commence proceedings to collect amounts owed. There is no right of acceleration in the case of a default in any payment on the notes (whether when due or otherwise) or the performance of any of our other obligations under the indenture or the notes. Notwithstanding the immediately preceding sentence, the holders of the notes shall have the right to accelerate the payments due under the notes

 

S-6

		during the occurrence of an Event of a Default (as defined herein); provided that there shall have been a change, amendment or modification to the Colombian Banking Laws that would permit such right without disqualifying the Notes from Regulatory Capital—Tier Two Capital status and the holders exercise such right in accordance with applicable Colombian Banking Law. Subject to the subordination provisions of the notes, if any Event of Default occurs and is continuing, the Trustee may pursue any available remedy (excluding acceleration, except as provided herein) to collect the payment of principal and interest on the notes or to enforce the performance of any provision under the indenture. See “Colombian banking regulations—Bankruptcy considerations.”
Listing		We have applied to list the notes on the NYSE. Currently, there is no public market for the notes.
Use of Proceeds		The net proceeds from the offering will be used to purchase a loan portfolio from our subsidiary, Bancolombia Panama S.A.
		We expect that the issuance of the notes in this offering will improve our ratio of capital to risk weighted assets and strengthen our capital structure. See “Use of proceeds.”
Trustee		The Bank of New York.
Governing Law		New York.

 

S-7

 

S-8

		For the year ended										For the three month period ended
		December 31,				December 31,		December 31,		December 31,		March 31,		March 31,		March 31,
		2004				2005		2006		2006		2006		2007		2007
		(in millions of Ps and thousands of US$)(1)
CONSOLIDATED STATEMENT OF OPERATIONS:
Net interest income			Ps1,217,365			Ps2,049,810		Ps1,767,503		US$789,491		Ps458,144		Ps538,567		US$245,887
Net interest income after provisions			1,150,741			1,918,770		1,617,321		722,409		407,466		501,458		228,945
Net operating income			812,773			1,226,242		885,415		395,488		279,612		269,562		123,071
Income before taxes			817,488			1,224,396		924,409		412,906		281,881		283,274		129,331
Net income			Ps578,678			Ps946,881		Ps749,529		US$334,792		214,102		199,957		US$91,292
OTHER DATA (2)
Profitability ratios:
Net interest margin (3)			8.75	%		8.12%		6.19%		6.19%		6.61%		6.76%		6.76%
Return on average total assets (4)			3.62			3.30		2.31		2.31		2.78		2.28		2.28
Return on average shareholders’ equity (5)			32.14			31.49		22.10		22.10		25.11		22.06		22.06
Efficiency ratio:
Operating expenses as a percentage of interest, fees, services and other operating income			50.92	%		54.94%		64.37%		64.37%		55.91%		60.87%		60.87%
Capital ratios:
Period-ended shareholders’ equity as a percentage of period-end total assets			11.96			10.96		10.57		10.57		10.33		9.38		9.38
Period-end regulatory capital as a percentage of period-end risk-weighted assets (6)			13.44			10.93		11.05		11.05		12.66		11.14		11.14
Credit quality data:
Non-performing loans as a percentage of total loans (7), (10)			0.88	%		1.48%		1.36%		1.36%		1.56%		1.46%		1.46%
“C,” “D” and “E” loans as a percentage of total loans (9), (10)			3.86			3.38		2.54		2.54		3.11		2.69		2.69
Allowance for loan and accrued interest losses as a percentage of non-performing loans (10)			496.30			259.02		252.87		252.87		250.61		240.36		240.36
Allowance for loan and accrued interest losses as a percentage of “C,” “D” and “E” loans (9), (10)			113.47			113.59		135.06		135.06		125.80		130.50		130.50
Allowance for loan and accrued interest losses as a percentage of total loans (10)			4.37			3.84		3.43		3.43		3.92		3.50		3.50
Operating Data:
Number of branches (8)			377			678		701		701		680		703		703

(1)		Amounts stated in U.S. dollars have been translated at the rate of Ps 2,238.79 per US$1.00, which is the representative market rate calculated on December 29, 2006, the last business day of the year, or at the rate of Ps 2,190.30 per US$1.00, which is the representative market rate calculated on March 30, 2007, the last business day of the quarter, as applicable, both as reported by the Superintendency of Finance.
(2)		Ratios were calculated on the basis of monthly averages.
(3)		Net interest income divided by average interest-earning assets.
(4)		Net income divided by average total assets.
(5)		Net income divided by average shareholders’ equity.
(6)		For an explanation of risk-weighted assets and Technical Capital, see Item 4. “Information on the Company-B. Business Overview-B.7. Supervision and Regulation-Capital Adequacy Requirements” in our Annual Report which is incorporated by reference herein.
(7)		Non performing loans are small business loans that are past due 30 days or more, mortgage and consumer loans that are past due 60 days or more and commercial loans that are past due 90 days or more. (Each category includes financial leases).
(8)		Number of branches does not include branches of the Bank’s Subsidiaries.
(9)		See Item 4. “Information on the Company-E. Selected Statistical Information-E.3. Loan Portfolio-Classification of the Loan Portfolio and Credit Categories” in our Annual Report, which is incorporated by reference herein, for a description of “C”, “D” and “E” Loans.
(10)		In October 23, 2003, the Superintendency of Banking (now the Superintendency of Finance), through its External Circular 040 of 2003, modified the treatment of financial leases. Starting January 1, 2004, instead of recording financial leases as property, plant and equipment, companies must account for them in their loan portfolio.

 

S-9

As of the year ended											As of the three month period ended
		December 31,			December 31,		December 31,		December 31,		March 31,		March 31,		March 31,
		2004			2005		2006		2006		2006		2007		2007
		(in millions of Ps and thousands of US$)(1)
CONSOLIDATED BALANCE SHEET DATA
Loans and financial leases, net			Ps9,600,861		Ps17,920,370		Ps23,811,391		US$10,635,831		Ps18,365,410		Ps24,869,858		US$11,354,544
Investment securities, net			5,250,211		8,459,703		5,677,761		2,536,085		8,315,148		5,248,891		2,396,426
Other assets			2,628,057		4,423,444		4,999,544		2,233,145		4,284,405		6,344,005		2,896,409
Total Assets			17,479,129		30,803,517		34,488,696		15,405,061		30,964,963		36,462,754		16,647,379
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits			Ps11,862,116		Ps18,384,982		Ps23,216,467		US$10,370,096		Ps18,343,438		Ps24,237,791		US$11,065,968
Non-interest bearing			2,690,679		3,530,279		4,580,649		2,046,038		3,229,036		3,956,609		1,806,423
Interest bearing			9,171,437		14,854,703		18,635,818		8,324,058		15,114,402		20,281,182		9,259,545
Other liabilities			3,526,290		9,041,245		7,625,617		3,406,133		9,422,199		8,803,978		4,019,531
Total liabilities			15,388,406		27,426,227		30,842,084		13,776,229		27,765,637		33,041,769		15,085,499
Shareholders’ equity			2,090,723		3,377,290		3,646,612		1,628,832		3,199,326		3,420,985		1,561,880
Total liabilities and shareholders’ equity			17,479,129		30,803,517		34,488,696		15,405,061		30,964,963		36,462,754		16,647,379

For the year ended

December 31,

December 31,

December 31,

December 31,

2004

2005

2006

2006

(in millions of Ps and thousands of US$)(1)

CONSOLIDATED INCOME STATEMENT DATA

Net income

Ps642,126

Ps891,121

Ps941,183

US$420,398

(1)		Amounts stated in U.S. dollars have been translated at the rate of Ps 2,238.79 per US$1.00, which is the representative market rate calculated on December 29, 2006, the last business day of the year, or at the rate of Ps 2,190.30 per US$1.00, which is the representative market rate calculated on March 30, 2007, the last business day of the quarter, as applicable, both as reported by the Superintendency of Finance.

 

S-10

 

Investing in the notes involves risks. You should consider carefully the information set forth in this section and all the other information provided to you or incorporated by reference in this prospectus supplement and the accompanying prospectus before deciding whether to invest in the notes.

 

RISKS RELATING TO OUR BUSINESS

 

The quality of the Bank’s loan portfolio and of other assets may decline.

 

The continuous growth in both family and corporate income levels in Colombia, as well as the profitability in the prices of goods and interest rates, have triggered a significant annual growth in the Bank’s loan portfolio (including the Bank’s mortgage loan portfolio) of approximately 32% as of December 31, 2006. Unforeseen changes in the income levels of the Bank’s borrowers, increases in the inflation rate or an unexpected increase in interest rates could have a negative effect on the quality of the Bank’s loan portfolio, causing the Bank to increase provisions for loan losses and resulting in reduced profits. In particular, the Bank might not be able to maintain its current level of asset quality and credit risk in the future. Furthermore, if the Bank successfully increases the participation of consumer, mortgage and small business credits in its loan portfolio, it may experience detrimental changes in its credit risk levels.

 

The Bank’s concentration in and reliance on short-term deposits may increase its funding costs.

 

The Bank’s principal sources of funds are short-term deposits, checking accounts and savings accounts, each of which represented a share of 76.8%, 66.4% and 72.8% of total funds at the end of 2004, 2005 and 2006, respectively. Because the Bank relies primarily on short-term deposits for its funding, in the event of a sudden or unexpected shortage of funds in the Colombian banking system and money markets, the Bank might not be able to maintain its current level of funding without incurring higher costs or liquidating certain assets.

 

The Bank’s businesses rely heavily on data collection, processing and storage systems, the failure of which could materially and adversely affect the effectiveness of its risk management and internal control system as well as its financial condition and results of operations.

 

All of the Bank’s principal businesses are highly dependent on the ability to timely collect and process a large amount of financial and other information across numerous and diverse markets and products at its various branches, at a time when transaction processes have become increasingly complex with increasing volume. The proper functioning of financial control, accounting or other data collection and processing systems is critical to the Bank’s businesses and to its ability to compete effectively. A partial or complete failure of any of these primary systems could materially and adversely affect its decision making process, its risk management and internal control systems as well as the Bank’s ability to respond on a timely basis to changing market conditions. If the Bank cannot maintain an effective data collection and management system, its business operations, financial condition and results of operations could be materially and adversely affected.

 

The Bank is also dependent on information systems to operate its website, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. The Bank may experience operational problems with its information systems as a result of system failures, viruses, computer “hackers” or other causes. Any material disruption or slowdown of its systems could cause information, including data related to customer requests, to be lost or to be delivered to the Bank’s clients with delays or errors, which could reduce demand for the Bank’s services and products and could materially and adversely affect the Bank’s results of operations and financial position.

 

S-11

 

Risk factors

 

 

Adverse economic and political conditions in Colombia may adversely affect the Bank’s financial condition and results of operations.

 

The Bank is a Colombian financial institution, and most of the Bank’s operations, property and customers are located in Colombia. As a result, the quality of its assets, financial condition and results of operations depend primarily on macroeconomic and political conditions prevailing in Colombia. Colombia is subject to political, economic and other uncertainties, including renegotiation, or nullification of existing contracts, currency exchange restrictions and international monetary fluctuations. Furthermore, changes in Colombia’s monetary, exchange and trade policies could affect the overall business environment in Colombia, which would impact the Bank’s financial condition and results of operations. The Government’s recent action increasing the deposit requirement with respect to foreign currency borrowings in order to manage monetary policy may have a negative impact on the Bank’s financial condition and results of operation. For example, the Central Bank could raise interest rates, which could negatively affect the Bank’s assets and restrict their growth. Increases in exchange rates could negatively affect borrowers’ foreign currency position, while setbacks in trade relations with Venezuela and Ecuador, as well as any difficulties with the approval of the Free Trade Agreement with the United States, could affect the financial position of the Bank’s larger customers. Any of these events could have a negative impact on the Bank’s financial condition.

 

Furthermore, decreases in the growth rate in the Colombian economy, periods of negative growth or increases in inflation or interest rates could result in lower demand for the Bank’s services and products, lower real pricing of its services and products, or cause it to shift to lower margin services and products. Because a large percentage of the Bank’s costs and expenses are fixed, it may not be able to reduce costs and expenses upon the occurrence of any of these events and its profit margins could suffer as a result.

 

In addition adverse economic and political conditions in other countries where the Bank has subsidiaries may adversely affect the Bank’s financial condition and results of operations.

 

Colombian government policies will likely significantly affect the economy and, as a result, the Bank’s business and financial condition.

