Financial Instruments to Overcome the Economic Consequences of COVID-19

By Sylvina Beleva, Dimitrov, Petrov & Co. Law Firm

The Government has announced summarised information about the approved public resource of BGN 4.5 billion to be allocated and intended for small and medium-sized businesses, as well as for people on unpaid leave and self-employed persons.

1. The first financial instrument

This is the measure initiated and announced in March and to be implemented through the Bulgarian Development Bank, namely the Interest-Free Credit Guarantee Program adopted to assist people deprived of the opportunity to work due to the COVID-19 pandemic. The measure unfolded with specific parameters following the adoption of the Council of Ministers Decision 257/14.04.2020.

The individuals who can apply until December 31, 2020 should meet the following conditions:

Persons with employment contract should:

  • Have ceased performing paid labour and be on unpaid leave due to the pandemic;
  • Be a party to an employment contract during the last 6 months prior to taking unpaid leave;
  • Not receive remuneration for other employment contracts;
  • Have worked at least five business days in March, if this is the month in which they are put on unpaid leave.

Self-employed persons should:

  • Have interrupted their self-employment activities and/or have suffered at least a 20% decline of their income for the first quarter of 2020 compared to the first quarter of 2019, as a result of the pandemic;
  • Not receive remuneration for other legal relationships.

For all eligible persons, the following applies:

  • Must have their social security contributions paid and be able to resume their activities (to return to the same job) upon termination of the unpaid leave
  • The maximum loan amount stands at BGN 4,500, disbursed in full or in three tranches of BGN 1,500 each. If the loan is initially granted for a smaller amount, it can be annexed subsequently in order to reach the amount of BGN 4,500.
  • The loan agreement shall be with only one commercial bank.
  • The loans are interest-free (with regular interest rate 0%)
  • No fees, commissions and penalties shall be charged.
  • Applicants shall not provide collateral under the loan
  • The maximum repayment period is 5 years, with a grace period of minimum of 6 months and maximum of 24 months.
  • The loans shall be repaid in installments after the end of the grace period, and the amount and number of installments shall be determined by the commercial bank and the borrower.
  • The commercial banks have the right to amend the agreed (with the clients) repayment schedule, yet within the maximum program deadlines.
  • Every citizen is entitled to early repayment of his / her debt without fee / commission.

Subject to the financial agreement between BDB and the commercial banks: The loans are to be granted by the commercial banks.

For each loan granted, the BDB confirms to the commercial bank that it includes the loan in a previously issued for this portfolio guarantee, based on the concluded financial agreement, which contains a maximum guarantee limit. On the grounds of this inclusion in the portfolio guarantee, the commercial bank shall be entitled to receive from the BDB the outstanding amount of the loan, provided that the following conditions are cumulatively fulfilled:

  • The credit granted to the eligible person has been declared chargeable; and
  • The eligible person has not responded by repaying the debt within a further one month by the commercial bank for voluntary execution; and
  • The commercial bank’s receivable is recognized by an effective enforcement order.

12 credit institutions have declared their participation in the guarantee program so far, and they are: Allianz Bank Bulgaria, DSK Bank, Investbank, International Asset Bank, United Bulgarian Bank, Municipal Bank, First Investment Bank, Raiffeisen Bank, Commercial bank D, UniCredit Bulbank, Central Cooperative Bank, Eurobank Bulgaria.

The first four credit institutions to start work under the Program are Investbank, International Asset Bank, Municipal Bank and First Investment Bank, in the following order:

  1. Municipal Bank starts accepting applications on Monday, April 27.
  2. After Wednesday, April 29, Investbank clients will be able to apply for the program as well.
  3. International Asset Bank will start considering applications as of May 4 and
  4. First Investment Bank – as of May 5.
Several questions remain unclear:

Will remote identification and electronic filing of loan applications be possible? If one of the banks determines that a particular person is not eligible for the loan, does this preclude him/her from applying to other commercial banks? How will the application entry and their order be controlled, given that the resource has a certain limit and how will giving advantage to one person over another be evaded? Given that most of the prerequisites are verified only by the applicant’s statement, are the banks supposed to carry out further checks and how will the fairness of the presumably eligible applicants be ensured?

Unsecured loans for small and medium-sized enterprises

2. The second instrument provided by the Government is unsecured loans for small and medium-sized enterprises, which will be managed by the Bulgarian Development Bank through commercial banks.

Main parameters:

  • Maximum amount of loan – up to BGN 300,000
  • Grace period (principal and interest): up to 36 months
  • No collateral
  • All economic sectors are admitted
  • Application term: December 23, 2020

The expected loan portfolio, which will be obtained under this instrument, could reach BGN 2 billion.

The eligibility principles for credit approval at this stage are a decline in turnover for the first quarter of 2020 compared to the second quarter of 2019 based on the company’s financial statements, existing receivables from customers, outstanding payments to suppliers.

More detailed parameters for this financial instrument are to be officially announced by BDB.

Loans to small and medium-sized enterprises

3. The third instrument is loans to small and medium-sized enterprises with interest rate subsidies

It concerns provision of working and investment loans to small and medium-sized enterprises, including the restructuring in difficult financial situation of enterprises following the crisis. The total budget of the product is BGN 170 million with the option to finance a portfolio of new loans up to BGN 850 million.

The guarantee product was designed by the Fund of Funds, which will provide commercial banks with guarantees of the stated value of BGN 170 million.

Main parameters

  • Maximum amount of guarantee/loan: up to BGN 3,6 million
  • Maximum period: up to 10 years, with the option of extended grace period.
  • Interest rate subsidy loans for companies maintaining employment during the crisis (i.e., the grace period for interest rates for the crisis period, which is still under discussion).

