The sale of portfolios of non-performing loans (NPLs) in Bulgaria is once again a hot topic. Lenders expect the percentage of work-out exposures to increase as the government's various stimulus packages come to an end. However, following a multitude of successful portfolio NPL sales in the years prior to COVID-19, more and more international investors are expressing interest in the local market.
What does this mean for NPL portfolio sales in Bulgaria?
There are several factors that will play a major role in the future of NPL portfolio sales in Bulgaria:
Following the negative consequences stemming from the COVID-19 pandemic, a new regime was introduced in Bulgaria for debt deferral. The rationale behind the new mechanism was to ensure a stable, reliable, and secure financial system that is resilient to external events and influences.
Pursuant to the new procedure, which was confirmed by the Bulgarian National Bank on 9 July 2020 (and subsequently amended on 10 December 2020), all borrowers with regular servicing of debts or borrowers who have failed to meet payment deadlines by less than 90 days can apply for postponement of their payment obligations (for both principal and interest). The borrower, however, must explicitly express the desire to avail of the concessions offered by the creditor. Likewise, the deferral request must have been submitted no later than 23 March 2021, and the creditor was required to make a decision by 31 March 2021.
Such liabilities can be deferred for a maximum of nine months, expiring not later than 31 December 2021. The end date may vary based on when the buyer requested the deferral and whether there are any outstanding payments as of that date. It was possible to request a deferral for all amounts due or only the principal within a grace-period timeframe. Following the expiry of the grace period, the outstanding amounts on the agreed maturity dates must be repaid in installments. Importantly, the postponement mechanism can only be applied to contracts signed not later than 31 March 2020. In cases where a deferral was agreed upon under the new procedure prior to 30 September 2020, these may be additionally deferred for a total period not exceeding nine months.
Absolute prescription period
On 1 December 2020, Bulgaria published an amendment to the Bulgarian Obligation and Contracts Act in the State Gazette. The measure was created to halt protracted enforcement processes against debtors, which, in the case of natural individuals, were frequently transmitted to their heirs after a debtor's death. Often, debtors are natural persons who do not own property from which a creditor may receive compensation, and even though a debt is uncollectible, enforcement procedures against these debtors continue. In Bulgaria, there is no legal option for natural persons to declare personal bankruptcy. Frequently, they are debtors for life.
The new legal provision stipulates that with the expiry of a ten-year limitation period, monetary claims against natural persons will be extinguished, regardless of any interruptions, except where the obligation is deferred. Pursuant to the amendment, if a case commences before the application of the absolute statute of limitation, the ten-year term begins when the receivables become due. If an enforcement procedure has already been initiated, the ten-year term begins from the first enforcement action. Otherwise, the term will commence as of the date of the legal act, which acknowledges that the receivable has come into force.
There are exceptions for the prescription period under the Bulgarian Obligation and Contracts Act. The prescription does not apply to receivables in the following cases:
- the commercial activity of sole traders or of natural persons-partners in an undertaking;
- a tort action;
- unjust enrichment;
- labour remuneration;
- compensations under the Labour Code;
- privatisation deals;
- property restituted according to the procedure established by a statutory instrument.
The absolute prescription period in the legislation has been met with controversy and mixed views. As a result, the legislation has garnered criticism from various sides. As a result, it is critical that all credit institutions carefully evaluate the repercussions and implications of the absolute prescription period and take the appropriate procedures to settle due claims or initiate judicial proceedings.
In April 2021, the Bulgarian Constitutional Court held that the provisions of the absolute prescription period, which were supposed to have retroactive effect, are unconstitutional.
On 26 June 2019, EU Directive 2019/1023 was adopted, which covers preventative restructuring frameworks, on the discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
The logical basis of the Restructuring Directive (seen as an integral part of the EU’s wider Capital Markets Union Action Plan) is to establish substantive minimum standards for preventative restructuring procedures as well as for procedures leading to a discharge of debt for entrepreneurs. After entering into force on 16 July 2019, the Directive's provisions were to be transposed no later than 17 July 2021, subject to a one-year extension in justified cases. Despite the ambition to harmonise restructuring procedures across the EU, member states will have a certain degree of flexibility for the implementation of the Restructuring Directive.
What to expect
Bulgarian banks still carry high volumes of non-performing loans on their balance sheets. In March 2021, Bulgaria's non-performing loans ratio stood at 4.71%, which was a slight decline from the ratio of 4.78% in the last quarter of 2020, based on data from the BNB Banking Supervision Department. The factors driving this trend include the current epidemic situation and restrictive measures, which resulted in the extension of the deadline for submission of requests until the end of March 2021. As a result, deferrals could be extended until the end of 2021, but not more than a total of nine months. The rise of successful portfolio NPL sales in Bulgaria has piqued the interest of international investors. Still, banks must carefully evaluate the repercussions and implications of the absolute prescription period and adopt the appropriate procedures to settle due claims or initial judicial proceedings. Moreover, the size of the offered ticket will also determine whether there will be interest by large international players. If not, only companies specialised in workouts will be involved.
Co-authored by Berdzh Draganov, Trainee at CMS Sofia