 

The Colombian government (excluding departmental and municipal governments, the “Government”) has historically exercised substantial influence over the Colombian economy, and its policies are likely to continue to have an important effect on Colombian entities (including the Bank), market conditions, prices and rates of return on Colombian securities (including the Bank’s securities). The Bank’s business and financial condition could be adversely affected by changes in policy, or future judicial interpretations of such policies, involving exchange controls and other matters such as currency devaluation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia. Future developments in Government policies could impair the Bank’s business or financial condition or the market value of its securities.

 

Colombia has experienced several periods of violence and instability, and such instability could affect the economy and the Bank.

 

Colombia has experienced several periods of criminal violence over the past four decades, primarily due to the activities of guerilla groups and drug cartels. In response, the Government has implemented various security measures and has strengthened its military and police forces by creating specialized units. Despite these efforts, drug-related crime and guerilla activity continue to exist in Colombia. These activities, their possible escalation and the violence associated with them may have a negative impact on the Colombian economy or on the Bank in the future.

 

S-12

 

Risk factors

 

 

The administration of the president of Colombia, Alvaro Uribe, who was re-elected for the period from 2006 to 2010, is implementing a plan prioritizing the protection of civil rights and the strengthening of democratic authority. Nevertheless, the plan may not achieve its objectives and economic and social conditions could deteriorate in the future, giving rise to outflows of capital and a general devaluation of Colombian financial assets. The Bank’s business or financial condition, or the market value of the Bank’s securities and any dividends distributed by it, could be adversely affected by rapidly changing economic and social conditions in Colombia and by the Government’s response to such conditions. Moreover, additional deterioration in the economic and political situation of neighboring countries could affect national stability or the Colombian economy by disrupting Colombia’s diplomatic or commercial relationships with these countries.

 

Colombia’s economy remains vulnerable to external shocks that could be caused by significant economic difficulties experienced by its major regional trading partners or by more general “contagion” effects, which could have a material adverse effect on Colombia’s economic growth and its ability to service its public debt.

 

Emerging-market investment generally poses a greater degree of risk than investment in more mature market economies because the economies in the developing world are more susceptible to destabilization resulting from domestic and international developments.

 

A significant decline in the economic growth of any of Colombia’s major trading partners, such as the United States and Venezuela, could have a material adverse impact on Colombia’s balance of trade and adversely affect Colombia’s economic growth. The United States is Colombia’s largest export market. A decline in US demand for imports could have a material adverse effect on Colombian exports and Colombia’s economic growth, which would, in turn, have detrimental results on the business activities of the Bank. In addition, because international investors’ reactions to the events occurring in one emerging market country sometimes appear to demonstrate a “contagion” effect, in which an entire region or class of investment is disfavored by international investors, Colombia could be adversely affected by negative economic or financial developments in other emerging market countries. In the past, Colombia has been adversely affected by such contagion effects on a number of occasions, including following the 1997 Asian financial crisis, the 1998 Russian financial crisis, the 1999 devaluation of the Brazilian real and the 2001 Argentine financial crisis.

 

Similar developments can be expected to affect the Colombian economy in the future. Such a contagion effect could be expected to lower market prices of Bancolombia’s securities and threaten its liquidity, cause higher rates of past due loans in Bancolombia’s loan portfolios, lead to significant weaknesses in Bancolombia’s investment portfolio and diminish Colombia’s ability to make payments on its public debt (which represents a significant portion of Bancolombia’s investment portfolio).

 

The Bank may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose the Bank to additional liability.

 

The Bank is required to comply with applicable anti-money laundering, anti-terrorism laws and other regulations. These laws and regulations require the Bank, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. While the Bank has adopted policies and procedures aimed at detecting and preventing the use of its banking network for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures have in some cases only been recently adopted and may not completely eliminate instances where it may be used by other parties to engage in money laundering and other illegal or improper activities. To the extent the Bank may fail to fully comply with applicable laws and regulations, the relevant government

 

S-13

 

Risk factors

 

agencies to which it reports have the power and authority to impose fines and other penalties on the Bank. In addition, the Bank’s business and reputation could suffer if customers use the Bank for money laundering or illegal or improper purposes.

 

Any additional taxes resulting from changes to tax regulations or the interpretation thereof in Colombia could adversely affect the Bank’s consolidated results.

 

Uncertainty relating to tax legislation poses a constant risk to Colombian entities, like the Bank, and Colombian national authorities have levied new taxes in recent years. Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting stated expenses and deductions, and eliminating incentives and non-taxed income.

 

Additional tax regulations could be implemented that could require the Bank to make additional tax payments, negatively affecting its financial condition, results of operation and cash flow. In addition, either national or local taxing authorities may not interpret tax regulations in the same way that the Bank does. Differing interpretations could result in future tax litigation and associated costs.

 

Instability of Colombian banking laws and regulations could adversely affect the Bank’s consolidated results.

 

Changes in banking laws and regulations, or in their official interpretation, may have a material effect on the Bank’s business and operations. Since banking laws and regulations change frequently, their interpretation and, in particular, the manner in which these laws and regulations are applied to financial institutions like the Bank are continuously evolving. For example, on May 6, 2007, the Central Bank issued a resolution materially increasing the amount of a deposit that must be held in a reserve account with the Central Bank. Laws or regulations could be adopted, enforced or interpreted in a manner that has an adverse effect on the Bank’s business. In addition, banking laws or regulations may change in other countries where the Bank has subsidiaries, such as Panama, Puerto Rico and the Cayman Islands.

 

Colombian banking regulations, accounting standards and corporate disclosure differ from those in the United States.

 

While many of the policies underlying Colombian banking regulations are similar to those underlying regulations applicable to banks in other countries, including those in the United States, Colombian regulations can differ in a number of material respects from those other regulations. For example, capital adequacy requirements for banks under Colombian regulations differ from those under U.S. regulations.

 

The Bank prepares its annual audited financial statements in accordance with Colombian GAAP, which differs in significant respect to U.S. GAAP. Thus, Colombian financial statements and reported earnings may differ from those of companies in other countries in these and other respects. Some of the main significant differences affecting earnings and shareholders’ equity include the accounting treatment for restructuring, capitalization of foreign exchange gains (losses) on deferred costs, inflation accounting, deferred taxes and the accounting treatment for depreciation expense.

 

Moreover, under Colombian GAAP, allowances for non-performing loans are computed by establishing each non-performing loan’s individual inherent risk, using criteria established by the Superintendency of Finance that differs from that used under U.S. GAAP. See “Item 4 Information on the Company — E. Selected Statistical Information — E.4. Summary of Loan Loss Experience — Allowance for Loan Losses” in our Annual Report, which is incorporated by reference herein.

 

S-14

 

Risk factors

 

 

Although the Government has undertaken a review of present regulations relating to accounting, audit, and information disclosure, with the intention of conforming them to international standards and proposing pertinent modifications to Congress, current regulations continue to differ in certain respects from those in other countries. Accordingly, there may be less publicly available information about the Bank than is regularly published by or about U.S. issuers.

 

The Bank’s financial results are constantly exposed to market risk. The Bank is subject to fluctuations in interest rates and other market risks, which may materially and adversely affect its financial condition and results of operations.

 

Market risk refers to the probability of variations in the Bank’s net interest income or in the market value of its assets and liabilities due to interest rate volatility. Changes in interest rates affect the following areas, among others, of the Bank’s business:

 

 

Changes in short-term interest rates may affect the Bank’s net interest income, which comprises the majority of the Bank’s revenue.

 

Increases in interest rates may reduce the volume of loans the Bank originates. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets.

 

Increases in interest rates may reduce the value of the Bank’s financial assets. The Bank holds a substantial portfolio of loans and debt securities that have both fixed and floating interest rates. The market value of a security with a fixed interest rate generally decreases when the prevailing interest rates rise, which may have an adverse effect on the Bank’s earnings and financial condition. In addition, the Bank may incur costs (which, in turn, will impact its results) as it implements strategies to reduce future interest rate exposure. The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase due to a lag in the implementation of repricing terms.

 

Increases in interest rates may reduce gains or require the Bank to record losses on sales of its loans or securities.

 

The Bank’s loan and investment portfolios are subject to risk of prepayment, which could negatively affect its net interest income because the Bank would not be able to receive the interest income from the prepayment date to the maturity date.

 

The Bank’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases which reduces the weighted average lives of the Bank’s earning assets and adversely affects its operating results. The Bank would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage obligations, since prepayments could shorten the weighted average life of these portfolios, which may result in a mismatch in funding or reinvestment at lower yields.

 

S-15

 

Risk factors

 

 

The Bank is subject to concentration default risks in its loan portfolio. Problems with one or more of its largest borrowers may adversely affect its financial condition and results of operations.

 

The aggregate outstanding principal amount of the Bank’s 25 largest borrowing relationships, in a non consolidated basis, represented approximately 10.98% of its total consolidated loan portfolio as of December 31, 2006. Approximately 1.23% of the Bank’s total loan portfolio as of that date represented transactions with related parties. Problems with one or more of the Bank’s largest borrowers could materially and adversely affect its results of operations and financial position.

 

The Bank’s increasing focus on individuals and small and medium-sized businesses could lead to higher levels of non-performing loans and subsequent charge-offs.

 

As part of the Bank’s business strategy, it seeks to increase lending and other services to individuals and to small and medium-sized companies. Low to medium income individuals and small and medium-sized companies are, however, more likely to be adversely affected by downturns in the Colombian economy than are large corporations and high-income individuals. Consequently, in the future the Bank may experience higher levels of non-performing loans, which could result in higher provisions for loan losses. The levels of non-performing loans and subsequent charge-offs could be higher in the future.

 

As of December 31, 2004, 2005 and 2006, the Bank’s Retail and Small-and Medium-Sized Enterprises (SMEs) banking division represented 37%, 27% and 28%, respectively, of BC’s total loan portfolio.

 

The Bank’s heavy reliance in its investment portfolio on debt securities issued by the Colombian Government leaves it vulnerable to fluctuations in public debt valuations.

 

As of December 31, 2006, the Bank’s investment portfolio in Colombian debt securities valued at Ps 2,856,921 million, representing approximately 52% of the Bank’s total investment portfolio. In 2004 and 2005, investments in public debt securities represented 75.36% and 68.76%, respectively of Bank’s total investment portfolio. In 2006, following the increase in interest rates in foreign markets which in turn negatively impacted the market price of Colombia’s public debt securities, the Bank reduced the portion of public debt securities in its portfolio. However, the Bank’s investment portfolio still contains a significant amount of public debt securities, and, therefore, the Bank continues to be exposed to the possibility of non-payment by Colombia and could suffer future losses if the value of Colombian public debt securities on the secondary market decreases.

 

The Bank is exposed to risks associated with the mortgage loan market.

 

As a result of its merger with Conavi in 2005, the Bank acquired Conavi’s mortgage loan portfolio and became a significant player in Colombia’s mortgage loan market. With the launching in 2006 of the Casa Propia para Todos homeowner plan, the Bank became one of the leaders of such market and increased its mortgage loan market share (including securitized loans) from 18.9% as of December 31, 2005 to 23.9% as of December 31, 2006.

 

Colombia’s mortgage loan market is highly regulated and has historically been affected by various macroeconomic factors. Risks associated with this market to which the Bank is exposed include the risk of increases in interest rates that may reduce the volume of mortgage loans that the Bank originates. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased defaults in outstanding loans and deterioration in the quality of assets.

 

S-16

 

Risk factors

 

 

Increased competition and consolidation in the Colombian financial industry could adversely affect the Bank’s market share.

 

The Colombian financial system is highly competitive. Since the 1990s, when the Colombian financial market was deregulated and international capital flows resumed, there has been an ongoing process of financial system consolidation. The Bank expects this consolidation to lead to the creation of large local institutions and the possibility of foreign entities banks entering the market, presenting the risk that the Bank could lose a portion of its share in the industry affecting the Bank’s net interest margin.

 

The Bank and members of its senior management are defendants in several legal proceedings.

 

We are a party to lawsuits arising in the ordinary course of business. Litigation arising in the ordinary course of business, as well as the lawsuits and investigations described in our Annual Report incorporated by reference herein, under Item 8. “Financial Information—Consolidated Statements and Other Financial Information—Consolidated Financial Statements—Legal Proceedings,” can be expensive and lengthy. In addition, the Bank and its management, including the Bank’s current President and a Vice-President, are currently involved in several legal proceedings relating to the acquisition of its predecessor entity. An unfavorable resolution to any of the lawsuits or investigations could negatively affect the Bank’s reputation and the price of its outstanding securities including its equity securities and the notes. The negative publicity related to litigation matters may have a negative impact on the trading price of the notes and could ultimately negatively impact our financial results. See Item 8. “Financial Information—Consolidated Statements and Other Financial Information—Consolidated Financial Statements—Legal Proceedings” in our Annual Report incorporated by reference herein.

