Bulgaria set to lower debt to 60 percent of GDP at end-2002

SOFIA – Bulgaria’s Brady bond swap, which saved the country more than it had expected, should allow the country to meet a key European Union accession criterion, Bulgaria’s deputy finance minister said on Thursday. Deputy Finance Minister Krassimir Katev told Reuters Bulgaria’s debt would be below the key 60-percent debt to GDP Maastricht criterion by the end of the year, thanks to two Brady bond swaps this year, the second of which completed on Thursday. «We do not plan other Brady bond swaps in coming years. We have already swapped some 45 percent of Bulgaria’s total Brady bond debt and do not plan new restructuring,» Katev told Reuters by telephone from New York, adding he was pleased with the results of this week’s exchange. «We also do not plan to issue new Eurobonds this or next year because our fiscal reserve stands at $2 billion at the moment, which is enough to cover debt payments for two years.» Investors tendered $1.49 billion Brady bonds earlier this week, of which the country swapped $866 million for new bonds – more than the $800 million targeted. The Finance Ministry said the swap would save around $364 million in debt repayments over the next 10 years, also above the initial target of $346 million. In exchange, the country offered $759 million of its 2015 maturity dollar global bond, an initial tranche of which was exchanged for Brady bonds under the country’s first debt swap in March this year. This week’s operation reduced Bulgaria’s nominal net debt by $243 million, the Finance Ministry said in a statement on Thursday. Bulgaria’s new benchmark traded down on the new supply, however. The country’s 2015 bond was quoted at 101.875 percent of face value, down 0.5 points on the session, and nearly a point lower than the 102.75 offer price for the bond that emerged from the swap. Traders said that this was not a judgement on the swap’s economic efficacy, but simply a knee-jerk reaction to new supply coming to market. «It is just what you would expect technically, a little selling in the extra that is created,» said a trader at a UK bank. Brady bonds had sold off because investors who need liquidity swapped what they could and then exited. But investors who bought with the idea of participating in Bulgaria’s transformation into a healthier, better functioning economy would still be keen to hold Brady debt, he said. The country swapped some $342 million of its Discount Brady bonds for new 2015 maturity bonds. It paid 92 percent for tranche A of those bonds and 94.5 percent for tranche B, above the 91-percent minimum bid price announced on Wednesday. It also swapped $298 million worth of Front Loaded Interest Reduction bonds, paying 91.75 for tranche A and 92.375 for tranche B, again both above the minimum bid price of 91.375. The $226 million worth of Interest Arrears Bonds swapped were exchanged at the minimum price of 89.125 percent of face value. «I think Bulgaria can be fairly pleased with the result,» said Tim Ash, emerging bond strategist at Bear Stearns in London. «They managed to swap more than they had planned.» He said the Ministry of Finance was keener to pay up for this swap than it had been in March because Bulgaria’s economy seems to be growing, which will eventually raise debt payments. «No doubt the ministry has its eye on the GDP clause in the Discount contracts, which jack up interest rates once real GDP passes 125 percent of the 1993 level,» said Ash. «Economic growth has accelerated nicely over the past quarter and looks set to push up well beyond 4 percent this year. Assuming a 5-percent real growth rate thereafter, 1993 real GDP would hit the 125-percent level in 2007,» he said.