Bulgaria relies on bond swap to reduce debt and meet EU criteria

SOFIA – Bulgaria on Monday unveiled plans for a new Brady bond swap, its second in less than a year, as part of a wider strategy to reduce its debt burden and meet European Union eurozone membership criteria. The swap of up to $800 million of its Brady debt into dollar-denominated Eurobonds could save $346 million in debt service costs over 10 years and aims to guarantee fiscal stability in one of the poorest candidates for EU entry. «This transaction perfectly fits into our debt strategy aimed at achieving higher credit ratings, minimizing currency and interest rate risk, and meeting EU criteria,» Deputy Finance Minister Krassimir Katev told Reuters in a brief interview. He said that after the swap Bulgaria’s ratio of debt to gross domestic product, which stood at 61.3 percent in June, would be below 60 percent as required by Maastricht criteria. Bulgaria aims to wrap up EU entry talks by the end of next year, but is not expected to join the Union before 2007. The new swap boosted the price of Bulgarian bonds and comes after the country in March swapped $1.327 billion in Brady bonds into fixed-coupon Global bonds. Brady bonds, named after then-US Treasury Secretary Nicholas Brady, were designed as part of a program in the 1980s and 1990s to relieve the crushing debt burden of heavily indebted poor nations. Katev said Bulgaria will not pay large premiums or use current high prices when swapping the Brady bonds. «Like before, we would set minimum prices in line to where the market was prior to the announcement and probably give a very small premium to that. I want to emphasize we are not prepared to pay high prices for the Brady bonds,» Katev said. He said mid-market prices late last week were 90.5 percent for Discount Brady bonds, 89.5 percent for Interest Arrears Bonds (IAB) and 91.25 for Front-Loaded Interest Reduction Bonds (FLIRB). «We want to capture the real situation before the announcement and insulate as much as possible the post-announcement noise which is not driven by real investors but by speculators who want to make short-term profit,» Katev said. Overall, the Finance Ministry said that nominal debt would be reduced by $87 million and that the net reduction of debt under the swap would be $238 million, including the release of $151 million of the US Treasury collateral in the Brady bonds. «These calculations were made with the assumption of a $750 million (Brady bond swap) that may be too high,» Katev said. «We would be happy only with $150-200 million as well but in a transaction with good prices. We would not pay higher prices only to get big volume,» Katev said. The debt operation would be carried out by increasing the volume of the March issue, the Finance Ministry said. In order to be carried out, the new swap needs parliamentary approval. Parliament’s budget and finance commission will discuss the planned deal today and Parliament is expected to approve the deal on Friday, said Katev. But he said the government would not necessarily proceed with the swap right after its approval. «Even if we are ready with approval by the end of next week, we may still not choose to proceed. We may decide that market conditions are not good enough and that we can theoretically wait until Christmas,» he said. He said road show stops will include New York, and probably Boston and London as well. Eying rating upgrade Bulgarian Finance Ministry officials were also looking to credit rating agencies to upgrade the outlook for the country, a move which would allow interest rates to decline and create a wider investment base for Bulgarian debt. «We don’t think this action by itself will immediately trigger an upgrade or change in the outlook but we know for sure that rating agencies look quite well on these types of transactions,» Katev said. He said the government hoped to win a BBB- credit rating by the end of its term in office in mid-2005. Bulgaria is rated BB- by Standard & Poor’s and Fitch and finance officials said both ratings agencies would visit the country in the next two weeks.

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