 

Our acquisition of Banagricola and future acquisitions and strategic partnerships may not perform in accordance to expectations or may disrupt our operations and hurt our profits.

 

An element of our business strategy is to identify and pursue growth-enhancing strategic opportunities. As part of that strategy, we acquired interests in various institutions during recent years. For example, on December 22, 2006, Bancolombia Panama, S.A., our affiliate, entered into a Stock Purchase Agreement with a group of shareholders of Banagricola to acquire a controlling stake of 52.9% and up to 100% of all issued and outstanding shares of Banagricola.

 

In 2006, we also acquired Factoring Bancolombia (formerly Comercia). In 2005, we completed the Conavi/Corfinsura merger including the integration process in areas such as operations, technology and commercial banking. For more information on these acquisitions and mergers, see Item 4.A. “Information on the Company—History and Development of the Company—Public takeover offers” and Item 4.A. “Information on the Company—History and Development of the Company—Recent Developments” in our Annual Report on Form 20-F incorporated by reference in this prospectus supplement.

 

The Bank will continue to actively consider other strategic acquisitions and partnerships from time to time. We must necessarily base any assessment of potential acquisitions and partnerships on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. The Banagricola acquisition, if and when consummated, and other future acquisitions, significant investments and alliances may not produce anticipated synergies or perform in accordance with our expectations and could adversely affect our operations and profitability. In addition, new demands on our existing organization and personnel resulting from the integration of new acquisitions could disrupt our operations and adversely affect our operations and profitability.

 

S-17

 

Risk factors

 

 

If the Bank is unable to effectively control the level of non-performing or poor credit quality loans in the future, or if its loan loss reserves are insufficient to cover future loan losses, the Bank’s financial condition and results of operations may be materially and adversely affected.

 

Non-performing or low credit quality loans can negatively impact the Bank’s results of operations and financial condition. The Bank might not be able to effectively control and reduce the level of the impaired loans in its total loan portfolio. In particular, the amount of the Bank’s reported non-performing loans may increase in the future as a result of growth in its total loan portfolio, including as a result of loan portfolios that the Bank may acquire through auctions or otherwise, or factors beyond the Bank’s control, such as the impact of macroeconomic trends and political events affecting Colombia or events affecting specific industries. In addition, the Bank’s current loan loss reserves may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the overall credit quality of its total loan portfolio. As a result, if the quality of its total loan portfolio deteriorates the Bank may be required to increase its loan loss reserves, which may adversely affect its financial condition and results of operations. Moreover, there is no precise method for predicting loan and credit losses, and loan loss reserves might not be sufficient to cover actual losses. If the Bank is unable to control or reduce the level of its non-performing or poor credit quality loans, its financial condition and results of operations could be materially and adversely affected.

 

If the Bank is unable to realize the collateral or guarantees securing its loans to cover the outstanding principal and interest balance of its loans, its financial condition and results of operations may be adversely affected.

 

As of December 31, 2006, 45% of the Bank’s loans and financial leases were secured by collateral or guarantees. The Bank’s loan collateral primarily includes real estate and other assets that are located in Colombia, the value of which may significantly fluctuate or decline due to factors beyond the Bank’s control, including macroeconomic factors and political events affecting the Colombian economy. An economic slowdown in Colombia may lead to a downturn in the Colombian real estate market, which may in turn result in declines in the value of the collateral, consisting primarily of real estate, securing many of the Bank’s loans to levels below the outstanding principal balance of such loans. Any decline in the value of the collateral securing the Bank’s loans may result in a reduction in the recovery from collateral realization and an impact in its results of operations and financial condition.

 

In addition, the Bank may face difficulties in enforcing its rights as a secured creditor. In particular, timing delays and procedural problems in enforcing against collateral provided, and local protectionism, may make foreclosures on collateral and enforcement of judgments in its favor difficult, and hence may result in losses, which could materially and adversely affect its results of operations and financial position.

 

As a result, any significant decline in the value of the collateral securing the Bank’s loans or deterioration of the economic condition of the guarantors of such loans or the Bank’s inability to enforce its rights as a secured creditor could materially and adversely affect its results of operations and financial position.

 

Operational Risks

 

The Bank businesses are dependant on the ability to process a large number of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee errors, failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure

 

S-18

 

Risk factors

 

of external systems. The Bank’s currently adopted procedures may not be effective in controlling each of the operational risks faced by the Bank.

 

The Bank is subject to credit risks with respect to its non-traditional banking businesses such as investing in securities and entering into types of derivatives transactions.

 

A portion of the Bank’s businesses are not in the traditional banking businesses of lending and deposit-taking and therefore expose it to credit risk.

 

Non-traditional sources of credit risk can, for example, arise from:

 

 

Any significant increases in exposure to any of these non-traditional risks could materially and adversely affect the Bank’s results of operations and financial position.

 

The failure to successfully implement and continue to upgrade the Bank’s credit risk management system could materially and adversely affect its business operations and prospects.

 

One of the principal types of risks inherent in the Bank’s business is credit risk. The Bank may not be able to, on a timely basis, upgrade its credit risk management system. For example, an important part of its credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a client. As this process involves detailed analyses of the client’s credit risk, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, the Bank’s employees may not always be able to assign an accurate credit rating to a client or credit risk, which may result in the Bank’s exposure to higher credit risks than indicated by the Bank’s risk rating system. The Bank may not be able to timely detect these risks before they occur, or due to limited resources or tools available to it, the Bank’s employees may not be able to effectively implement its credit risk management system, which may increase its exposure to credit risk. As a result, the Bank’s failure to implement effectively, consistently follow or continuously refine its credit risk management system may result in a higher risk exposure for the Bank, which could materially and adversely affect its results of operations and financial position.

 

The Bank is subject to market and operational risks associated with its derivative transactions, as well as structuring risks and the risk that its documentation will not incorporate accurately the terms and conditions of its derivatives transactions.

 

The Bank enters into derivative transactions primarily for hedging purposes and, to a lesser extent, on behalf of its customers. The Bank is subject to market and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder).

 

In addition, the market practice and documentation for derivative transactions is less well developed in Colombia than in other countries, and Colombian courts have limited experience in dealing with issues related to derivative transactions. Given that the derivatives market and related documentation are not

 

S-19

 

Risk factors

 

yet well developed in Colombia, there are structuring risks and the risk that the Bank’s documentation will not incorporate accurately the terms and conditions of derivatives transactions. In addition, the execution and performance of these types of transactions depend on the Bank’s ability to develop adequate control and administration systems, and to hire and retain qualified personnel. Moreover, the Bank’s ability to adequately monitor, analyze and report these derivative transactions depends, to a great extent, on its information technology systems. These factors may further increase the risks associated with these transactions and could materially and adversely affect the Bank’s results of operations and financial position.

 

The credit card industry is highly competitive and entails some risks. The Bank may have difficulties competing in this industry, and its success may depend significantly on its ability to grow organically or to strengthen alliances with its strategic partners.

 

The credit card business is subject to a number of risks and uncertainties, including the composition and risk profile of credit card customers. The success of the Bank’s credit card business will also depend, in part, on the success of the Bank’s product development, product rollout efforts and marketing initiatives, including the marketing of credit card products to existing retail and mortgage loan customers, and the Bank’s ability to continue to successfully target creditworthy customers.

 

As part of its credit card business, the Bank faces risks relating to the price of merchant fees. There has been an ongoing dispute in Colombia, between retailers and banks, regarding merchant fees. For example, the Superintendency of Commerce and Industry has issued resolutions related to Credibanco and Redeban, the entities that manage the credit card system in Colombia, in order to prevent an agreement on the prices of the merchant fees. As a result, the clearance fees among the banks and the fees collected from the customers have decreased. These types of disputes could result in a decrease in income from credit card merchant fees or could also lead to changes in commercial strategies that could impact the Bank’s financial results.

 

The increase of civil constitutional (acciones populares) and class actions against financial institutions may affect the Bank’s businesses.

 

Under the Colombian Constitution, individuals may initiate civil or class actions to protect their collective or class rights, respectively. During 2006, the aggregate number of such type of actions brought against Colombian financial institutions, including the Bank, has increased substantially. The great majority of such actions are related to fees, financial services and interest rates, and their outcome is uncertain. The number of such type of actions may continue to increase in the future and could significantly affect the Bank’s businesses.

 

Reductions in the Bank’s credit ratings would increase its cost of borrowing funds and make its ability to raise new funds, attract deposits or renew maturing debt more difficult.

 

The Bank’s credit ratings are an important component of its liquidity profile. Among other factors, its credit ratings are based on the financial strength, credit quality and concentrations in its total loan portfolio, the level and volatility of its earnings, its capital adequacy, the quality of management, the liquidity of its balance sheet, the availability of a significant base of core retail and commercial deposits, and its ability to access a broad array of wholesale funding sources. Changes in the Bank’s credit ratings would increase its cost of raising funds in the capital markets or of borrowing funds. The Bank’s ability to renew maturing debt may be more difficult and expensive. In addition, its lenders and counterparties in derivative transactions are sensitive to the risk of a rating downgrade.

 

S-20

 

Risk factors

 

 

The Bank’s ability to compete successfully in the marketplace for deposits depends on various factors, including its financial stability as reflected by the Bank’s credit ratings. A downgrade in its credit rating may adversely affect perception of the Bank’s financial stability and the Bank’s ability to raise deposits.

 

The Bank’s ability to maintain its competitive position depends mainly on its capacity to fulfill new customers’ needs through the development of new products and services and its ability to offer adequate services and strengthen its customers base through cross selling. Bank’s business will be affected if the Bank may not be able to maintain its current customers with efficient service’s strategies.

 

As the Bank expands the range of its products and services, some of which are at an early stage of development in the Colombian market, it will be exposed to new and potentially increasingly complex risks. The Bank’s employees and its risk management systems may not be adequate to handle such risks. Any or all of these factors, individually or collectively, could materially and adversely affect the Bank’s results of operations and financial position.

 

Any failure to effectively improve or upgrade the Bank’s information technology infrastructure and management information systems in a timely manner could adversely affect its competitiveness, financial condition and results of operations.

 

The Bank’s ability to remain competitive will depend in part on its ability to upgrade the Bank’s information technology infrastructure on a timely and cost-effective basis. The Bank must continually make significant investments and improvements in its information technology infrastructure in order to remain competitive. In particular, as the Bank continues to open new branches throughout Colombia, it needs to improve its information technology infrastructure, including maintaining and upgrading its software and hardware systems and its bank-office operations. The information available to and received by the Bank’s management through its existing information systems may not be timely and sufficient to manage risks or to plan for and respond to changes in market conditions and other developments in its operations. In addition, the Bank may experience difficulties in upgrading, developing and expanding its information technology systems quickly enough to accommodate its growing customer base. Any failure to effectively improve or upgrade the Bank’s information technology infrastructure and management information systems in a timely manner could materially and adversely affect its competitiveness, financial condition and results of operations.

 

The Bank is subject to Colombian regulatory inspections, examinations, inquiries or audits, and any future sanctions, fines and other penalties resulting from such inspections and audits could materially and adversely affect the Bank’s business, financial condition, results of operations and reputation.

 

The Bank is subject to comprehensive regulation and supervision by Colombian banking authorities. These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of its capitalization, organization and operations, including the imposition of anti-money laundering measures and the authority to regulate the terms and conditions of credit that can be applied by Colombian banks. Moreover, Colombian financial regulatory authorities possess significant powers to enforce applicable regulatory requirements in the event of the Bank’s failure to comply with them, including the imposition of fines, sanctions or the revocation of licenses or permits to operate its business. In the event the Bank encounters significant financial problems or becomes insolvent or in danger of becoming insolvent, Colombian banking authorities would have the power to take over the Bank’s management and operations.

 

S-21

 

Risk factors

 

 

Colombian banking and financial services laws and regulations are subject to continuing review and changes, and any such changes in the future may have an adverse impact on, among other things, the Bank’s ability to make and collect loans and other extensions of credit on terms and conditions, including interest rates, that are adequately profitable, which could materially and adversely affect its results of operations and financial position.

