BULGARIA: An Introduction to Banking & Finance
The Bulgarian economy has continued its relatively strong growth for the last three 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. Similarly to the situation in Europe inflation has been being decreasing, especially lately. Bulgaria, which entered ERM II in 2022, is on track to join the Eurozone in 2025 or 2026. The country has been principally approved to join the OECD subject to satisfying a few remaining requirements. Bulgaria will join the border-free Schengen Area for travel by air and sea on 31 March 2024.
Above-average (for the EU) 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.
After prolonged political instability resulting from a string of inconclusive general elections, since the middle of 2023 Bulgaria has been governed by a de facto coalition of the two largest parties (GERB and PPDB) who enjoy the critical support of DPS (a predominantly Turkish minority party). The government was formed on the understanding between the parties participating in it that there would be a rotation of the government after nine months. The current government, led by the PPDB party, resigned in early March and a new government, to be led by GERB, is likely to be formed soon. The DPS support gives the government a qualified majority which has proven critical in important votes including most recently in amending the Constitution.
Current Economic Conditions
The consensual economic forecasts for 2024 predict that the economy will post a worse than expected growth of approximately 2.0%. Businesses, especially export-oriented industries such as metallurgy, IT software, agricultural products and mining are surging ahead. Defence manufacturers have continued to fare exceptionally well on the back of arms production for export to Ukraine.
Residential and commercial construction continues to be an important growth driver with a fair 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 still easily available, especially for good and sensible transactions or projects, especially in the renewable energy and property sectors.
Business Climate Activity
The year 2023 saw a few notable acquisitions being completed or announced. The M&A transaction of the year was Rezlov Energy’s multi-million euro acquisition of Bulgaria’s largest ready-to-build solar PV project in Kalipetrovo (north-eastern Bulgaria).
In the TMT sector, the Bulgarian-based opportunistic investor Spas Roussev sold the assets of BulSatCom (a leading satellite TV provider) to United Group, Bulgaria’s leading telecom and media company. TAWAL's EUR1.2 billion acquisition of United Group's CEE Tower Assets was also particularly noteworthy.
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 2023 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). 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 Cineworld Group's debt restructuring.
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.
While public-private partnerships continue to proceed slowly, the government has recently, after a long delay, resuscitated NPP New Kozlodui project to be constructed using Westinghouse’s AP 1000 PWR technology.
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 2024.
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
The Constitution was amended in late 2023. The amendments chiefly concern further reforming the judiciary and limiting the powers of the president to appoint caretaker governments. Amendments to the Investment Promotion Act, implementing the screening mechanism set out in Regulation (EU) 2019/452 were passed earlier this in 2024. The enabling legislation is to be adopted by September 2024 when the screening regime is expected to become fully operational.