Category: Bulgaria

Bulgaria, along with the entire CEE region, has been experiencing a surge in investment and transactions over the past two to three years. Prior to that, hit by a late wave of the global recession, Bulgarian business faced problems with over-indebtedness, resulting in a large number of insolvencies, especially in the real estate sector. Since then, however, insolvencies have been decreasing. Thus, the recent uptick in the number of insolvency procedures being initiated in a particular sector – energy – deserves special focus and attention.

The Bulgarian energy sector has been liberalizing for the past 20 years, moving from a centralized state-controlled economy to a market-oriented model of operation. Bulgaria, following the example of countries like Spain, Italy, and the Czech Republic, offers fertile soil, an abundance of sun and wind, and favorable legislation to renewable energy producers. Accordingly, the renewables sector boomed in 2011-2012, before stringent governmental reactions slowed it down. However, the latest trend in the energy sector is full liberalization, fueled by the newly established energy marketplace for producers and consumers.

In the wake of increased competition stemming from the recent liberalization of the Bulgarian electricity market, more and more electricity players and major electricity traders have been facing serious financial difficulties. According to reports, some are now fighting to stay afloat after the initiation of insolvency proceedings. Given this increased market pressure, analysts state that it is likely that these and other energy traders may declare bankruptcy and face eventual liquidation. The most recent newcomer to the list of insolvent companies is the Future Energy and Energy Finance Group, one of the largest players on the market, even though a year ago, Future Energy was bidding to acquire the largest grid operator in Bulgaria. They went from boom to bust in a couple of months. 

The disruption appears to be connected to the arrival of renewable energy companies into the free market and their ability to sell power at non-regulated prices (i.e., without a feed-in-tariff (FiT)). The FiT was the key incentive for renewables but it was slowly curtailed over the past two to three years and a portion of the energy they produced had to be sold by the brokerage of energy traders looking for large quantities of energy. At that time, many of Bulgaria’s electricity traders opted to seize the opportunity and obtain new clients by offering competitive prices to these renewable energy producers.  

Initially, the renewable energy producers were competitive on the free market despite the costs of this type of power generation. Low-margin operations, however, now seem to be turning against both RES producers and the electricity traders with a crushing effect on the market as a whole. Electricity traders have been unable to generate more profit in order to pay off increased prices to RES producers, resulting in delayed payments to these producers and other creditors, ultimately pushing many traders into insolvency.

Because many of the endangered energy traders are tied to each other commercially, this insolvency avalanche is expected to cause more instability in the near future. A further twist in the tale is brought by recent legislation, which in mid-2018 abolished the FiT entirely, meaning most RES companies will now have to sell a significant amount of the energy they produce on the free market, whereas this previously was the agenda only for the larger ones. 

Unfortunately, creditors may have little luck recouping losses in insolvency proceedings since energy traders traditionally do not have properties or assets beyond the receivables they are owed. This factor seriously jeopardizes the interests of these creditors. As the new legislation jeopardizes RES producers as well, it is possible that Bulgaria will see a growing number of insolvencies in the renewable energy sector stemming from its ongoing liberalization. 

By Assen Georgiev, Partner, Iliyan Petrov, Senior Associate, and Deyan Draguiev, Associate, Dispute Resolution, CMS Sofia 

This Article was originally published in Issue 5.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Two concentrations recently prohibited by the Bulgarian Commission for the Protection of Competition with limited analysis have been widely criticized for their lack of valid economic arguments. Because both decisions were highly publicized and concern the politically sensitive sectors of media and energy, they are worth special attention.

On July 19, 2018 the CPC prohibited: (1) The sale of Nova Broadcasting Group AD, the second largest media conglomerate in Bulgaria, to PPF (owned by Czech businessman Petr Kellner); and (2) the sale of CEZ’s assets in Bulgaria, including its energy distribution and trade businesses and some small renewable energy parks, to Bulgaria’s Inercom, which maintains three solar power stations in the country. 

In both decisions, the commission’s legal arguments were expressed in a few paragraphs and it remains unclear why it classified the acquisition of companies which are not major competitors as potential strengthening of the acquirer’s dominant positions.

In both prohibited concentrations the overlap on the horizontal and vertical market/s is none or almost non-existent. Also, both concentrations concern acquisitions of large undertakings in Bulgaria (with market share in certain relevant markets close to or exceeding 40%) while the market share of the acquirer is insignificant (below 5%).