 

Future Colombian government restrictions on interest rates or banking fees could negatively affect the Bank’s profitability.

 

In the future, the Colombian Government could impose limitations or additional informational requirements regarding interest rates or fees. A portion of the Bank’s revenues and operating cash flow is generated by its consumer credit services and any such limitations or additional informational requirements could materially and adversely affect the Bank’s results of operations and financial position.

 

The Bank is subject to trading risks with respect to its trading activities.

 

The Bank’s trading income is highly volatile. The Bank derives a portion of its profits from its proprietary trading activities and any significant reduction in its trading income could adversely affect the Bank’s results of operations and financial position.

 

The Bank’s trading income is dependent on numerous factors beyond its control, such as the general market environment, overall market trading activity, interest rate levels, fluctuations in exchange rates and general market volatility. A substantial amount of its trading income has been derived from alternative investment strategies such as same-day foreign exchange trades and adjustable-rate bond instruments. A significant decline in the Bank’s trading income, or incurring a trading loss, could adversely affect its results of operations and financial position.

 

RISKS RELATING TO THE NOTES

 

It may be difficult to enforce your rights if we enter into a bankruptcy, liquidation or similar proceeding in Colombia.

 

The insolvency laws of Colombia may be less favorable to your interests than the bankruptcy laws of the United States, which laws affect the priority of creditors (secured or unsecured), the ability to obtain post-petition interest and the duration of insolvency proceedings. Your ability to recover payments due on the notes may be more limited than would be the case under U.S. bankruptcy law. The following is a brief description of certain aspects of insolvency laws in Colombia.

 

Your ability to enforce your rights under the notes may be limited if we become subject to the proceedings principally set forth in Decree 663 of 1993 and Decree 2211 of 2004, which proceedings establish the events under which the Superintendency of Finance may initiate a takeover or intervention (toma de posesión) proceeding either to administer the Bank or to liquidate it.

 

Under Colombian Banking Laws, financial institutions are subject to a special administrative takeover by the Superintendency of Finance in the event that the financial institution becomes insolvent.

 

The Superintendency of Finance can only take control of financial institutions due to the existence of some very strict and grave legal reasons. The following grounds for takeover are considered to be “automatic” in the sense that, if the Superintendency of Finance discovers their existence, the Superintendency of Finance is obligated to step in and take over the respective financial institution. These grounds are: (i) if the financial institution’s technical net worth falls below 40% of the legal minimum adequate capital required, or (ii) the expiration of the term of any present recuperation

 

S-22

 

Risk factors

 

programs or the non fulfillment of the goals set forth in said programs. Additionally, the Superintendency of Finance also conducts periodic visits to the financial institutions and as a consequence of these visits, said entity can impose capital or solvency obligations on the institutions without taking control of the financial institution.

 

Additionally, and subject to the approval of the Ministry of Finance, the Superintendency of Finance may, at its discretion, initiate intervention procedures if, among other reasons, the financial institution suspends the payment of its debts. Other causes for such intervention include: (i) refusal by the entity to present in duly form its files, accounting books and other documents required by the Superintendency of Finance, (ii) non-fulfillment of the orders and instructions issued by the Banking Superintendency; (iii) persistent violation of the by-laws or any law; (iv) persistent unauthorized or insecure management practices of business; and (v) net worth below the 50% of the subscribed capital.

 

A takeover by the Superintendency of Finance may have two different purposes: (i) to manage the financial institution, in which case the intervened entity will be allowed to continue its activities subject to the administration of the authorities or (ii) to liquidate the financial institution. The Superintendency of Finance must decide if it will either manage or liquidate the financial institution within the two months following the takeover.

 

In view of the broad discretionary powers of the Superintendency of Finance it is impossible to predict how long payments under the notes could be delayed and whether or to what extent you would be compensated for any delay.

 

Holders of notes will not have the right to accelerate the notes.

 

The holders of the notes have no right of acceleration in the case of a default in any payment on the notes, either when due or otherwise, nor will the Bank’s failure to perform its obligations under the Indenture or the notes provide the holder of the notes with a right of acceleration of the notes.

 

The holders will have no right to accelerate the payments due under the notes during an Event of Default unless there has been a change, amendment or modification to the Colombian Banking Laws that would allow such right without disqualifying the notes from Regulatory Capital—Tier Two Capital status. If any Event of Default occurs and is continuing, the Trustee may only pursue other available remedies, if any, excluding acceleration, to collect the payment of principal and interest on the notes or to enforce the performance of any provision under the indenture.

 

Because we are located in an emerging market country, any market for the notes may be adversely affected by economic and market conditions in other emerging market economies.

 

Colombia is generally considered by investors to be an “emerging market country,” and securities of Colombian issuers have been, to varying degrees, influenced by economic and market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reactions to developments in one country may materially affect the securities of issuers in other countries, including Colombia. The international financial and securities markets have exhibited volatility since October 1997, reflecting the risks created by weakness in global commodity prices and slowing global economic growth. Latin American countries, including Colombia, have generally responded to these external factors, including currency speculation, by widening or eliminating currency fluctuation bands, raising interest rates and tightening fiscal policies. We cannot assure you that events elsewhere that are unrelated to our financial performance, especially in other emerging market countries, will not adversely affect any market for the notes that may develop.

 

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Risk factors

 

 

We cannot assure you that an active trading market will develop for the notes.

 

Prior to this offering, there was no market for the notes. Although we plan to apply to list the notes in the NYSE, there is no guarantee that we will be able to list the notes. Even if your note is listed, there may be little or no secondary market for your note. Even if a secondary market for your note develops, it may not provide significant liquidity and we expect transaction costs would be high.

 

The underwriters have informed us that they intend to make a market in the notes after this offering is completed. The underwriters, however, may cease their market-making at any time without notice. The price at which the notes may trade will depend on many factors, including, but not limited to, prevailing interest rates, general economic conditions, our performance and financial results and markets for similar securities. Historically, the markets for debt such as the notes have been subject to disruptions that have caused substantial volatility in their prices. The market, if any, for the notes may be subject to similar disruptions which may have an adverse effect on the holders of the notes.

 

There are no restrictive covenants in the indenture for the notes limiting our ability to incur future indebtedness or complete other transactions.

 

The indenture governing the notes does not contain any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness, change of control, transactions with affiliates, incurrence of liens or the issuance or repurchase of securities by us or any of our subsidiaries. We therefore may incur additional indebtedness, including senior indebtedness, and engage in other transactions that may not be in the interests of the noteholders.

 

The ratings of the notes may be lowered or withdrawn depending on various factors, including the rating agency’s assessments of our financial strength and Colombian sovereign risk.

 

One or more independent credit rating agencies may assign credit ratings to the notes. The ratings address the timely payment of interest on each payment date. The ratings of the notes are not a recommendation to purchase, hold or sell the notes, and the ratings do not comment on market price or suitability for a particular investor. The ratings of the notes may not remain for any given period of time and may be lowered or withdrawn. A downgrade in or withdrawal of the ratings of the notes will not be an event of default under the indenture. The assigned ratings may be raised or lowered depending, among other things, on the rating agency’s assessment of our financial strength, as well as its assessment of Colombian sovereign risk generally.

 

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Use of proceeds

 

We estimate that our net proceeds from the sale of the notes in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately US$396 million.

 

We intend to use the net proceeds from the offering to purchase a loan portfolio from our subsidiary, Bancolombia Panama S.A. We expect that the issuance of the notes in this offering will improve our ratio of capital to risk weighted assets and strengthen our capital structure.

 

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Capitalization

 

The following table sets forth our consolidated Technical Capital (defined herein) as of March 31, 2007, and adjusted to give effect to issuance of the US$400,000,000 of notes offered hereby as if had occurred on March 31, 2007.

 

 

 

 

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Selected financial data

 

The selected consolidated financial data as of December 31, 2005 and 2006, and for each of the three fiscal years in the period ended December 31, 2006 set forth below has been derived from the Bank’s audited consolidated financial statements included in the Bank’s Annual Report on Form 20-F for the year ended December 31, 2006. The selected consolidated financial data as of December 31, 2002, 2003 and 2004, and for each of the two fiscal years in the period ended December 31, 2003 set forth below have been derived from the Bank’s audited consolidated financial statements for the respective periods, which are not included therein. The Bank’s consolidated financial statements for each period were prepared in accordance with Colombian GAAP. The selected consolidated financial data should be read in conjunction with the Bank’s consolidated financial statements, related notes thereto, and the report of the independent registered public accounting firm, included in the Bank’s Annual Report on Form 20-F for the year ended December 31, 2006.

 

 

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Selected financial data

 

 

 

 

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Selected financial data

 

 

 

S-29

 

COLOMBIAN BANKING REGULATORS

 

Pursuant to Colombia’s Constitution, Congress has the power to prescribe the general framework within which the Government may regulate the financial system. The governmental agencies vested with the authority to regulate the financial system are the Board of Directors of the Central Bank, the Ministry of Finance and Public Credit (“Ministry of Finance”) and the Superintendency of Finance.

 

Central Bank

 

The Central Bank exercises the customary functions of a central bank, including price stabilization, monetary policy, regulation of currency circulation, regulation of credit, exchange rate monitoring and management of international reserves. Its board of directors is the regulatory authority for monetary, currency exchange and credit policies, and is responsible for the direction of the Central Bank’s duties. The Central Bank also acts as lender of last resort to financial institutions.

 

Ministry of Finance and Public Credit

 

One of the functions of the Ministry of Finance is to regulate all aspects of finance and insurance activities.

 

As part of its duties, the Ministry of Finance issues decrees relating to financial matters that may affect banking operations in Colombia.

 

Superintendency of Finance

 

The SFC is the authority responsible for supervising and regulating financial institutions, including commercial banks such as BC, finance corporations, commercial finance companies, financial services companies and insurance companies. The SFC has broad discretionary powers to supervise financial institutions, including the authority to impose fines upon the institutions themselves, their directors and officers for violations of applicable regulations. The SFC can also conduct on-site inspections of Colombian financial institutions.

 

The SFC is also responsible for monitoring, and regulating the market for publicly traded securities in Colombia and for monitoring and supervising securities market participants, including the Colombian Stock Exchange, brokers, dealers, mutual funds, and issuers.

 

Financial institutions must obtain the prior authorization of the SFC before commencing operations.

 

REGULATORY FRAMEWORK FOR COLOMBIAN BANKING INSTITUTIONS

 

The basic regulatory framework of the Colombian financial sector is set forth in Decree 663 of 1993, modified among others, by Law 510 of 1999, Law 546 of 1999, Law 795 of 2003 and Law 964 of 2005. Laws 510 and 795 substantially amended the powers of the SFC to control, regulate and supervise financial institutions. Law 510 also streamlined the procedures for the Fondo de Garantías de Instituciones Financieras (“Fogafin”), the agency that insures deposits in financial institutions and provides credit and support to troubled financial institutions. The main purpose of Law 510 was to improve the solvency standards and stability of Colombia’s financial institutions, by providing rules for their incorporation, and regulating permitted investments of credit institutions, insurance companies and investment companies.

 

Law 546 of 1999 was enacted to regulate the system of long-term home loans. Afterwards, Law 795 was enacted to broaden the scope of activities that financial institutions can engage in, update

 

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Colombian banking regulations

 

regulations with the latest principles of the Basel Committee and increase the minimum capital requirements in order to incorporate a financial institution (for more information see “Minimum Capital Requirements” below). Law 795 further provided authority to the SFC to take precautionary measures, consisting mainly in preventive interventions with respect to financial institutions whose capital falls below certain thresholds. For example, in order to avoid a temporary take-over by the SFC, such financial institutions must submit to the SFC a restructuring program to restore their financial situation.

 

The SFC has authority to implement applicable regulations and, accordingly, issues from time to time administrative resolutions and circulars. By means of External Circular 007 of 1996 (as amended), the Superintendency of Banking (now SFC) compiled the rules and regulations applicable to financial institutions. Likewise, by means of External Circular 100 of 1995, (the “Basic Accounting Circular”), it compiled all regulations applicable to the accounting rules and regulations.

 

KEY INTEREST RATES

 

Colombian commercial banks, finance corporations and commercial finance companies are required to provide the Central Bank with, on a weekly basis, data regarding the total volume (in pesos) of certificates of deposit issued during the prior week and the average interest rates paid for certificates of deposit with maturities of 90 days. Based on such reports, the Central Bank computes the Tasa de Captaciones de Corporaciones Financieras (“TCC”) and the Depósitos a Término Fijo (“DTF”) rates, which are published at the beginning of the following week for use in calculating interest rates payable by financial institutions. The TCC is the weighted average interest rate paid by finance corporations for deposit with maturities of 90 days. The DTF is the weighted average interest rate paid by finance corporations, commercial banks and commercial finance companies for certificates of deposit with maturities of 90 days. For the week of March 26-30, 2007, the DTF was 7.60% and the TCC was 6.50%.

