Why Failed Bank Won’t Foil Bulgaria Eurobond: East Europe Credit

Jun 25, 2014 6:05 am ET

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June 25 (Bloomberg) -- Bulgaria’s first Eurobond sale since 2012 is proving resistant to the country’s biggest bank failure in 17 years as low debt levels reassure investors.

The Finance Ministry is meeting bondholders this week to sell 1.5 billion euros ($2 billion) of debt, it said on June 18. Last week, the central bank agreed to rescue Corporate Commercial Bank AD after Bulgaria’s fourth-largest lender ran out of cash.

The banking mishap won’t deter investors from buying the new securities because public debt in Bulgaria, the European Union’s poorest member, is among the lowest relative to economic output in the 28-nation bloc, said Lutz Roehmeyer at LBB Invest. Concern about the health of lenders helped sent the yield on the nation’s July 2017 Eurobond to a three-month high yesterday.

“The banking-sector problem will curb the appetite for the new Bulgarian bond a little bit but the basic demand will be there,” Roehmeyer, who plans to buy the securities, said by phone from Berlin on June 23. “The government debt is so low the bank bailout won’t change credit metrics much.”

Bulgaria is returning to the market as European Central Bank stimulus measures are pushing investors to higher-yielding assets. The sale’s proceeds will allow the country to repay $1.1 billion of dollar bonds coming due in January and about 1.3 billion lev ($905 million) in domestic debt maturing this year, Finance Minister Petar Chobanov told lawmakers on June 6.

‘Negative Signals’

While the Black Sea nation of 7.3 million people weathered the global financial crisis without bailout loans, it’s struggling to revive the $51 billion economy. Turmoil within Prime Minister Plamen Oresharski’s ruling coalition has triggered snap elections, complicating efforts to boost growth.

Standard & Poor’s cut Bulgaria’s credit rating on June 13 to BBB-, its lowest investment grade, from BBB. The ratings company cited a lack of reforms needed to strengthen the rule of law, curb corruption and revamp inefficient state-owned energy and railway companies which pose risks for public finances.

“We view these factors as inhibiting growth and believe that other disruptions add to business uncertainty and send strong negative signals to potential investors,” S&P said.

The collapse of Corporate Commercial Bank, or CCB, amid the political rift boosted yields on Bulgaria’s 2017 euro note by 22 basis points, or 0.22 percentage point, over the past month to 1.50 percent yesterday, the highest since March. The rate on similar-maturity Eurobonds from Romania, also rated at BBB- by S&P, fell to a record 1.86 percent yesterday.

Extra Yield

The extra yield investors demand to hold Bulgaria’s 2017 notes over comparable German debt rose to a four-month high of 142 basis points yesterday, data compiled by Bloomberg show.

The central bank will increase CCB’s capital after a review of its assets and liabilities, and the lender will reopen for business on July 21, the regulator said on June 22, two days after it seized the company. CCB, where Bulgarian businessman Tsvetan Vassilev is the majority shareholder and Russia’s VTB Group owns a stake, was hit by a run on savings after reports that a large depositor pulled funds, according to the central bank.

“The biggest question” surrounding the bank’s failure is “why the government and the central bank allowed the issue to go this far,” Simon Quijano-Evans, head of emerging-markets research at Commerzbank AG in London, said in a June 23 e-mailed report. “We recommend a cautious approach.”

The bank’s collapse doesn’t change Bulgaria’s plans to meet investors in Germany, the U.K., France and Austria this week, Finance Ministry spokeswoman Maya Milanova said two days ago.

Bulgaria’s public debt at 23 percent of gross domestic product is on par with Luxembourg and compares with 49 percent in Poland, 76 percent in Germany and the euro-area average of 96 percent. Estonia is the only EU member with lower indebtedness, at 9.8 percent, according to European Commission estimates.

“Placing the new bonds should not be a big problem for Bulgaria,” said LBB’s Roehmeyer. “The notes will have scarcity value and the yields are attractive.”