Thus, for instance, in the prohibited concentration of Nova Broadcasting, the parties’ activities overlap only in the market of e-commerce, where both the acquirer and the target hold a market share of less than 5%. Indeed, the Nova Broadcasting Group holds a market share of approximately 40% on the markets of TV distribution and TV advertising. In these two markets, however, the acquirer is not active in Bulgaria, and there is no overlap. Despite the lack of actual threatening horizontal or vertical overlapping, the CPC considered that the “significant amount of mass information resources, which would be accumulated by the concentrated group, would lead to its significant advantage over the other participants in the media market. Thus, the participants in the concentration would have the incentive and actual possibility to change their trade policy (e.g., by limiting the access, price increases or changes in the terms of the concluded agreements).”

In the decision prohibiting the sale of CEZ’s assets in Bulgaria, the CPC found that there was a horizontal overlap between the participants’ activities on the market for the production and wholesale supply of electricity from photovoltaic power plants. The CPC also stated that the concentration generates vertical effects on downstream markets, namely the markets for electricity distribution, and supply and trade with electricity.

However, the CPC did not assess the market shares of the participants on these markets. The CPC only referred to a potential threat for the competition by analyzing the legislative changes in Bulgaria, which concern the buy-out of electric energy produced by small electricity plants with a capacity exceeding 4 megawatts. The analysis of the CPC failed to explain why the concentration would be detrimental for the concentration under the new legal regime considering that no substantial actual change would occur as a result of the concentration.

Next, in the CEZ decision, the CPC directly prohibited the concentration after a Phase I proceeding, without initiating a Phase II proceeding. As a general principle under the Competition Protection Act (CPA), when, during a Phase I proceeding, the CPC establishes that the concentration poses serious threats to effective competition on the market, it starts an in-depth investigation and analysis of the merger’s effects on competition. The CPC, however, directly prohibited the CEZ concentration based on the Phase I investigation alone.

In the Nova TV decision, the CPC formally opened a Phase II proceeding. However, the results of those proceedings were not clear. In particular, the conclusions the CPC drew from the Phase II proceedings were identical to the conclusions it drew which led to its opening of the Phase II proceedings in the first place.  

Next, the CPC did not discuss the positive effects of the concentrations in either of the two decisions. While the CPC examined the stable and substantial financial resources of the acquirers and the experience of the targets, it seems that these factors were considered as negative per se in the context of the two transactions.

It also remains largely unclear as to why recent concentrations with almost identical factual backgrounds concerning markets as those under the prohibited decisions were approved without conditions, while these concentrations were directly prohibited by the CPC.

The decisions of the CPC can be appealed to the Supreme Administrative Court in the second instance. It remains to be seen what will happen.  

By Ilko Stoyanov, Partner, and Galina Petkova, Attorney at Law, Schoenherr Sofia

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The amendments provide new business opportunities to banks to enter into repo transactions and derivatives with Bulgarian pension funds.

There are various types of private social security funds (фондове за социално осигуряване) under Bulgarian law depending on the social security risks they cover. However, as the regime for derivatives and repo transactions is identical for all types of funds, no differentiation is necessary for the purposes of this paper. The term “Pension Funds” as used here thus covers all social security funds under the Bulgarian Social Security Code [Кодекс за социалното осигуряване] (the Code).

Certain amendments to the Code which will enter into force on 18 November 2018 will change the regime for derivatives and repo transactions with Bulgarian Pension Funds (1), and these will be briefly outlined below.

Existing legal framework and problems underlying repo transactions 

So far there have been only two statutory restrictions on repo transactions with Pension Funds (Repos). Firstly, as Pension Funds’ assets may only be invested in certain types of securities expressly listed in the Code, Repos must be for such securities only. Secondly, there is a quantitative restriction whereby Repos under the preceding sentence may be for up to 5 % of the Pension Funds’ assets.

The Financial Supervision Commission (FSC), which is the authority supervising Pension Funds’ activities in Bulgaria, attempted to impose certain additional restrictions to avoid the risks that Repos be used to provide long-term credits. In this respect, it published some guidelines requiring inter alia that the relevant agreement for Repos be for a period not exceeding six months. In practice, however, many Repos were entered with tacit prolongation clauses for additional six-month periods, after the expiry of each preceding six-month period. The FSC used to impose administrative penalties for such arrangements, which were normally successfully appealed before the courts. There have been more than 20 final publicly available judgments in the last couple of years repealing such penalties, arguing that the FSC had no legal power to impose additional requirements on Repos apart from those imposed under the Code.