 

CAPITAL ADEQUACY REQUIREMENTS

 

Capital adequacy requirements for Colombian financial institutions (as set forth in Decree 1720 of 2001, as amended) are based on the Basel Committee standards. The regulations establish four categories of assets, which are each assigned different risk weights, and require that a credit institution’s Technical Capital (as defined below) be at least 9% of that institution’s total risk-weighted assets.

 

Technical Capital for the purposes of the regulations consists of basic capital (“Primary Capital”) and additional capital (“Secondary Capital”) (collectively, “Technical Capital”). Primary Capital consists mainly of:

 

 

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Colombian banking regulations

 

 

 

These bonds may only be computed as part of the Primary Capital if:

 

 

Items deducted from Primary Capital are:

 

 

Secondary Capital consists of other reserves and retained earnings, which are added to the Primary Capital in order to establish the total Technical Capital. Secondary Capital includes:

 

 

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Colombian banking regulations

 

The following items are deducted from Secondary Capital:

 

 

In computing Technical Capital, Secondary Capital may not exceed (but may be less than) the total amount of Primary Capital.

 

Liquidity risks and market risks are currently governed by the Basic Accounting Circular, issued by the former Superintendency of Banking (now SFC), which defines criteria and procedures for measuring a bank’s exposure to interest rate risk, foreign exchange risk, and market risk. Under such regulations, banks must send to the Superintendence of Finance information on the net present value, duration, and interest rate of its assets, liabilities, and derivative positions. Since January 2002, Colombian banks have also been required to calculate, for each position on the balance sheet, a volatility rate and a parametric VaR (value at risk), which is calculated based on net present value, modified duration and a risk factor computed in terms of a basis points change. Each risk factor is calculated and provided by the Superintendence of Finance.

 

The SFC, in its External Circular 037 of 2004, provided that financial institutions must maintain a ratio between its Technical Capital and credit/market risk-weighted assets of more than 9%.

 

A bank’s loan portfolio, net of provisions, is 100% weighted as risk-weighted assets. By measuring credit risk, the provisions corresponding to each of a bank’s operations is duly determined. For this purpose, different levels of risk are set up, and different ratings are awarded (A, B, C, D and E) to the different credit operations showing the gradual increase in risk. Each of these ratings have a minimum provision level, as established by the Superintendence of Finance in Chapter II of the Basic Accounting Circular.

 

MINIMUM CAPITAL REQUIREMENTS

 

The minimum capital requirement for banks on an unconsolidated basis is established in article 80 of Decree 633 of 1993, as amended. The minimum capital requirement for 2007 is Ps 62,069 million. Failure to meet such requirement can result in a fine by the SFC in an amount equivalent to 3.5% of the difference between the required minimum capital and the bank’s effective capital for each month in arrears.

 

Capital Investment Limit

 

All investments in subsidiaries and other authorized capital investments, other than those made in order to abide by legal requirements, may not exceed 100% of the total aggregate of capital, equity reserves and the equity re-adjustment account of the respective bank, financial corporation or commercial finance company, excluding unadjusted fixed assets and including deductions for accumulated losses.

 

FOREIGN CURRENCY POSITION REQUIREMENTS

 

According to External Resolution 5 of 2005 issued by the board of directors of the Central Bank, a financial institution’s foreign currency position (posicion propia en moneda extranjera) is the difference

 

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Colombian banking regulations

 

between such institution’s foreign currency-denominated assets and liabilities (including any off-balance sheet items), made or contingent, including those that may be sold in Colombian legal currency.

 

Resolution 5 of 2005 of the board of directors of the Central Bank provides that the average of a bank’s foreign currency position for 3 business days cannot exceed the equivalent in Colombian pesos of 20% of the bank’s Technical Capital. Currency exchange intermediaries are permitted to hold a three business day’s average negative foreign currency position not exceeding the equivalent in foreign currency of 5% of its Technical Capital (with penalties being payable after the first business day).

 

Resolution 5 of 2005 also defines foreign currency position in cash (posicion propia de contado en moneda extranjera) as the difference between all foreign currency-denominated assets and liabilities. A bank’s three business days average foreign currency position in cash can not exceed 50% of the bank’s Technical Capital. In accordance with Resolution 5 of 2005, the three day average shall be calculated on a daily basis and the foreign currency position in cash cannot be negative.

 

On May 6, 2007, the board of directors of Central Bank issued Resolution 4 of 2007. However, this resolution did not change any of the above described requirements.

 

RESERVE REQUIREMENTS

 

Commercial banks are required by the Central Bank to satisfy reserve requirements with respect to deposits. Such reserves are held by the Central Bank in the form of cash deposits and their required amounts vary.

 

According to Central Bank’s Resolution 19 of 2000 and Resolution 3 of 2007, the reserve requirements for Colombian banks as of May 7, 2007, are:

 

 

 

FOREIGN CURRENCY LOANS

 

The board of directors of the Central Bank requires every Colombian resident and institution borrowing under foreign currency loans, regardless of the term or conditions of the loan, to post with the Central Bank a non-interest bearing deposit for a percentage of the respective indebtedness and during a term specified by the Central Bank’s board of directors. According to External Resolution 2 of 2007, the deposit is required to be 40% of the amount received from any such borrowings, which must be converted into pesos using the representative market rate for the date in which the deposit will be made. Such deposit is non-interest bearing and has a term of 6 months. The receipt whereby the deposit is evidenced is not negotiable.

 

External Resolution 8 of 2000, which contains the principal foreign exchange regulations applicable in Colombia, sets forth exemptions to the obligation of posting the deposit mentioned in the previous paragraph. Among such exceptions, pursuant to article 59 of such External Resolution, banks that obtain financing in a foreign currency from foreign financial entities or intermediaries acting in the

 

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Colombian banking regulations

 

foreign exchange market or through the issuance of securities and subsequently lend such borrowings in a foreign currency for a term not exceeding the original term of such financing are exempted from the deposit requirement.

 

NON-PERFORMING LOAN ALLOWANCE

 

The SFC maintains guidelines on non-performing loan allowances for financial institutions. (See Form 20 F—Item 4. Information on the Company—E. Selected Statistical Information—E.4. Summary of Loan Loss Experience—Allowance for Loan Losses).

 

LENDING ACTIVITIES

 

Through the issuance of Decrees 2360 and 2653 of 1993, as amended, the Government set the maximum amounts that a financial institution may lend to a single borrower (including for this purpose all related fees, expenses and charges). These maximum amounts may not exceed 10% of a commercial bank’s Technical Capital. The limit is raised to 25% when amounts lent above 5% of Technical Capital are secured by guarantees that comply with the financial institutions’ guidelines, in accordance with the requirements set forth in Decrees 2360 and 2653. Also, according to Decree 1886 of 1994, a bank may not make loans to any shareholder that holds directly more than 10% of its capital stock, for one year after such shareholder reaches the 10% threshold. In no event may a loan to a shareholder holding directly or indirectly 20% or more of the Bank’s capital stock exceed 20% of the Bank’s Technical Capital. In addition, no loan to a single financial institution may exceed 30% of the Bank’s Technical Capital, with the exception of loans funded by Colombian development banks which are not subject to such limit.

 

Also, Decree 2360 set a maximum limit for risk concentrated in one single party, equivalent to 30% of the Bank’s Technical Capital, the calculation of which includes loans, leasing operations and equity and debt investments.

 

The Central Bank also has the authority to establish maximum limits on the interest rates that commercial banks and other financial institutions may charge on loans. However, interest rates must also be consistent with market terms with a maximum limit established by the SFC.

 

OWNERSHIP RESTRICTIONS

 

The Bank is organized as a stock company (sociedad anónima). Its corporate existence is subject to the rules applicable to commercial companies, principally the Colombian Commerce Code. The Colombian Commerce Code requires stock companies (such as the Bank) to have at least five shareholders at all times and provides that no single shareholder may own 95% or more of the Bank’s subscribed capital stock. Article 262 of the Colombian Commerce Code prohibits the Bank’s Subsidiaries from acquiring the stock of the Bank.

 

Pursuant to Decree 663 of 1993 (as amended by Law 795 of 2003), any transaction resulting in an individual or corporation holding 10% or more of any class of capital stock of any Colombian financial institution, including, in the case of BC, transactions resulting in holding ADRs representing 10% or more of the outstanding stock of BC, is subject to the prior authorization of the SFC. For that purpose, the SFC must evaluate the proposed transaction based on the criteria and guidelines specified in Law 510 of 1999, as amended by Law 795 of 2003. Transactions entered into without the prior approval of the SFC are null and void and cannot be recorded in the institution’s stock ledger. These restrictions apply equally to national as well as foreign investors.

 

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Colombian banking regulations

 

 

BANKRUPTCY CONSIDERATIONS

 

Pursuant to Colombian Banking Law, the SFC has the power to intervene the operations of a bank in order to prevent it from, or to control and reduce the effects of, a bank failure. Accordingly, the SFC may intervene in a bank’s business, (1) prior to the liquidation of the bank, by taking one of the following precautionary measures (medidas cautelares) in order to prevent the bank from incurring in a cause for the taking of possession by the SFC (i) submit the bank to a special supervision regime (a “Special Supervision”), (ii) issue a mandatory order to recapitalize the bank, (iii) place the bank under the management of another authorized financial institution, acting as trustee; (iv) order the transfer of all or part of the assets, liabilities and contracts, as well as certain commercial establishments (establecimientos de comercio) of the bank to another financial institution ; (v) order the bank to merge with one or more financial institutions that consent to the merger, whether by creating a new institution or by having another institution absorb the bank; (vi) order the adoption of a recovery plan by the bank, including adequate measures to reestablish its financial situation, pursuant to guidelines approved by the government; (vii) order the exclusion of certain assets and liabilities by requiring the transfer of such assets and liabilities to another institution designated by the SFC; and (viii) order the progressive unwinding (desmonte progresivo) of the operations of the bank; or (2) take possession of the bank (toma de posesión) (“Taking of Possession”), to either administer the bank or order its liquidation, depending on how critical the situation is found to be by the SFC.

 

The Taking of Possession may occur upon certain events, including: (i) suspension of payments; (ii) failure to pay deposits; (iii) refusal to submit its files, accounts and supporting documentation to the inspection of the Superintendence; (iv) repeated failure to comply with orders and instructions from the Superintendence; (v) repeated violation of applicable laws and regulations or of the bank’s by-laws; (vi) unauthorized or insecure management of the bank’s affairs; (vii) reduction of the bank’s net worth below 50% of its subscribed capital, (viii) reduction of the technical net worth of the bank (patrimonio técnico) below 40% of the minimum required under Colombian law, and (ix) failure to comply with the minimum capital requirements set forth in the Colombian Financial Statute.

 

The SFC may decide to order the Taking of Possession subject to the prior opinion of its advisory council (consejo asesor del Superintendente) and with the prior approval of the Ministery of Finance.

 

The purpose of Taking of Possession of a bank is to decide whether the entity should be liquidated, whether it is possible to place it in a position to continue doing business in the ordinary course, or whether other measures may be adopted to secure better conditions so that depositors, creditors and investors may obtain the full or partial payment of their credits.

 

Within two months from the date when the SFC takes possession of a bank, the SFC must decide which of the aforementioned measures is to be pursued. The said decision is subject to the prior favorable opinion of the Fogafin which is the government agency that insures deposits made in Colombian financial institutions. The said two month term may be extended with the prior consent of Fogafin.

 

Upon taking possession of a bank, depending on the financial situation of the bank and the reasons that gave rise to such measure, the SFC may (but is not required to) order the bank to suspend payments to its creditors. The SFC has the power to determine that such suspension will affect generally all of the obligations of the bank, or only certain types of obligations or even obligations up to or in excess of a specified amount.

 

As a result of the Taking of Possession the SFC must appoint as special agent the person or entity designated by Fogafin to administer the affairs of the bank while such process lasts and until it is decided whether to liquidate the bank.