There are still no specifics as to the criteria to be met by the applicants, as well as which commercial banks have agreed to participate in the program, what the terms for considering of applications and terms for real absorption of funds will be, how they will be used, how the processes will be controlled, etc., the answers to these questions will shed light on the effectiveness of the measure.

The other financial instruments presented by the Government are not new in nature. They are old mechanisms used before. However, in response to the situation of the pandemic spread of COVID-19, on 13 March 2020, the European Commission launched and proposed several amendments to the EU Cohesion Policy regulations. This gave Member States the opportunity to promptly adapt their programs in order to respond to the crisis. Under the Commission’s initiative, Member States will not be required to reimburse unused advances to fund projects and programs, which provides liquidity and reduces our budgetary pressure.

Briefly, the instruments are:

4. Loans to SMEs and medium-sized enterprises through the European Investment Fund (JEREMIE)

By definition, the Jeremy (Joint European Resources for Micro to Medium Enterprises) initiative offers EU Member States the opportunity, through their national or regional managing authorities, to use part of their EU Structural Funds to finance small to medium-sized enterprises (SMEs) with equity, loans or guarantees through a revolving holding fund acting as a fixed asset. JEREMIE does not award any grants to SMEs.

Main parameters:

  • Maximum amount of guarantee/loan: up to BGN 3,4, million
  • Option to refinance liabilities (incurred no more than 60 days ago)
  • Total budget of the product: BGN 160 million with the option to finance a portfolio of new loans of up to BGN 500 million, reaching up to BGN 880 million

It concerns working and multi-purpose loans, including refinancing. Enterprises will apply to a commercial bank implementing the scheme of their choice.

The following banks are JEREMIE financial intermediaries: United Bulgarian Bank, Raiffeisenbank, UniCredit Bulbank, ProCredit bank, Cibank, Deutsche Leasing Bulgaria, Expressbank, Eurobank, DSK Bank, Piraeus Bank Bulgaria.

5. Micro loans for entrepreneurs and self-employed persons is the fifth financial instrument presented

This is an active, not a new, program of the Fund of Funds for financing self-employed persons and small start-ups with very short or almost no business history, including those created by vulnerable groups (disabled people under the age of 29, who have been unemployed for more than 6 months).

It is an instrument for granting soft loans, including without collateral, to target end-borrowers, who usually do not have access to bank financing due to a lack of credit history.

The purpose of the instrument is to maintain employment through financing of small private businesses, including self-employed persons.

The instrument is operational, and the loans are made available through the financial intermediaries of the Fund of Funds.
The measure is now available through First investment Bank and two financial intermediaries.

Main parameters:

  • Micro loans of up to BGN 50 thousand
  • Period: up to 10 years
  • Grace period option
  • Total budget of the instrument: BGN 24 million
  • The possibility of being interest free is being discussed.
6. Capital investment through the Fund of Funds is the sixth financial instrument

This instrument is intended to finance companies with the potential to support the rapid recovery of the economy after the crisis, especially in key areas of innovation and digitalisation, as well as investment in high technology such as bio and nanotechnology, nanotechnology, mechatronics, clean and information technology, pharmaceuticals, fintech, etc.

The market share of venture capital investments in start-ups and innovative enterprises amounts to BGN 150 million.
It concerns shareholding of up to BGN 800,000.

Main parameters:

  • Investment amount: approximately BGN 800,000
  • Intermediaries: Four investment funds through Fund of Funds.
  • The financing is intended for companies with the potential to support economic recovery after the crisis, especially in the fields of innovation and digitalisation.
  • Total budget: BGN 150 million.

End -borrowers are SMEs, with a focus on start-ups and innovative businesses.

The investment funds through which the capital investments will be realised have not yet been announced. Currently, the financial intermediaries of the Fund of Funds in equity and quasi-equity investments are: Innovation Accelerator Bulgaria, Neveq Management, and Morningside Hill.

7. Under the Operational Program Innovation and Competitiveness 2014-2020

Procedure title: “Supporting micro and small enterprises in overcoming the economic impact of the COVID-19 pandemic”
The total amount of the grant is BGN 173 million

The minimum and maximum amount of the requested grant for each individual project are BGN 3 thousand and BGN 10 thousand, respectively.

Applicants are required to certify that they are a micro or a small business, and have registered a decline of at least 20% in turnover for the month preceding the month in which the grant application (project proposal) was submitted relative to the arithmetic average turnover in 2019. Legal entities registered in Bulgaria cannot participate in the project selection procedure due to the lack of separate legal personality.

The deadline for submission of project proposals is 4:30 p.m. on May 30, 2020.

8. Urban development financing

Urban development funds are not a new instrument.

Main parameters:

  • Maximum amount of financing: BGN 40 million.
  • Long-term investment and working capital loans.
  • Total budget of the instrument: BGN 418 million.
  • End-borrowers:
  • Municipalities;
  • Public-private partnerships;
  • Enterprises affected by the crisis, including sectors of direct impact – tourism, transport.

The companies apply to the respective manager for the region in the country

The intermediaries who manage the finances for urban development funds are:

  • For the region of Southern Bulgaria and the City of Sofia – the Fund for Sustainable Cities (FSC) Consortium, which includes the UBB, the FLAG Fund, the Sustainable Urban Development Fund and the Bulgarian Consultancy Organization.
  • For the region of Northern Bulgaria – Regional Urban Development Fund (RUDF), owned by Société Générale (majority shareholder), Elana Investment, Elana Holding and Balkan Advisors.

Specific information on some of the measures is not yet available, which raises further questions; there are, though assurances that additional information material will be available for each of the instruments within a few days.