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If You Build It, They Will Come: Charting Bulgaria’s Capital Markets Resurgence

If You Build It, They Will Come: Charting Bulgaria’s Capital Markets Resurgence

Issue 10.3
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For Bulgaria’s capital markets, the past ten years saw several landmark developments, large IPOs, and programs and initiatives tailored for small and medium-sized enterprise needs. Penkov Markov & Partners Associated Partner Boris Lazarov, Djingov Gouginski Kyutchukov & Velichkov Partner Gergana Monovska, and Tokushev and Partners Managing Partner Viktor Tokushev walk us through the highlights.

Landmark Developments

“Against the backdrop of a decade filled with many challenges, optimism prevails thanks to several decisive steps that have been taken towards the development of the Bulgarian capital market,” Tokushev begins. “In 2016, on the initiative of the Central Depository, the Financial Supervision Commission, and in partnership with the business community, a Strategy for the Development of the Bulgarian Capital Market was adopted. The project analyzed the current state of the capital market in Bulgaria and outlined areas for action aimed at its accelerated development.”

According to Tokushev, “measures were adopted to increase the range of financial instruments traded on the Bulgarian Stock Exchange and, in 2017, trading in government securities started within the framework of the established regulated secondary market for sovereign domestic debt. The trading of shares of the first exchange-traded fund – Expat Bulgaria SOFIX UCITS ETF, and the opportunity for Bulgarian investors to invest directly in shares of international companies on the new market – BSE International – have improved the country’s image as an investment destination,” he explains.

“In 2018, the Exchange has been granted approval by the Financial Supervision Commission of Bulgaria to set up the new SME Growth Market BEAM – a special market organized by the BSE which allows small and medium enterprises in Bulgaria to become listed companies,” Lazarov chimes in. “The main objective of the BEAM is to provide SMEs with an alternative to the banking finance of businesses by giving them the opportunity to raise funds within easier terms in comparison to those on the main BSE market.”

It would appear the BEAM market has been a success, with Tokushev reporting that “the first IPO on the growth market was that of technology company Biodit AD, which raised BGN 1 million in capital. Since then, a total of 14 companies have benefited from access to capital with a lower administrative burden,” he says. In total, 2022 saw seven successful IPOs completed on the BSE, “six of which were on the BEAM market,” Tokushev says, stressing that “in this respect, the past year was the strongest in at least 15 years.”

On the other hand, Monovska points to several market issues as well. “The Bulgarian capital market has been marked by low trading turnover and a lack of liquidity of the BSE. There has been a tendency of delistings from the BSE by large market players, such as the Bulgarian Telecommunication Company, delisted in 2013, energy sector companies, such as those part of the Energo-Pro group, delisted in 2015, and the former CEZ power units, delisted in 2022 after being acquired by Bulgarian insurance group Eurohold,” she reports.

Greatest Hits

“In 2018, Gradus AD, a joint-stock company specializing in poultry farming, feed production, and agricultural trade and exporting, made its stock market debut with the largest initial public offering in the history of Bulgaria,” Lazarov says. “On the first day of the IPO, the company registered 43,961,878 shares at the price of BGN 1.80, totaling close to BGN 80 million on the Bulgarian Stock Exchange.”

“This was the largest IPO on the Bulgarian stock exchange since the economic crisis and the largest listing since 2007 when the First Investment Bank raised BGN 107 million,” Tokushev adds. While the IPO gave Gradus a boost, the “war in Ukraine seriously affected the price of cereals, which are the main resource for the company’s production,” he continues. “Despite this, the company started the year with expectations of increasing revenues and profits, a sustained increase in margins in all the sectors in which it operates, and an increase in the company’s stock market value.”

Market Drivers

Looking at the key drivers of the local equity and debt markets, Tokushev primarily stresses the overall regulatory framework improvements, “both in terms of rules for debt financial instruments and to ease listing conditions. Overcoming fragmentation in national legislations will greatly increase the flexibility of companies, especially SMEs, to list on regulated and growth markets.”

Lazarov adds that “the BEAM market is driving the local equity market forward, a perfect option in comparison to the heavily regulated main BSE market, whose rules sometimes make it difficult for Bulgarian businesses to comply. In addition, the BEAM market appears more and more to be a great alternative to bank financing for companies.” Lazarov explains that according to available data, “in 2022, a record 45% growth of the companies listed on the BEAM market occurred, increasing the total capitalization on the market by 35%.”

Breaking Barriers

“Globally, there is a strong interest for investments and even migration of entire business segments to emerging and developing markets such as Central and Eastern Europe, which unfortunately bypass Bulgaria,” Tokushev says, assessing the outlook of the capital markets. “In recent years, both the public and private sectors have relied heavily on European programs and European Structural and Investment Funds. With cautious optimism, we can say that attracting investment through the stock exchange is beginning to come into focus for business and the state,” Tokushev posits.

However, there are hurdles as well. According to Tokushev, this year is looking at difficult financial conditions due to inflation. “The war in Ukraine has had an undeniable economic impact on the Bulgarian market. Against this backdrop, there are important steps to be taken towards the introduction of the euro in Bulgaria,” he says. “The country is in the process of implementing several measures related to payment and settlement systems. In the area of securities settlement in Bulgaria, the main measure is the accession of the Depository for Government Securities at the BNB and that of the Central Depository JSC to the TARGET2-Securities centralized securities settlement platform.”

Monovska chimes in, stressing that “most of the listed companies have a very small free float. Even the largest companies are small by international standards and the market lacks a benchmark issue after the delisting of large players such as Bulgarian Telecom,” she explains. Limited free float and weak corporate governance, according to her, contribute to “a low level of trust in the capital market and the low interest of international investors.”

Lazarov agrees, stating that the biggest obstacles to seeing a market boom are rather related to “some cultural and advertising contextual factors. On one side, the capital markets are not usually taken into consideration by a lot of investors for various reasons, on the other side, the entrepreneurs had, for a long period of time, access to easy funding through the banks.” Still, Lazarov ultimately believes that “the situation is changing and there is a trend of more and more people taking part in the capital markets, be it as a prospective company seeking capital or as investors searching for a promising target.” 

This article was originally published in Issue 10.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here