 

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Colombian banking regulations

 

 

As part of its duties during the Taking of Possession, Fogafin must provide to the SFC the plan to be followed by the special agent in order to meet the goals set for the fulfillment of the measures that may have been adopted. If the underlying problems that gave rise to the Taking of Possession of the bank are not resolved within a term not to exceed two years, the SFC must order the liquidation of the bank.

 

During the Taking of Posession (which period ends when the liquidation process begins), Colombian Banking Laws prevent any creditor of the bank from: (i) initiating any procedure for the collection of any amount owed by the bank, (ii) enforcing any judicial decision rendered against the bank to secure payment of any of its obligations, (iii) constituting a lien or attachment over any of the assets of the bank to secure payment of any of its obligations, or (iv) making any payment, advance or compensation or assume any obligation on behalf of the bank, with the funds or assets that may belong to it and are held by third parties, except for payments that are made by way of set-off between regulated entities of the Colombian financial and insurance systems.

 

In the event that the bank is liquidated, the SFC must, among other measures, provide that all term obligations owed by the bank are due and payable as of the date when the order to liquidate becomes effective.

 

During the liquidation process, claims of creditors rank as follows: (i) amounts owed to employees and former employees for salaries, benefits, indemnities and pensions, (ii) bank deposits and other types of saving instruments, (iii) taxes, (iv) all other credits, except subordinated credits, and (v) subordinated credits. Each category of creditors will collect in the order indicated above, whereby distributions in one category will be subject to completing full distribution in the prior category.

 

Colombian banks and other financial institutions are not subject to the laws and regulations that govern generally the insolvency, restructuring and liquidation of industrial and commercial companies.

 

DEPOSIT INSURANCE—TROUBLED FINANCIAL INSTITUTIONS

 

In response to the crisis faced by the Colombian financial system during the early 1980s, in 1985 the Government created Fogafin. Subject to specific limitations, Fogafin is authorized to provide equity (whether or not reducing the par value of the recipient’s shares) and/or secured credits to troubled financial institutions, and to insure deposits of commercial banks and certain other financial institutions.

 

To protect the customers of commercial banks and certain financial institutions, Resolution No. 1 of 1988 of the board of directors of Fogafin, as amended, requires mandatory deposit insurance. Under this Resolution No. 1, banks must pay an annual premium of 0.5% of total funds received on saving accounts, checking accounts and certificates of deposit. If a bank is liquidated, the deposit insurance will cover 75% of all funds deposited by an individual or corporation with such bank, up to a maximum of Ps 20 million. Thus, the maximum amount that a customer of a liquidated financial institution is entitled to recover under deposit insurance is Ps 15 million.

 

ANTI-MONEY LAUNDERING PROVISIONS

 

The regulatory framework to prevent and control money laundering is contained, among other regulations, in Decree 663 of 1993, External Circulars 025 of 2003, 034 of 2004, 040 of 2004, 04 of 2006 and regulation 022 of 2007 issued by the SFC, as well as by Law 599 of 2000 as amended (Colombian Criminal Code).

 

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Colombian banking regulations

 

 

The External Circulars issued by the SFC regulate anti-money laundering issues for financial institutions. They adopt the latest guidelines related to anti-money laundering and other terrorist activities established by the Financial Action Task Force on Money Laundering (“FATF”). Colombia, as a member of the GAFI-SUD (a FATF style regional body) follows all of FATF’s forty recommendations and eight special recommendations. These rules emphasize “know your customer” policies, as well as complete knowledge by financial institutions of their users and markets. They also establish processes and parameters to identify and monitor a financial institution’s customers. According to these regulations, financial institutions must cooperate with the appropriate authorities to prevent and control money laundering and terrorism.

 

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As used below in this “Description of the notes” section, the “Bank” means Bancolombia S.A., a sociedad anónima organized and existing under the laws of Colombia, and its successors, but not any of its subsidiaries. The Bank will issue the notes described in this prospectus supplement under an indenture (the “Indenture”) to be executed between the Bank and The Bank of New York, as trustee (the “Trustee”). The terms of the notes include those set forth in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. You may obtain a copy of the Indenture from the Bank at its address set forth elsewhere in this prospectus supplement.

 

The following is a summary of the material terms and provisions of the notes. The following summary does not purport to be a complete description of the notes and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Indenture. You can find definitions of certain terms used in this description under the heading “—Certain Definitions.”

 

The notes are being issued by the Bank as Subordinated notes due 2017 under the laws of Colombia (as debt instruments regulated by Article 7(d) of Decree 1720 of 2001, as amended by Decree 2061 of 2004). The notes are not treated under the banking laws and regulations of Colombia as bank deposits, and the noteholders are not required to open accounts with the Bank. Noteholders will not have recourse to deposit insurance or any other protections afforded to depositors in financial institutions under the laws of any jurisdiction. The notes are treated under Colombian and New York law as debt instruments.

 

According to Colombian Banking Laws, banks are permitted to issue subordinated debt, including the notes, and to include the outstanding aggregate principal amount of such subordinated debt as a component of Regulatory Capital—Tier Two Capital. Regulatory Capital is comprised of Tier One Capital, which consists of different elements, such as Capital Stock and capital reserves, and Tier Two Capital, which provides for subordinated debt, such as the notes. However, commencing on the fifth anniversary prior to the final maturity date, the amount of subordinated debt that will be eligible to be included in Regulatory Capital—Tier Two Capital will decrease by 20% of the aggregate outstanding amount of such subordinated debt on an annual basis. As a result, after          , 2012, the outstanding aggregate principal amount of the notes that will qualify as Regulatory Capital—Tier Two Capital will decrease by 20% annually. See “Colombian banking regulations.”

 

PRINCIPAL, MATURITY AND INTEREST

 

The notes will mature on          , 2017. The notes will bear interest at the rate shown on the cover page of this prospectus supplement, payable on           and           of each year (each, an “interest payment date”), commencing on          , 2007, to Holders of record at the close of business on           or          , as the case may be, immediately preceding the relevant interest payment date. Interest on the notes will be computed on the basis of a 360-day year of twelve 30-day months. If any interest payment date or maturity date would otherwise be a day that is not a Business Day, the related payment of the principal and interest will be made on the next succeeding Business Day as if it were made on the date the payment was due, and no interest will accrue on the amounts so payable for the next period from and after the interest payment date or the maturity date, as the case may be, to the next succeeding Business Day.

 

The notes will be issued in registered form, without coupons, and in minimum denominations of US$2,000 and integral multiples of US$1,000. Each book-entry note will be represented by one or more global notes registered in the name of The Depository Trust Company, which is referred to in this prospectus supplement as “DTC” or the “depositary,” or its nominee. Beneficial interests in the global

 

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Description of the notes

 

notes will be shown on, and transfers thereof will be effected only through, records maintained by the DTC and its participants. See “—Book-Entry, Delivery and Form of Securities.”

 

An aggregate principal amount of notes equal to US$400,000,000 is being issued in this offering. The Bank may issue additional notes having identical terms and conditions to the notes being issued in this offering (the “Additional Notes”). Any Additional Notes will be part of the same issue as the notes being issued in this offering and will be treated as one class with the notes being issued in this offering, including for purposes of voting, redemptions and offers to purchase. Pursuant to the Indenture, no Additional Notes may be issued unless the Bank delivers to the Trustee an opinion of counsel to the effect that such Additional Notes will be fungible with, and will constitute a single issue with, the notes being issued in this offering for U.S. federal income tax purposes. For purposes of this “Description of the notes,” references to the notes include Additional Notes, if any.

 

ADDITIONAL AMOUNTS

 

All payments made by the Bank under or with respect to the notes will be made free and clear of and without withholding or deduction for or on account of any present or future Taxes imposed or levied by or on behalf of any Taxing Authority in any jurisdiction in which the Bank is organized or is otherwise resident for tax purposes or any jurisdiction from or through which payment is made (each a “Relevant Taxing Jurisdiction”), unless the Bank is required to withhold or deduct Taxes by law or by the interpretation or administration thereof. If the Bank is required to withhold or deduct any amount for or on account of Taxes imposed by a Relevant Taxing Jurisdiction, from any payment made under or with respect to the notes, the Bank will pay such additional amounts (“Additional Amounts”) as may be necessary so that the net amount received by each Holder of notes (including Additional Amounts) after such withholding or deduction will equal the amount the Holder would have received if such Taxes had not been withheld or deducted; provided, however, that no Additional Amounts will be payable with respect to any Tax that would not have been imposed, payable or due:

 

(1)  but for the existence of any present or former connection between the Holder (or the beneficial owner of, or person ultimately entitled to obtain an interest in, such notes) and the Relevant Taxing Jurisdiction (including being a citizen or resident or national of, or carrying on a business or maintaining a permanent establishment in, or being physically present in, the Relevant Taxing Jurisdiction) other than the mere holding of the notes or enforcement of rights thereunder or the receipt of payments in respect thereof;

 

(2)  but for the failure to satisfy any certification, identification or other reporting requirements whether imposed by statute, treaty, regulation or administrative practice, provided, however, that the Bank has delivered a request to the Holder to comply with such requirements at least 30 days prior to the date by which such compliance is required; or

 

(3)  if the presentation of notes (where presentation is required) for payment has occurred within 30 days after the date such payment was due and payable or was duly provided for, whichever is later.

 

In addition, Additional Amounts will not be payable if the beneficial owner of, or person ultimately entitled to obtain an interest in, such notes had been the Holder of the notes and such beneficial owner would not be entitled to the payment of Additional Amounts by reason of clause (1), (2) or (3) above. In addition, Additional Amounts will not be payable with respect to any Tax which is payable otherwise than by withholding from payments of, or in respect of principal of, or any interest on, the notes.

 

Whenever in the Indenture or in this “Description of the notes” there is mentioned, in any context, the payment of amounts based upon the principal amount of the notes or of principal, interest or of any other amount payable under or with respect to any of the notes, such mention shall be deemed to

 

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include mention of the payment of Additional Amounts to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.

 

Upon request, the Bank will provide the Trustee with documentation satisfactory to the Trustee evidencing the payment of Additional Amounts.

 

The Bank will pay any present or future stamp, court or documentary taxes, or any other excise or property taxes, charges or similar levies which arise in any jurisdiction from the execution, delivery or registration of the notes or any other document or instrument referred to therein, or the receipt of any payments with respect to the notes, excluding any such taxes, charges or similar levies imposed by any jurisdiction other than a jurisdiction in which the Bank is organized or is otherwise resident for tax purposes, the United States of America or any jurisdiction in which a paying agent is located, but not excluding those resulting from, or required to be paid in connection with, the enforcement of the notes or any other such document or instrument following the occurrence of any Event of Default with respect to the notes.

 

METHODS OF RECEIVING PAYMENTS ON THE NOTES

 

If a Holder has given wire transfer instructions to the Bank, copying the Trustee, at least ten Business Days prior to the applicable payment date, the Trustee will make all payments on such Holder’s notes by wire transfer of immediately available funds to the account specified in those instructions. Otherwise, payments on the notes will be made at the office or agency of the paying agent (the “Paying Agent”) and registrar (the “Registrar”) for the notes within the City and State of New York unless the Bank elects to make interest payments by check mailed to the Holders at their addresses set forth in the register of Holders.

 

SUBORDINATION OF NOTES

 

The payment of all Obligations on or relating to the notes will be subordinated in right of payment to the prior payment in full in cash or cash equivalents of all Obligations due in respect of Senior External Debt of the Bank, whether outstanding on the Issue Date or incurred after that date and will be senior only to all classes of the Bank’s Capital Stock and to any other instrument that may qualify as Regulatory Capital—Tier One Capital for purposes of Colombian Banking Laws, if any, and which is expressly or effectively subordinated to the notes. The notes will rank equally with all other unsecured and subordinated Indebtedness of the Bank, if any, other than subordinated Indebtedness which, under its terms, is designated as junior to the notes. Pursuant to Colombian Banking Laws, the notes will constitute “subordinated bonds” (bonos subordinados).

 

The holders of Senior External Debt will be entitled to receive payment in full in cash or cash equivalents of all Obligations due in respect of Senior External Debt before the Holders of notes will be entitled to receive any payment or distribution of any kind or character with respect to any Obligations on or relating to the notes in the event of any distribution to creditors of the Bank:

 

 

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As a result of the subordination provisions described above in the event of a bankruptcy, the taking of possession of the Bank by the Superintendency of Finance and liquidation or reorganization of the Bank, the notes will be senior only to the Bank’s capital stock, and accordingly, Holders of the notes may recover less ratably than creditors of the Bank who are holders of Senior External Debt.

