According to information from the Bulgarian National Bank (“BNB”), over the past few years non–performing loans (“NPLs”) have come to represent around 20% of all loans in the Bulgarian banking system. Although this is not a small percentage, there have been far fewer deals in Bulgaria with portfolios of NPLs than in other developed markets and even in comparison with neighbouring Romania. Local market factors, such as national regulations, the liquidity of the banking sector, and political, legal and economic stability, contribute to this difference. On the other hand, trends such as increasing European regulation and events in neighbouring Greece could pave the way to more deals involving NPLs in Central and Eastern Europe, including Bulgaria. Below we set out some of the main legal aspects to bear in mind when considering deals involving portfolios of non-performing loans in Bulgaria:
Foreign investment funds and asset management companies not established in Bulgaria and interested in purchasing NPLs should be aware that the acquisition of credit claims could be considered an activity subject to regulation by the BNB. Pursuant to the Bulgarian Credit Institutions Act and BNB Ordinance on Financial Institutions, a company should register as a non-banking financial institution if its core business is the acquisition of receivables from loans, i.e., if such business represents over 30% of its total revenue or the assets related to this activity are more than 30% of its total assets (assuming that there will not be any public acceptance of deposits or lending of loans, which would require a banking license). The registration must be completed before commencing the material activity, with subsequent compliance with the special regulatory requirements, including implementation of appropriate anti-money laundering measures, periodic reporting and applying of respective internal rules and procedures for management and internal control.
In the event of a deal with a portfolio of non-performing loans, a merger notification with the Bulgarian Commission for protection of competition may also be necessary in case the turnover of the participants exceeds the thresholds provided under the Law on the Protection of Competition.
The acquisition of credit portfolios extended to individuals includes the processing of personal data of the respective debtors. This implies the registration of the company acquiring the portfolio as an administrator of personal data at the Bulgarian Commission for the protection of personal data and the maintenance of a respective register. It is arguable whether the often too general consents for the processing and transfer of personal data initially provided by the debtors at the time the loan was extended are actually sufficient for the buyer of the portfolio to subsequently use the personal data for the management and collection of the loan. In case of a change in the purposes for the processing of such data, an additional explicit consent from the individual debtors might be necessary.
Structuring the deal
The prevailing method for the transfer of a non-performing loan portfolio in Bulgaria is via assignment. It is also possible to sell the portfolio as a part of a commercial enterprise or through a spin-off into a separate SPV, the stakes and the shares of which are later transferred to the buyer. This option is suitable in cases in which the buyer wishes to acquire the team of employees and supporting assets (e.g. software and equipment) related to the service of the bad credits along with the receivables.
The structuring of the deal also requires good judgement regarding the moment of the transfer of the title of the receivables. As a rule, these portfolios include multiple loan receivables, the value of which changes from time to time (payment of instalments, accrual of interest, expenses, etc.). Therefore, the parties should consider these changes and provide mechanics in the agreement for the adjustment of the price in case of a change of the initially set value of the portfolio.
Another issue is related to the expenses and activities for servicing the portfolio, such as court and out-of-court fees, expenses for notifications and invitations, etc. Under Bulgarian law, the assignment of receivables becomes effective vis-à-vis third parties after the debtor is duly notified. Until this moment (and sometimes after that), it might be necessary for the seller to continue to perform certain activities and incur certain expenses in order to maintain the NPLs. Therefore, it is advisable to negotiate what assistance would be necessary from the previous creditor and the respective compensation.
The quality of the information regarding the portfolio is also a crucial point in the negotiations. After a certain period, it could be established that a receivable from the portfolio is void, time-barred or uncollectible due to other circumstances that were not obvious from the documentation regarding the NPLs. Under the provisions of the Bulgarian Contracts and Obligations Act, in cases of assignment against consideration, the transferring party is responsible for the existence of the claim. In such situation, the parties may agree for the seller to repay part of the price corresponding to non-existing receivables or to agree another form of compensation for the buyer. Additionally, it would be good for the parties to settle who will bear the risk of other defects that have remained hidden during the initial due diligence, such as incomplete documentation on the credit files or problems with the security interests.
What comes after the transfer
One of the first challenges a buyer of non-performing loan portfolio faces is the notification to the debtors. Under assignments governed by Bulgarian law, this notification is necessary for the buyer to legitimise himself to the debtor and to perform any subsequent activities as the new creditor. Unlike other countries, such as the Czech Republic and Romania, where the new creditor may notify the debtor by providing respective evidence for completion of the assignment, Bulgarian law requires a notification by the old creditor, who very often loses interest in the performance of any actions after the sale. In many cases, the seller of the portfolio authorises the buyer to carry out the notification on his behalf. This entails certain risks, as the debtor may dispute the validity of the power of attorney or at least require to see a copy, if it is not attached to the notification. Thus, in the case of a portfolio of hundreds of loans, the due notification of the debtors might turn out to be quite a challenge.
Besides the notification, the investor in an NPL portfolio should consider that for some loans the collection of receivables might be in a court phase or there might be lawsuits brought by third parties, enforcements, or insolvency proceedings. The Bulgarian Civil Procedure Code does not allow the substitution of the old creditor by the new one during in-court procedures without the consent of the debtor. Since it is unlikely for the debtor to agree on such a substitution, the buyer of the portfolio will need the assistance of the seller to continue the litigation process. Additionally, they should settle the issue with expenses in the event of the successful or unsuccessful completion of the case. This problem is resolved differently in countries such as Hungary or the Czech Republic, where the claimant can transfer his claim during the case and the new creditor will substitute him completely and will continue the case on his own behalf.
In the case of the transfer of secured loans, where the security interests are entered into a register (e.g., registered pledges or mortgages), an additional registration reflecting the transfer of each of the transferred claims must be made. Of course, the availability of security interests and their transfer, preservation and realisation imposes other challenges on the new creditor, which could be the subject of a separate analysis.
Bulgarian legislation concerning deals with non-performing loans continues to have some disadvantages compared to other countries in the region. The enactment of legislative changes and a more pragmatic view by the enforcing courts on the issues, such as notification of debtors, transfer of the security interest and continuance of proceedings already started by the new creditors, would contribute to the development of the market for credit portfolios and an increase in foreign investor interest.