BULGARIA: An Introduction to Banking & Finance
The Bulgarian economy has continued its relatively strong growth for the last five years. While foreign direct investments have been on a downward trend for some time now, the economy has held up relatively well with stable domestic demand and increasing public expenditure on account of local COVID induced support measures and European Union funding. Throughout Europe double digit inflation has accelerated, especially since the war in Ukraine started in early 2022, but recently has shown signs of slowing down and falling back to single digits. Bulgaria, which entered ERM II in 2022, is on track to join the Eurozone in 2025 or 2026. The country has been approved in principal to join the OECD subject to satisfying a few remaining requirements.
Elevated levels of corruption, an unpredictable judiciary and arbitrary implementation of the law by state and local authorities remain significant challenges. Added to those is the lack of genuine independence of the key business regulators, most notably in the competition and energy sectors.
For the last two years Bulgaria has suffered from significant political instability. The last regular government (a coalition of political parties led by a newly founded technocratic party called We Continue the Change) lost a vote of confidence in Parliament and resigned in the summer of 2022. Since then the country has been run by a string of interim (caretaker) governments appointed by the president. A General election is schedule for 2 April 2023 which is highly expected to be inconclusive.
The politically unsettled situation meant that from end of December 2021 until now, Parliament barely passed any major legislation.
Current economic conditions
The consensual economic forecasts for 2023 predict that the economy will post a worse than expected growth of approximately 1.5%. Businesses, especially export-oriented industries such as metallurgy, apparel, IT software, agricultural products and mining are surging ahead. Defence manufacturers have fared exceptionally well on the back of arms production for export to Ukraine.
Residential and commercial construction continues to be an important growth driver with an increasing number of developments proceeding according to plan mostly office buildings in Sofia and other major cities. Other key sectors such as retail and tourism are also growing decently.
The banking sector is very competitive with five major banks (all except one subsidiaries of European-based banks) dominating all segments of it. Business credit is easily available, especially for good and sensible transactions or projects, especially in the sector of renewable energy.
Business climate activity
2022 saw a few notable acquisitions being completed or announced. The M&A transaction of the year was the USD2 billion acquisition by private-equity behemoth KKR of the global operations of ContourGlobal, the owner of Bulgaria’s second largest coal-fired power plant Maritza East 3.
In the TMT sector, the Bulgarian-based opportunistic investor Spas Roussev acquired the assets of BulSatCom (a leading satellite TV provider) for EUR130 million.
In the banking sector, the only notable transaction was the acquisition by Eurobank Bulgaria of the operations of BNP Paribas Personal Finance, Bulgaria Branch for approximately EUR40 million.
Investors in companies listed on the Bulgarian stock market had few reasons to cheer. No major Eurobonds were issued in 2022 and no notable international or local listings of Bulgarian companies were made.
Major international financings continued to dominate big-ticket project financings and leveraged acquisitions. Multilateral (EBRD, EIB/EIF, IFC) financings have decreased markedly due to the wide availability of commercial bank credit and increasing sophistication of the Bulgarian commercial banks, as well as the national development bank (BDB). It is international bank-led syndicates now routinely include large Bulgarian banks. Those for the most part comprise subsidiaries of major European banks such as UniCredit, OTP, KBC and Eurobank but also increasingly large Bulgarian-owned banks such as FIB, BDB and a few others.
Given the current fairly favourable market conditions it is perhaps unsurprising that very few insolvencies have been publicly announced. Several consensual corporate debt restructurings occurred, most notably one involving BulSatCom in which EBRD, BlackRock and BDB which was carried it in anticipation of the company’s sale.
Trends and developments
Acquisitions by local companies of the assets of departing major foreign investors will most likely continue. The “domestication” of big-ticket bank financings will gather speed, fuelled largely by the excess liquidity in the local banking sector.
The IT sector is a notable exception to this trend with a significant number of local software and IT services companies having sold themselves to US and European buyers.
Public-private partnerships continue to be very slow with key projects such as construction of NPP Belene and concession-tendering Plovdiv Airport (Bulgaria’s fourth largest) being largely put on hold.
One significant bright spot is the energy sector which has seen a flurry of renewable projects (mostly solar PV but also wind) achieving ready to build status which expect to be constructed and commissioned during 2023.
Impact on the legal market
The increasingly cut-throat fee competition, which is a characteristic of the local market, persists. The leading six-to-eight firms have continued doing the bulk of high-end legal work with very few new entrants having succeeded in breaking into the bulge bracket, most notably Kinstellar.
New legislation
Due to Parliament hardly being in session in 2022, very few major business laws were passed. An exception is a covered bonds law – the Covered Bonds Act 2022 – which transposes DIRECTIVE (EU) 2019/2162.