 

OPTIONAL REDEMPTION

 

The notes may not be redeemed prior to the maturity date.

 

CERTAIN COVENANTS

 

The Indenture will contain, among others, the following covenants:

 

Mergers, Consolidations, Etc.

 

The Bank will not consolidate with or merge into, or sell, lease, convey or transfer, in one transaction or a series of transactions, all or substantially all of the Bank’s properties and assets to any person, unless:

 

(1)  the surviving entity, if other than the Bank, is organized and existing under the laws of Colombia or the United States and assumes all of the Obligations under the notes and the Indenture and

 

(2)  the Bank, or the surviving entity, as the case may be, is not immediately after such transaction in Default under the notes and the Indenture.

 

Maintenance of Office or Agent for Service of Process

 

The Bank shall maintain an office or agent for service of process in the Borough of Manhattan, The City of New York, where notices to and demands upon the Bank in respect of the notes and the Indenture may be served. Initially this agent will be CT Corporation System, and the Bank will agree not to change the designation of such agent without prior notice to the Trustee and designation of a replacement agent in the Borough of Manhattan, The City of New York.

 

Provision of Financial Statements and Reports

 

At all times when the Bank is required to file any financial statements or reports with the SEC, the Bank shall use its best efforts to file all required statements or reports in a timely manner in accordance with the rules and regulations of the SEC. In addition, at any time when the Bank is not subject to or is not current in its reporting obligations under Section 13 or Sections 15(d) of the Exchange Act or is not included on the SEC’s list of foreign private issuers that claim exemption from the registration requirements of the Section 12(g) of the Exchange Act pursuant to Rule 12g3-2(b) thereunder and any note remain outstanding, the Bank will make available, upon request, to any Holder or any prospective purchaser of the notes, who so request in writing, substantially the same financial and other information that we would be required to include and file in an annual report on Form 20-F and reports on Form 6-K.

 

For so long as any notes are listed on the New York Stock Exchange, we will notify the New York Stock Exchange of the Event of Default and, prior to publication of notice of the event of default in New York, submit a draft of the notice to the New York Stock Exchange.

 

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Further Actions

 

The Bank will, at its own cost and expense, satisfy any condition or take any action (including the obtaining or effecting of any necessary consent, approval, authorization, exemption, filing, license, order, recording or registration) at any time required, as may be necessary or as the Trustee may reasonably request, in accordance with applicable laws and/or regulations, to be taken, fulfilled or done in order to (i) enable the Bank to lawfully enter into, exercise its rights and perform and comply with its obligations under the Indenture and the notes, as the case may be, (ii) ensure that its obligations under the Indenture and the notes are legally binding and enforceable, (iii) make the Indenture and the notes admissible in evidence in the courts of the State of New York and Colombia and (iv) preserve the enforceability of, and maintain the Trustee’s rights under, the Indenture and (v) respond to any reasonable requests received from the Trustee to enable the Trustee to facilitate the Trustee’s exercise of its rights and performance of its obligations under the Indenture and the notes, including exercising and enforcing its rights under and carrying out the terms, provisions and purposes of the Indenture and the notes.

 

Events of Default

 

Each of the following is an “Event of Default”:

 

(1)  failure by the Bank to pay interest on any of the notes when it becomes due and payable and the continuance of any such failure for 30 days;

 

(2)  failure by the Bank to pay the principal on any of the notes when it becomes due and payable, whether at stated maturity or otherwise and the continuance of any such failure for seven days;

 

(3)  the Bank pursuant to or within the meaning of any Bankruptcy Law:

 

(a)  commences a voluntary case,

 

(b)  consents to the entry of an order for relief against it in an involuntary case,

 

(c)  consents to the appointment of a Custodian of it or for all or substantially all of its assets,

 

(d)  makes a general assignment for the benefit of its creditors; or

 

(e)  a governmental intervention is declared with respect to the Bank; or

 

(4)  a court of competent jurisdiction or relevant entity enters an order or decree under any Bankruptcy Law that:

 

(a)  is for relief against the Bank as debtor in an involuntary case,

 

(b)  appoints a Custodian of the Bank or a Custodian for all or substantially all of the assets of the Bank, or

 

(c)  orders the liquidation of the Bank,

 

and the order or decree remains unstayed and in effect for 60 days.

 

If the Bank fails to make payment of principal of or interest or Additional Amounts, if any, on the notes (and, in the case of payment of principal, such failure to pay continues for seven days or, in the case of payment of interest or Additional Amounts, such failure to pay continues for 30 days), each Holder of the notes has the right to demand and collect under the Indenture and the Bank will pay to the Holders of the notes the applicable amount of such due and payable principal, accrued interest and Additional Amounts, if any, on the notes; provided, however, that to the extent that the Superintendency of Finance has taken possession of the Bank in order to administer it or to liquidate it, under the

 

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Description of the notes

 

Bankruptcy Law the Holders of the notes would not be able to commence proceedings to collect amounts owed. There is no right of acceleration in the case of a default in any payment on the notes (whether when due or otherwise) or the performance of any of the Bank’s other obligations under the Indenture or the notes. Notwithstanding the immediately preceding sentence, the Holders of the notes shall have the right to accelerate the payments due under the notes during the occurrence of an Event of a Default; provided that there shall have been a change, amendment or modification to the Colombian Banking Laws that would permit such right without disqualifying the notes from Regulatory Capital—Tier Two Capital status and the Holders exercise such right in accordance with applicable Colombian Banking Law. Subject to the subordination provisions of the notes, if any Event of Default occurs and is continuing, the Trustee may pursue any available remedy (excluding acceleration, except as provided herein) to collect the payment of principal and interest on the notes or to enforce the performance of any provision under the Indenture.

 

See “Risk factors—Risks relating to the notes—Holders of notes will not have the right to accelerate the notes.”

 

SATISFACTION AND DISCHARGE

 

The Indenture will be discharged and will cease to be of further effect (except as to rights of registration of transfer or exchange of notes which shall survive until all notes have been canceled) as to all outstanding notes when either:

 

(1)  all the notes that have been authenticated and delivered (except lost, stolen or destroyed notes which have been replaced or paid and notes for whose payment money has been deposited in trust or segregated and held in trust by the Bank and thereafter repaid to the Bank or discharged from this trust) have been delivered to the Trustee for cancellation, or

 

(2)  (a)  all notes not delivered to the Trustee for cancellation otherwise have become due and payable and the Bank has irrevocably deposited or caused to be deposited with the Trustee trust funds in trust in an amount of money sufficient to pay and discharge the entire Indebtedness (including all principal and accrued interest) on the notes not theretofore delivered to the Trustee for cancellation,

 

(b)  the Bank has paid all sums payable by it under the Indenture,

 

(c)  the Bank has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the notes at maturity, and

 

(d)  the Holders have a valid, perfected, exclusive security interest in this trust.

 

In addition, the Bank must deliver an Officers’ Certificate and an opinion of counsel stating that all conditions precedent to satisfaction and discharge have been complied with.

 

TRANSFER AND EXCHANGE

 

A Holder will be able to register the transfer of or exchange notes only in accordance with the provisions of the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. Without the prior consent of the Bank, the Registrar is not required to register the transfer or exchange of a note between a record date and the next succeeding interest payment date.

 

The notes will be issued in registered form and the registered Holder will be treated as the owner of such note for all purposes.

 

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Description of the notes

 

 

PURCHASE OF NOTES

 

The Bank may at anytime purchase notes at any price in the open market, in privately negotiated transactions or otherwise. Notes so purchased by the Bank may be held, resold in accordance with the Securities Act of 1933, as amended, or any exemption therefrom, or surrendered to the Trustee for cancellation.

 

AMENDMENT, SUPPLEMENT AND WAIVER

 

Subject to certain exceptions, the Indenture or the notes may be amended with the consent (which may include consents obtained in connection with a tender offer or exchange offer for notes) of the Holders of at least a majority in aggregate principal amount of the notes then outstanding, and any existing Default under, or compliance with any provision of, the Indenture may be waived (other than any continuing Default in the payment of the principal or interest on the notes) with the consent (which may include consents obtained in connection with a tender offer or exchange offer for notes) of the Holders of a majority in aggregate principal amount of the notes then outstanding; provided, that without the consent of each Holder affected, no amendment or waiver may:

 

(1)  reduce, or change the maturity, of the principal of any note;

 

(2)  reduce the rate of or extend the time for payment of interest on any note;

 

(3)  make any note payable in money or currency other than that stated in the notes;

 

(4)  modify or change the related definitions affecting the subordination of the notes or any provision of the Indenture (including the covenants in the Indenture) in a manner that adversely affects the Holders;

 

(5)  reduce the percentage of Holders necessary to consent to an amendment or waiver to the Indenture or the notes;

 

(6)  impair the rights of Holders to receive payments of principal of or interest on the notes; or

 

(7)  make any change in these amendment and waiver provisions.

 

Notwithstanding the foregoing, the Bank and the Trustee may amend the Indenture or the notes without the consent of any Holder to cure any ambiguity, defect or inconsistency, to provide for uncertificated notes in addition to or in place of certificated notes, to provide for the assumption of the Bank’s obligations to the Holders in the case of a merger, consolidation or sale of all or substantially all of the assets in accordance with “—Certain Covenants—Mergers, Consolidations, Etc.,” to make any change that does not adversely affect the rights of any Holder or, in the case of the Indenture, to maintain the qualification of the Indenture under the Trust Indenture Act.

 

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS

 

No director, officer, employee, incorporator or stockholder of the Bank will have any liability for any obligations of the Bank under the notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws. It is the view of the SEC that this type of waiver is against public policy.

 

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CONCERNING THE TRUSTEE

 

The Bank of New York is the Trustee under the Indenture and has been appointed by the Bank as Registrar and Paying Agent with regard to the notes. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Bank, to obtain payment of claims in certain cases, or to realize on certain assets received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest (as defined in the Indenture), it must eliminate such conflict or resign.

 

The Holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that, in case an Event of Default occurs and is not cured, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent person in similar circumstances in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to the Trustee.

 

UNCLAIMED AMOUNTS

 

Any money deposited with the Trustee or paying agent or held by the Bank, in trust, for the payment of principal, premium, interest or any Additional Amounts, that remains unclaimed for two years after such amount becomes due and payable shall be paid to the Bank or its requestor or, if held by the Bank, shall be discharged from such trust. The Holder of the notes will look only to the Bank for payment thereof, and all liability of the Trustee, paying agent or of the Bank shall thereupon cease. However, the Trustee or paying agent may at the expense of the Bank cause to be published once in a newspaper in each place of payment, or to be mailed to Holders of notes, or both, notice that the money remains unclaimed and any unclaimed balance of such money remaining, after a specified date, will be repaid to the Bank.

 

NO SINKING FUND

 

The notes will not be entitled to the benefit of a sinking fund.

 

LISTING

 

Application has been made to list the notes on the New York Stock Exchange. Trading of the notes on the New York Stock Exchange is expected to commence within days after they are first issued. Prior to this offering there has been no trading market for the notes.

 

GOVERNING LAW

 

The Indenture and the notes will be governed by, and construed in accordance with, the laws of the State of New York, except that the authorization and execution of such documentation by the Bank will be governed by the laws of Colombia.

 

CURRENCY RATE INDEMNITY

 

The Bank has agreed that, if a judgment or order made by any court for the payment of any amount in respect of any notes is expressed in a currency other than U.S. dollars, the Bank will indemnify the relevant Holder against any deficiency arising from any variation in rates of exchange between the date as of which the denomination currency is notionally converted into the judgment currency for the

 

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purposes of the judgment or order and the date of actual payment. This indemnity will constitute a separate and independent obligation from the Bank’s other obligations under the Indenture, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted from time to time and will continue in full force and effect notwithstanding any judgment or order for a liquidated sum or sums in respect of amounts due under the Indenture or the notes.

 

CERTAIN DEFINITIONS

 

Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms.

 

“amend” means to amend, supplement, restate, amend and restate or otherwise modify; and “amendment” shall have a correlative meaning.

 

“asset” means any asset or property.

 

“Bankruptcy Law” means the provisions of the Financial Statute concerning bankruptcy of financial entities and any other Colombian law or regulation regulating the insolvency of financial entities from time to time.

 

“Board of Directors” shall mean, with respect to any Person, (i) in the case of any corporation, the board of directors of such Person, (ii) in the case of any limited liability company, the board of managers of such Person, (iii) in the case of any partnership, the Board of Directors of the general partner of such Person and (iv) in any other case, the functional equivalent of the foregoing.

