SECURITISATION IN BULGARIA
First published in Global Securitisation and Structured
Finance 2003, published by Globe White Page in association with Deutsche
Securitisation – which has only truly
emerged in Bulgaria since the shift to a market economy
– is still perceived more as a method of granting security
over debts incurred, than as a technique for financial
engineering. Direct creation of security is still understood
as the essence of securitisation.
Generally, true securitisation transactions were completed
in relation to the restructuring of Bulgarian foreign debt.
The most significant transaction is the issue of Brady
Bonds in connection with the agreement with the London
Club of creditors executed on 28 July 1994.Bulgaria has
issued three types of bonds, listed at the Luxembourg stock
exchange, with a total face value of US$5.1 billion. These
are front loaded interest reduction bonds (‘FLIRBs’); discount
bonds (‘DISCs’) and interest arrears bonds (‘IABs’). FLIRBs
and DISCs may also be used as payment instruments in privatisation.
Further to that, another important transaction was the
restructuring of these issues. In March 2002 Bulgaria issued
new bonds with a face value of ˆ835.5 million and new bonds
with a face value of US$513 million. These new bonds were
offered to the holders of the three types of Brady Bonds
(denominated in US$) in exchange for the old ones. Such
bonds with a total face value of US$1.327 billion were
actually swapped (US$348.7 million IABs, US$376.5 million
FLIRBs and US$602 million DISCs).
Securities law development in Bulgaria
The provisions of Bulgarian law on security are marked
by several general principles.
As a continental legal system, Bulgarian law does not recognise
the English law concept of ‘trust’ and instead favours
the concept of ‘possessory security’. There is no tradition
of reliance on contractual security. Also, there is no
transfer of title to assets for security purposes, except
by endorsement of negotiable instruments to create a pledge.
Secondly, the modern development of banking law and practices
has resulted in banks lending on ‘external’security only.
That is to say, a project and the cash generated from such
a project are not considered to be sufficient security
by the banks; they require the creation of security rights
over assets that are separate from the project itself.
Therefore, the general understanding of securitisation
is closer to creation of security over the performance
of a debt, rather than to securitisation as an aspect of
Immovable property is highly respected (as evidence of
this, the Bulgarian population has one of the highest percentages
of homeowners in the world). Therefore, hypothecation of
real estate is perceived as providing first-class security.
This is not just because there is a stable property market,
but also for its psychological effect as a driver to ensure
that loans perform. Typically, a hypothecation on the home
of the manager of the credit applicant will be requested,
although the value of such immovable property may be immaterial
to the amount of the loan.
The legacy of a centralised economy means that exact performance
is encouraged and expected by legislation. Security, therefore,
was not actually relied upon. This notion has had a long-lasting
effect on the legal and commercial mindset of Bulgarian
society. This aspect of the legislative heritage is being
compensated for through commercial and banking practices
and behaviour, rather than by effective amendments to relevant
Bulgarian law is, in general, highly protective of debtors.
This is a throwback to the centralised economy era when
the sole ‘commercial’ players were state-owned entities,
and private citizens could not engage in commercial activities.
Foreclosure is generally available through court bailiffs,
and true sales are rarely available. Also, a defaulting
debtor has a number of tools (i.e. court procedures) at
his disposal, which he can use to slow down enforcement.
Last, but not least, the creation of security is regulated
only as an auxiliary right to an existing main obligation.
Where there is no valid debt, or where the secured debt
was extinguished in any manner (including novation, repayment,
and so on), security rights will be unenforceable.
Given the above, the development of a modern concept of
security (to say nothing of securitisation) has been slow
in Bulgaria when compared to other important branches of
the law of a market economy – such as company law, banking
Company law and banking law are wholly new branches of
the law in Bulgaria. However, one of the problems relating
to securitisation is that certain relevant legal provisions
already exist, and there are certain practices thereunder,
which make the transition in such a field even more difficult.
However, a strong influence for the development of security
concepts in Bulgarian law has been provided by the international
financial institutions, which, upon lending to the Bulgarian
government, have requested amendments to legislation. In
addition, Bulgaria’s aspiration to join the European Union
means that a degree of harmonisation with European law
Bulgaria now has a number of tools and instruments to help
towards the creation of security and – to a certain extent
– securitisation as well. These are able to provide a creditor
with a decent level of protection in instances where a
debtor fails to perform.
As a general caveat, cross-border securitisation is valid
only upon prior registration of the security (whatever
the instrument may be) with the Bulgarian National Bank
under s.4 (2) (3) of the Currency Act (1999,in force since
1 January 2000).This registration (which will not be unreasonably
refused) is a preceding condition for the validity of any
securitisation where a Bulgarian person or entity would
grant security rights to a foreign person, even where the
actual obligation may be between foreign persons only.
The only exemptions available under section 4 (4) of the
Currency Act are where the Bulgarian security grantor is
a bank, licensed to operate abroad, or, where the value
of the transaction is below Bulgarian leva 2,000 (i.e.
ˆ1022.58 under the exchange rate fixed under the currency
board legislation). Registration is not required in the
case of domestic securitisation, i.e. in favour of a Bulgarian
person or entity.
Hypothecation Bonds Act
In Bulgaria, the closest legislation to the concept of
securitisation in the modern legal world is the Hypothecation
Bonds Act (2000) (‘HBA’). This piece of legislation allows
banks with a portfolio of loans secured by first-rank hypothecation,
to package these loans and offer bonds secured by the pool
of receivables from such a portfolio to investors. These
bonds are negotiable instruments and are registered into
a public register, maintained by the issuing bank. The
bonds may be offered to the public, in which case the issue
falls under the regulation of the Public Offering of Securities
Act (1999,in force 31 January 2000, as amended), or may
be placed privately, under the general rules of the Commercial
Act (1991,as amended) for issue of bonds by a shareholding
company. Where the pool of assets may decrease, including
through repayment of the secured loans included therein,
the issuing bank is obliged to supplement the pool with
adequate coverage. It is not allowed to substitute more
than 30 per cent of the portfolio by claims, which are
not secured by hypothecation.
Importantly, the claims of the bondholders are insolvency
remote, i.e. the pool of assets under the register of hypothecation
bonds will not be amalgamated into the insolvent estate,
should the issuing bank become insolvent.
In any instance of insolvency, the pool of assets, and
the claims of the bondholders, are managed separately by
a special trustee, and not by the official representative
of the bank’s insolvent estate. Where there may be funds
available after the full satisfaction of the bondholders,
these will be directed towards the insolvent estate of
the issuing bank.
Specific Pledges Act
Aside from this true securitisation, expressly recognised
by a special piece of legislation, it ought to be mentioned
that in 1996 the Specific Pledges Act (in force 1 April
1997,‘SPA’) was adopted. This piece of legislation broadly
follows the European bank for Reconstruction and Development’s
‘Model Act for Secured Transactions’ and introduces concepts
of security, which are quite removed from the Bulgarian
legal tradition. For example, SPA recognises non-possessory
pledge (registered pledge) and, as a type thereof, a floating
charge. In order to trigger the application of SPA, the
security grantor has to operate as a trader (or to be exempt
from the duty to register as a trader under s.2 of the
Commercial Act). The assets subject to SPA are expressly
itemised, and these are: claims; dematerialised securities;
chattels (ships and aircrafts being expressly excluded);
shares in commercial companies (except paper-backed shares
of shareholding companies); aggregation of assets; industrial
and intellectual property rights; and business enterprises.
The rules of SPA are flexible enough to allow the pledging
of rights, which are not yet available to the pledgor,
as well as to create security over future claims and also
towards conditional claims. It is very important to note
that where a security secured by such a pledge claim is
assigned or even pledged itself, the original pledge follows
the secured claim.
The SPA allows the pledgor to retain possession of the
pledged assets and use these in its business. It may even
dispose of such assets in the normal course of its business.
Creation of a specific pledge is effected through making
a contract in writing and by entry of the pledge into the
Central Registry of Specific Pledges - an institution that
operates under the auspices of the Ministry of Justice.
Such an entry will be made on the application of the pledge
grantor and will be valid for a maximum period of five
years, unless a shorter period is requested. The Registry
operates on the basis of priority of entries, and the term
of an entry may be extended before the expiration of the
original term, which would protect the benefit of priority.
The nature of the particular asset may necessitate its
entry into other registers. Such other registers are:
• the company register, where the business enterprise of
a trader may be pledged or where shares into a company
may be pledged;
• the land registers, where an immovable may be pledged;
• the Patent Office, where industrial and intellectual
property rights may be pledged.
It is important to note that a pledge is perfected towards
any third persons upon the entry made in the relevant register,
different from the Central Registry of Specific Pledges.
A Pledge on dematerialised securities will not be registered
with the Central Registry of Specific Pledges, but with
the Central Depository instead. The latter is a special
purpose company, entitled to maintain the registers of
dematerialised securities. Among other specific rules,
it is worth mentioning that pledge of claim must be notified
to the debtor under such claim.
Foreclosure under a specific pledge is effected by registration
with the Central Registry of Specific Pledges (or with
the Central Depository, accordingly). Upon foreclosure,
the pledgee is entitled to seize the pledged assets and
make any relevant notices or undertake protection of the
pledged assets and their value. Where a pledgor will not
cooperate, the pledgee has to resort to the bailiff, and
the latter will proceed with enforcement under the rules
of the Civil Procedure Code (1952,as amended). Foreclosure
is organised by a depositor (administrator) appointed by
the pledgee. Such a depositor must be a qualified accountant,
and is empowered to sell the pledged property and administer
the proceeds thereof. The depositor must accommodate the
received funds into its special bank account and pay the
pledgee (and eventual other creditors who may have joined
the procedure) from this account. Thus, foreclosure under
the SPA does not actually amount to a true sale.
The procedures under the SPA provide for certain advantages
in cases of pledgor insolvency, although upon such insolvency
foreclosure proceedings will be terminated. First, a claim
secured by non-possessory pledge ranks, in insolvency,
immediately after claims secured by possessory pledge and
hypothecation. Secondly, non-possessory pledge extends,
upon express provision of the law, to the amounts of money
paid in consideration of the sale of the pledged assets
(whether in foreclosure or otherwise). Thirdly, where the
pledged assets could not be separated from the other assets
of the pledgor, the pledgee is entitled to privilege in
the amount of the pledged assets’ price. In the latter
case, upon the insolvency of the pledgor, the privilege
extends to all the assets within the insolvency estate
of the pledgor, except where possessory pledge, hypothecation
or retention rights exist.
The Commercial Act and general law
The Commercial Act provides for a commercial pledge, which
is a kind of possessory pledge, different from the general
pledge under the Obligations and Contracts Act (1950,as
amended) (‘OCA’). Commercial pledge is available as security
towards commercial transactions only, and is effective
upon delivery of the pledged asset – chattels or negotiable
instruments. Upon assignment of the secured claim the pledge
is deemed to have been assigned as well. True sale is available
in case of default only upon meeting certain additional
requirements, i.e. where there is express consent for such,
the date the pledge contract was made is prima facie evidence
and where the pledged assets have a market price or a stock
More classic types of security are hypothecation and possessory
pledge. While possessory pledge has no particular differences
from the other ‘continental’ jurisdictions, hypothecation
is made only by way of a notarial act and registration
into the relevant land register. Land registers are maintained
by each regional court, and, at present, there are 111
of them. At present there is no national information system
of land registrations. Registrations are made in the name
of the acquirer of real estate rights and not on the basis
of a property plan. Hypothecation is valid for a maximum
of 10 years from the date of entry, and may be renewed
before the expiration of the original term. Given that,
there may be only legal rights in security and no beneficial
rights in security, even where there may be no other secured
Some particular issues of Bulgarian law related to security
are worth mentioning. Bulgarian law and practices of securitisation
are not prepared to accommodate revolving credits. Where
an amount of money was repaid, the original obligation
is considered to be extinguished, and further re-borrowing
of a repaid amount will be treated as a new loan. Where
security was granted to the original loan, it will be extinguished
by the repayment of the first draw-downs, and the subsequent
borrowing will be treated as an unsecured loan. There are
some court practices, which reinstate this understanding.
Insolvency procedures have an impact on the legal status
of security under the general rules of the Commercial Act.
The creation of pledge or hypothecation of an asset of
the insolvency estate is invalid if made after the date
of the court decision for opening of the insolvency proceedings,
unless it is made in compliance with the insolvency regulation.
While such a rule is logical, more threatening to the secured
creditors’ interests is the rule that the creation of any
security interest by the insolvent trader is invalid if
made after the initial date of the insolvency. The point
here is that such a date will be determined by the insolvency
court and may be imposed retroactively, i.e. some time
before the opening date of any insolvency proceedings,
which is hard (if possible at all) to foresee by the secured
creditor. There have been court practices to declare a
security granted invalid, because the insolvency court
set the initial date of insolvency before the date the
security was created. Court practices have set the initial
date of insolvency years before proceedings were actually
Further, the creditors of the insolvency estate may enjoy
claims to rescind security granted, where security was
created within one year before the initiation of insolvency
proceedings, if such security was created after the secured
debt originated. Where security was created in favour of
a shareholder with more than 20 per cent control, a manager
of the insolvent company or other controller of the insolvent
company, the “suspicious” period is two years before the
opening of the insolvency proceedings.