The new framework for Repos applicable as of 18 November 2018

Under the 18 November 2018 amendments to the Code, apart from the two statutory restrictions above, Repos should comply with four additional requirements. Firstly, counterparties to Repos may only be credit institutions or investment firms with capital exceeding certain thresholds, licensed in an EEA or OECD Member State. Secondly, Repos should be for not more than six months. Thirdly, the possibility to enter into Repos must be provided for under each Pension Fund’s investment policy [инвестиционна политика], the mandatory requisites of which are set out in Regulation No. 56 of the FSC. Fourthly, the Repos should comply with the investment purposes and restrictions under the investment policy of each Pension Fund.

Apart from the six-month temporary restriction and the restrictions on the types of counterparties, which may be easily monitored and verified, counterparties to Pension Funds under Repos would be well-advised to make certain checks and have in place certain representations in the Repos documentation to cover the remaining restrictions.

New derivative risks mitigation instruments available to Pension Funds

To reduce investment risks associated with Pension Funds’ assets, certain transactions exhaustively listed in the Code may be used, whereby performance of the respective obligations is delayed. So far only three types of transactions were permitted: (i) deals in futures or options traded on EEA Member States’ regulated markets, or other markets as specified by the FSC; (ii) foreign currency forwards (FX forwards); and (iii) interest rate swaps (IR swaps). Under the 18 November 2018 amendments to the Code, Pension Funds will also be allowed to be parties to a fourth category of risk mitigation deals: over-the-counter options (2) (OTC Options), where the counterparty is a bank supervised in an EEA Member State or in another country as specified by the FSC.

New rules for the terms and obligations with respect to derivative risk mitigation instruments

The detailed terms (including some restrictions in addition to those under the Code) for entering into risk mitigation transactions and the ongoing regulatory obligations thereof are set out in detail in Regulation No. 34 of the FSC, which has been extensively amended alongside the Code, where most of the amendments will enter into force on 19 November 2018, i.e. immediately after the amendments to the Code discussed here.

Certain restrictive rules under Regulation No. 34 applicable to IR swaps and FX forwards do not apply to the new type of derivatives that Pension Funds may use under the Code: OTC Options. In particular, Pension Funds’ counterparties to IR swaps and FX forwards may be credit institutions and investment firms with a credit rating of BB/Ba2 or higher. As this restriction is not expressly applicable to OTC Options, it seems that even banks with a rating lower than BB/Ba2 may be counterparties to a Pension Fund under OTC Options.

By Tsvetan Krumov, Attorney at Law Schoenherr

The particularly-challenging nature of CEE law firm marketing becomes especially relevant as we bid adieu to a good friend in Bulgaria, who, after more than four years doing law firm marketing and business development with several of Bulgaria’s leading law firms, is leaving the profession altogether. We asked her some final questions on her last day, honoring her request for anonymity in the process.

CEELM: First, tell us a bit about your background and how you got into the law firm world.

A:  I was a project manager at a venture equity company, but I had an applied legal background; I was not a lawyer but I had a great focus on law in my education, and I had prepared many legal documents as a project manager. 

I was looking for diversity – for something new, for new challenges. I thought at that time the legal industry was very interesting. I thought it would provide a very dynamic environment, working with a lot of people, and a lot of projects. And It was very dynamic. Indeed, I was quickly quite overwhelmed with work. I was the only person in the business development departments at both firms I worked with, which meant all work went through me. Which is very difficult. It was very interesting, of course, and very challenging, because I participated in proposing new working procedures, new challenges, new networking challenges, and new marketing opportunities for the companies. But in terms of the unending submissions, and the frustration of trying to overcome Bulgaria’s bar restrictions, it was very frustrating, and very consuming.

CEELM: So why have you decided to move on?

A: It was just high time to leave the industry. I became very frustrated. Working with the lawyers was difficult, while trying to maintain my dignity. Of course, I value many of the relationships I was fortunate enough to develop, but whether it’s because of the stress they face, or the particular incentives, or simply the kind of characters that are attracted to the profession, I’m afraid I discovered that many of them are simply not very nice persons. And I’m afraid that non-fee earners are not persons that are much loved at law firms.

CEELM: Did you not feel that you were getting enough support? 

A: With more support I would have been happier, obviously.

CEELM: It sounds like you don’t feel that you were given enough respect, ultimately.

A:  Yes, exactly. That’s the right word. I didn’t feel I was receiving any real respect for the amount of work I was putting in. Still, I don’t want to be too negative. There were many parts of the job I enjoyed a great deal, including online marketing projects, helping develop and implement content strategies, participating in negotiations with clients, and creating/hosting client events.

CEELM: So what’s next for you?

A: I’ve accepted a position in a whole new industry: telecom. I will be managing telecom infrastructure projects. 

We wish you the best and the CEE law firm marketing world is the worse for your departure!

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.