 

“Business Day” means a day other than a Saturday, Sunday or other day on which banking institutions in New York or Colombia are authorized or required by law to close.

 

“Capital Stock” means any and all classes of shares a Colombian financial institution is authorized to issue under applicable Colombian laws including, but not limited to, common shares, non-voting preferred shares and privileged shares.

 

“Colombian GAAP” means generally accepted accounting principles as prescribed by the Superintendency of Finance for banks licensed to operate in Colombia, consistently applied, as in effect on the Issue Date.

 

“Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.

 

“Default” means (1) any Event of Default or (2) any event, act or condition that, after notice or the passage of time or both, would be an Event of Default.

 

“Equity Interests” of any Person means (1) any and all shares or other equity interests (including common stock, preferred stock, limited liability company interests and partnership interests) in such Person and (2) all rights to purchase, warrants or options (whether or not currently exercisable), participations or other equivalents of or interests in (however designated) such shares or other interests in such Person.

 

“Financial Statute” means Decree 663 of 1993 as amended, of the Republic of Colombia.

 

“Holder” means any registered holder, from time to time, of the notes.

 

“Indebtedness” means, with respect to any Person, any obligation, for the payment or repayment of money borrowed or otherwise evidenced by debentures, notes, bonds, or similar instruments or any other obligation (including all trade payables and other accounts payable and including payments

 

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relating to bank deposits) that would appear or be treated as indebtedness upon a balance sheet if such Person prepared it in accordance with Colombian GAAP as applicable to financial institutions.

 

“interest” means, with respect to the notes, interest on the notes.

 

“Issue Date” means the date on which the notes are originally issued.

 

“Obligation” means any principal, interest, penalties, fees, indemnification, reimbursements, costs, expenses, damages and other liabilities payable under any Indebtedness.

 

“Officer” means any of the following of the Bank: the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary.

 

“Officers’ Certificate” means a certificate signed by two Officers.

 

“Person” means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other entity of any kind.

 

“principal” means, with respect to the notes, the principal of, and premium, if any, on the notes.

 

“Regulatory Capital” means the patrimonio técnico of banks comprised of Tier One Capital basic capital (patrimonio básico) and Tier Two Capital additional capital (patrimonio adicional) pursuant to Decree 1720 of 2001, as amended, issued by the Ministry of Finance and Public Credit, or any other Colombian law or regulation regulating the patrimonio técnico in effect from time to time.

 

“SEC” means the U.S. Securities and Exchange Commission.

 

“Securities Act” means the U.S. Securities Act of 1933, as amended.

 

“Senior External Debt” means any external debt of the Bank, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular external debt, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such external debt shall not be senior in right of payment to the notes. Under Colombian Banking Laws and accounting principles, “external debt” (pasivo externo) means, in the case of the Bank, any and all liabilities to third parties as reflected in the financial statements of the Bank from time to time or any and all liabilities to third parties in the event of liquidation.

 

“Subsidiary” means, with respect to any Person:

 

(1)  any corporation, limited liability company, association or other business entity of which more than 50% of the total voting power of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Board of Directors thereof are at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and

 

(2)  any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof).

 

Unless otherwise specified, “Subsidiary” refers to a Subsidiary of the Bank.

 

“Tax” shall mean any tax, duty, levy, impost, assessment or other governmental charge (including penalties, interest and any other liabilities related thereto).

 

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“Taxing Authority” shall mean any government or political subdivision or territory or possession of any government or any authority or agency therein or thereof having power to tax.

 

“Tier One Capital” means, as of any date of determination, the “Patrimonio Básico” as the same is defined in article 5 of Decree 1720 of 2001, as amended, or any other Colombian law or regulation regulating the Patrimonio Básico in effect from time to time.

 

“Tier Two Capital” means, as of any date of determination, the “Patrimonio Adicional” as the same is defined in article 7 of Decree 1720 of 2001, as amended, or any other Colombian law or regulation regulating the Patrimonio Adicional in effect from time to time.

 

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended (15 U.S.C. §§77aaa-77bbbb).

 

BOOK-ENTRY, DELIVERY AND FORM OF SECURITIES

 

The notes will be represented by one or more global notes (the “Global Notes”) in definitive form. The Global Notes will be deposited on the Issue Date with, or on behalf of, DTC and registered in the name of Cede & Co., as nominee of DTC (such nominee being referred to herein as the “Global Note Holder”). DTC will maintain the notes in minimum denominations of US$2,000 and integral multiples of US$1,000 through its book-entry facilities.

 

DTC has advised the Bank as follows:

 

DTC is a limited-purpose trust company that was created to hold securities for its participating organizations, including Euroclear and Clearstream (collectively, the “Participants” or the “Depositary’s Participants”), and to facilitate the clearance and settlement of transactions in these securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary’s Participants include securities brokers and dealers (including the underwriters), banks and trust companies, clearing corporations and certain other organizations. Access to DTC’s system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the “Indirect Participants” or the “Depositary’s Indirect Participants”) that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Depositary’s Participants or the Depositary’s Indirect Participants. Pursuant to procedures established by DTC, ownership of the notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the interests of the Depositary’s Participants) and the records of the Depositary’s Participants (with respect to the interests of the Depositary’s Indirect Participants).

 

The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer the notes will be limited to such extent.

 

So long as the Global Note Holder is the registered owner of any notes, the Global Note Holder will be considered the sole Holder of outstanding notes represented by such Global Notes under the Indenture. Except as provided below, owners of notes will not be entitled to have notes registered in their names and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions, or approvals to the Trustee thereunder. Neither the Bank nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by DTC, or for maintaining, supervising or reviewing any records of DTC relating to such notes.

 

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Description of the notes

 

 

Payments in respect of the principal of, premium, if any, and interest on any notes registered in the name of a Global Note Holder on the applicable record date will be payable by the Trustee to or at the direction of such Global Note Holder in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Bank and the Trustee may treat the persons in whose names any notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Bank nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of notes (including principal, premium, if any, and interest). The Bank believes, however, that it is currently the policy of DTC to immediately credit the accounts of the relevant Participants with such payments, in amounts proportionate to their respective beneficial interests in the relevant security as shown on the records of DTC. Payments by the Depositary’s Participants and the Depositary’s Indirect Participants to the beneficial owners of notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary’s Participants or the Depositary’s Indirect Participants.

 

Subject to certain conditions, any person having a beneficial interest in the Global Notes may, upon request to the Trustee and confirmation of such beneficial interest by the Depositary or its Participants or Indirect Participants, exchange such beneficial interest for notes in definitive form. Upon any such issuance, the Trustee is required to register such notes in the name of and cause the same to be delivered to, such person or persons (or the nominee of any thereof). In addition, if (1) the Depositary notifies the Bank in writing that DTC is no longer willing or able to act as a depositary and the Bank is unable to locate a qualified successor within 90 days or (2) the Bank, at its option, notifies the Trustee in writing that it elects to cause the issuance of notes in definitive form under the Indenture, then, upon surrender by the relevant Global Note Holder of its Global Note, notes in such form will be issued to each person that such Global Note Holder and DTC identifies as being the beneficial owner of the related notes.

 

Neither the Bank nor the Trustee will be liable for any delay by the Global Note Holder or DTC in identifying the beneficial owners of Notes and the Bank and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or DTC for all purposes.

 

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COLOMBIAN TAX CONSIDERATIONS

 

The following summary contains a description of the principal Colombian income tax considerations in connection with the purchase, ownership and sale of the notes, but does not purport to be a comprehensive description of all Colombian tax considerations that may be relevant to a decision to purchase the notes. This summary does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than those of Colombia.

 

This summary is based on the tax laws of Colombia as in effect on the date of this prospectus supplement, as well as regulations, rulings and decisions in Colombia available on or before such date and now in effect. All of the foregoing is subject to change, which change could apply retroactively and could affect the continued validity of this summary.

 

Prospective purchasers of the notes should consult their own tax advisors as to Colombian tax consequences of the purchase, ownership and sale of the notes, including, in particular, the application of the tax considerations discussed below to their particular situations, as well as the application of state, local, foreign or other tax laws.

 

Article 25 of the Estatuto Tributario (“Colombian Tax Code”) provides that loans obtained abroad by Colombian financial institutions or banks do not generate taxable income in Colombia and will not be considered to be “possessed” in Colombia.

 

As a result, under current Colombian law, payments of principal and interest on the notes to Holders of the notes who are not resident or domiciled in Colombia are not subject to Colombian income tax, and no income tax will be withheld from payments by us to Holders of the notes not resident or domiciled in Colombia.

 

In addition, and given that the notes will be deemed to be a loan possessed abroad, gains realized on the sale or other disposition of the notes will not be subject to Colombian income tax or withholdings as long as the holder of the notes is not a Colombian resident for tax purposes or is not domiciled in Colombia.

 

There are no Colombian transfer, inheritance, gift or succession taxes applicable to the notes, and no taxes will apply unless the beneficiary (in the case of a gift or succession) is a Colombian resident for tax purposes.

 

The provisions of Colombian law (Articles 124-2 and 408 of the Estatuto Tributario) which make non-deductible all payments made by Colombian payors to beneficiaries incorporated in, located in, or conducting business from, tax havens, unless a 34% (for taxable year 2007) or 33% (for taxable years 2008 et. seq.) withholding tax is applied, are not applicable to the payments made by us under the notes, since such anti-haven regulations exclude all payments corresponding to financial operations registered with the Central Bank. The notes are deemed a financial operation and foreign indebtedness that must be registered with the Colombian Central Bank.

 

U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

This section describes the material United States federal income tax consequences of owning the notes. It applies only to United States holders (as defined below) who acquire notes in this offering at the offering price and who hold the notes as capital assets for tax purposes. This section does not apply to Holders who are members of a class of Holders subject to special rules, such as:

 

 

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Tax Considerations

 

 

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations under the Internal Revenue Code, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

 

A Holder is a United States holder if such Holder is a beneficial owner of a note and is:

 

 

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the notes, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Such partner or partnership should consult its own tax advisor as to its consequences.

 

If you are not a United States holder, this subsection does not apply to you and you should refer to “United States Alien Holders” below.

 

Payments of Interest.  A United States holder will be taxed on interest on a note as ordinary income at the time interest is received or when it accrues, depending on such United States holder’s method of accounting for tax purposes. Interest paid by the Issuer on the notes is income from sources outside the United States subject to the rules regarding the foreign tax credit allowable to a United States holder. Under the foreign tax credit rules, interest paid or accrued in taxable years beginning before January 1, 2007, with certain exceptions, will be “passive” or “financial services” income, while interest paid or accrued in taxable years beginning after December 31, 2006 will, depending on a United States holder’s individual circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit.

 

The rules governing the foreign tax credit are complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.

 

Purchase, Sale and Retirement of the notes.  A United States holder’s tax basis in a note generally will be its cost. A United States holder will generally recognize capital gain or loss on the sale or retirement of a note equal to the difference between the amount realized on the sale or retirement, excluding any amounts attributable to accrued but unpaid interest, which will be taxable as interest, and such United States holder’s tax basis in the note. Capital gain of a non-corporate United States holder that is

 

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Tax Considerations

 

recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year.

 

UNITED STATES ALIEN HOLDERS

 

This subsection describes the tax consequences to a United States alien holder. You are a United States alien holder if you are a beneficial owner of a note and you are, for United States federal income tax purposes:

 

 

If you are a United States holder, this subsection does not apply to you.

 

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the notes, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Such partner or partnership should consult its own tax advisor as to its consequences.

 

Under United States federal income and estate tax law, and subject to the discussion of backup withholding below, if you are a United States alien holder of a note interest on a note paid to you is exempt from United States federal income tax, including withholding tax, whether or not you are engaged in a trade or business in the United States, unless you:

 

 

 

Purchase, Sale, Retirement and Other Disposition of the Notes.  If you are a United States alien holder of a note, you generally will not be subject to United States federal income tax on gain realized on the sale, exchange or retirement of a note unless:

 

 

For purposes of the United States federal estate tax, the notes will be treated as situated outside the United States and will not be includible in the gross estate of a holder who is neither a citizen nor a resident of the United States at the time of death.

 

BACKUP WITHHOLDING AND INFORMATION REPORTING

 

If you are a non-corporate United States holder, information reporting requirements, on Internal Revenue Service Form 1099, generally will apply to:

 

 

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Tax Considerations

 

 

Additionally, backup withholding will apply to such payments if you are a noncorporate United States holder that: