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The market for non-performing loan (NPL) transactions is expected to grow, as a result of the COVID-19 pandemic. This article outlines some of the most important legal aspects around NPL transactions in Bulgaria.
NPL transactions are commonly structured as assignments of receivables. This is the preferred route for sellers, as it permits full risk transfer of NPL portfolios to purchasers, as parties are free to contract out of the statutory rule that assignors are liable for the existence of the receivables at the time of the sale. In contrast, structuring an NPL deal as a transfer of business enterprise or demerger is associated with certain mandatory liability regimes that parties may not derogate from.
Under Bulgarian law, assignors are under a statutory obligation to provide assignees with all documents concerning the assigned receivables. Since such documents may contain personal data or facts and circumstances subject to banking secrecy, the interaction between this statutory disclosure requirement on the one hand and data protection and banking secrecy limitations on the other merit particular attention. As far as data protection is concerned, the selling bank's legitimate interest (e.g. to achieve regulatory capital relief by assigning loan receivables) should prevail over the interests of the debtor, especially with respect to non-performing loan receivables. We believe that the "legitimate interest" exception from personal data protection rules could be applied mutatis mutandis to bank secrecy restrictions where a bank has assigned non-performing loans to a third party. Nevertheless, during a due diligence prior to closing NPL assignments, only loan balances (which by law are not subject to bank secrecy) and anonymised data should be disclosed.
From a financial services regulatory perspective, the general rule is that the acquisition of receivables arising from credit agreements and other forms of financing (such as factoring and forfeiting) may be performed locally as a "substantial activity" (bringing 30 % or more of the net revenues or corresponding to 30 % or more of the balance sheet total) only by credit institutions (local or EU/EEA under EU passporting rules) or by non-banking financial institutions registered with the Bulgarian National Bank (or by EU/EEA non-bank financial institutions passported under Article 34 of Directive 2013/36/EU, an alternative not used so far).
"Registration as a non-banking financial institution with the Bulgarian National Bank which would make an entity eligible to acquire NPLs does not imply fully fledged supervision compared to a credit institution but involves certain minimum capital requirements as well as information disclosure procedures both initially and on an ongoing basis."
Registration as a non-banking financial institution with the Bulgarian National Bank ("BNB") which would make an entity eligible to acquire NPLs does not imply fully fledged supervision compared to a credit institution but involves certain minimum capital requirements as well as information disclosure procedures both initially and on an ongoing basis.
Our practice shows that the BNB disregards the purposive argument that acquisition of NPLs is different from acquisition of receivables under contracts that are regularly performed. In the latter case, all parties assume full and regular performance in the future, so that in a classic factoring transaction, for example, the sale of such receivables resembles "extension of credit". There is no element of "extension of credit" in an NPL sale, so arguably persons who acquire NPLs commercially should not be obliged to register as financial institutions, as the statutory rule requiring such registration may be interpreted as implying that the receivables acquisition should be a form of crediting. However, the BNB so far insists that the commercial acquisition of any receivables under bank loans (including NPLs) requires registration as a financial institution even if there is no element of extending credit in the particular case.
author: Tsvetan Krumov and Kristina Lyubenova
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