Project finance is a type of financing where the loans are serviced out of the revenues of the project with limited support from sponsors and other project participants and is used for a variety of projects. A common type of project finance in Bulgaria is the so called real estate finance, however the framework of project finance also covers infrastructure projects, development of schools and hospitals, other buildings with public use, roads, energy projects (power projects). All of the latter might also fall within the category of Public Private Partnerships, which is a currently developing concept in Bulgaria. With a view to the potential of such projects, it is important to outline the main characteristic features of a traditional project finance scheme in Bulgaria.

Direct Agreement's Limitations

In addition to the standard facility agreement and security documents, the project finance scheme requires a "direct agreement" to be executed. In project finance, this term denotes an agreement that allows the lender to "step into the shoes" of the company that develops or exploits the right or the asset i.e. replacement of this company by the lender as a party to the project. In this way upon default, the lender will be entitled to run the project and generate income to recover the debt. Under the Bulgarian Public Procurement Law the parties to a public procurement agreement are generally prohibited from amending it once it has been concluded. This prohibition also refers to replacement of the contractor by the lender because of the various requirements towards the candidate for a contractor of a public procurement. These requirements are related to the candidate's corporate status and capacity, economic and financial status, technical capacity and/or qualification and are subject to assessment, which would not be applied towards the potential substituting party (the lender). Yet, security can still be provided but only in the form of pledge over those receivables from the government authority that are with monetary nature and arise out of the public procurement agreement.

Currency Risk

In cases where revenues of the project are provided for in the Bulgarian national currency, for example proceeds generated by power sales, in addition to the other project finance risks the lender should consider currency risk from the perspective of local currency devaluation. Bulgaria introduced a currency board on 1 July 1997. As of the present moment the fixed exchange rate of Bulgarian National Bank is BGN 1 per EUR 0.51129. A change in the fixed exchange rate would require amendment of the Law on the Bulgarian National Bank to be adopted by the Bulgarian Parliament. Following the European Union membership Bulgaria committed to adopt the Euro subject to the fulfilment of the Maastricht convergence criteria: price stability, long-term interest rates and government budgetary position. According to the latest European Commission Convergence Report from 2008, due to the level of inflation Bulgaria does not fulfil the criterion on price stability. Due to the fact that the Bulgarian lev is not participating in ERM II Bulgaria does not fulfil the exchange rate criterion either.

Political Risk

For avoidance of certain political risks such as risks of expropriation, imposing transfer restriction a political risk guarantee or insurance might be sought from export credit agencies and government insurance companies. For example, the Multilateral Investment Guarantee Agency ("MIGA"), a member of the World Bank Group, provides political risk insurance for projects in Bulgaria.

General Notification Requirements

Typically project finance in Bulgaria involves multi-jurisdictional structures, where the lender is outside Bulgaria, while the single (special) purpose vehicle, the projects and the related securities are in Bulgaria. There is no limitation of cross-border lending in Bulgaria, rather the general notification requirement under the Bulgarian Currency Act should be applied. Upon a cross-border lending the Bulgarian borrower has to file a declaration with the Bulgarian National Bank within 15 days of signing a financial loan (including a secured loan) granted by a foreign lender. 

Securities Under Bulgarian Law