Asset-based financing or lending secured by an asset is allowed under Bulgarian law. Various manners could be utilized by lenders (whether foreign or local entities or individuals) to achieve collateralization of their loans.  Bulgarian law recognizes two main types of real security ("security in rem") - mortgages and pledges. Furthermore, lenders could make use of financial collateral arrangements to validly secure their claims under loan agreements.

Mortgage

The object of a mortgage can be title rights over real estates or limited right in rem in real estate, such as the superficies. A mortgage of the full title to a piece of land shall also attach to the edifice constructed on same land after the mortgaging without any need for further creditor action. Mortgages are created by means of (i) notary deed executed by a Bulgarian public notary, and (ii) registration of the mortgage by the notary public in the respective land registry.

A mortgage under Bulgarian law is valid and creates security interest only once it has been registered with the respective real estate registry. Until then the mortgage deed does not create and establish any rights in favour of the mortgagee both vis-a-vis the mortgagor and also vis-a-vis third parties.

The registration of the mortgage is effective for 10 years with an option for renewal before the expiration of the 10-year period, preserving the original date of registration as the date of perfection and priority of the mortgage.

The only possible method to foreclose on a mortgaged piece of real estate is the judicial foreclosure provided for by the Code on Civil Procedure. Based on the mortgage deed, the mortgagee may obtain a writ of execution against the mortgagor, without the need to obtain a final court judgement against the mortgagor.

Pledges

A creditor may decide to secure its receivables from the debt with a pledge (security interest) on movables, securities, equity interests, account receivables and intellectual property rights (including floating pools of such assets) or by financial collateral over securities and account receivables. Security can be granted either by the debtor, or by a third party.

Under Bulgarian law there are three types of pledges: (i) possessory pledge, (ii) commercial possessory pledge and (iii) registered pledge.

(i) Possessory Pledges

A possessory pledge is a security interest in movable goods or transferable accounts receivable created by a pledge agreement and delivery of the goods or of the documents evidencing the account receivables to the secured creditor.

(ii) Commercial Possessory Pledges

A commercial possessory pledge is a security interest in movable goods or securities created by a pledge agreement and delivery of the pledged goods or securities to the secured creditor.

(iii) Registered pledges

Registered pledges are established on the grounds of a written pledge agreement and their perfection vis-à-vis third parties requires a filing of financing statement describing the secured obligations and the collateral provided. A registered pledge is a security interest in movable goods or other items of personal assets specified by law created for the purpose of securing performance of duty or payment of debt, while possession of the collateral remains with the pledgor. The following types of assets could serve as collateral: (a) account receivables, movable items (except for ships and aircrafts) and book-entry form securities; (b) shares in limited liability companies and different types of partnership; (c) floating pools of account receivables, machines, equipment, raw materials and book-entry form securities; (d) intellectual property rights and (e) going concerns defined as the floating pool of all assets, rights, obligations and factual relationships of a commercial enterprise.

The two main advantages of registered pledges which makes them a preferred method for collateralizing a loan are as follows: (a) simple and efficient manner of obtaining security – through eliminating unnecessary formalities the creation of a registered pledge enables the reducing of transaction cost, as opposed to the execution formalities and relatively high costs of a mortgage creation; (b) predictable and timely enforcement of creditor's rights – the registered pledge is subject to out-of-court foreclosure allowing for efficient, predictable and commercially reasonable enforcement to be effected.

Financial Collaterals

In 2006 a new Law on Financial Collateral Arrangements ("LFCA") introduced the harmonized European framework on financial collateral. The main purpose of the law is to limit the credit risk within the financial system by providing less formalized system for perfection of security interest and enhanced foreclosure mechanics seeking fast and effective foreclosure against defaulting debtors. Entities that qualify as, inter alia, banks, investment intermediaries, insurance companies, investment companies, mutual funds, management companies or other financial institutions may obtain as collateral (i) cash receivables credited to an account in any currency or (ii) financial instruments negotiable on capital markets by executing a written instrument or recording the security interest in the accounts, where the receivables/financial instruments are credited. No other formal acts or registrations are required for the purposes of establishing and perfecting the security interest. Furthermore, creditors secured with financial collaterals could opt to enforce their rights by: (i) selling the collateral in a manner chosen by the creditor without the interference of judicial or other authorities, or acquiring the collateral (only where the parties have agreed in advance on such option and the valuation of the collateral); and (ii) netting their obligations with the debtor, where both methods could be used jointly.