Bondholders of KTB Urge Bulgaria Parliament to Reconsider Rescue Plan

Letters to the Editor | November 4, 2014, Tuesday // 09:48
Bulgaria: Bondholders of KTB Urge Bulgaria Parliament to Reconsider Rescue Plan

International bondholders of Corporate Commercial Bank (KTB) have urged Bulgaria’s Parliament to reconsider the proposal to rescue the troubled bank delivered by the Omani sovereign wealth fund last week.

In an open letter to the government and people of Bulgaria mailed to  on Tuesday the group of international bondholders said that "Parliament’s decision to reject the rescue proposal offered by the Omani sovereign wealth fund, and the Bulgarian National Bank’s  recommendation to strip KTB of its license, will wipeout billions of leva of depositor savings, lead to the closure of hundreds of businesses and the loss of thousands of jobs.”

Moreover, KTB’s closure will “bankrupt multiple municipalities and public institutions, and subject the state to dozens of lawsuits from depositors and creditors.”

 The full text of the open letter follows:

"4 November 2014 

To:         The Government and People of Bulgaria 

From:   The International Bondholders in KTB Bank 

Open Letter to the Government and People of Bulgaria 

We, the international bondholders of Corporate Commercial Bank (KTB), respectfully publish this open letter to the government of the Republic of Bulgaria and its citizens regarding recent developments concerning KTB. 

Parliament’s decision to reject the private shareholder rescue offered by the Omani sovereign wealth fund, and the Bulgarian National Bank’s (BNB) recommendation to strip KTB of its license, will wipeout billions of leva of depositor savings, lead to the closure of hundreds of businesses and the loss of thousands of jobs, bankrupt multiple municipalities and public institutions, and subject the state to dozens of lawsuits from depositors and creditors.  This will consume precious state resources, mire Bulgaria in recession, and ultimately result in a cost far greater than what is called for today in the proposed plan to rescue the bank.  This decision will haunt the Republic of Bulgaria for years to come. 

Simply put, the cost of bankrupting KTB will far outstrip even the highest assumptions as to the amount of state assistance required to rescue the bank and its depositors. 

It does not have to be this way.  Decisive and courageous leadership could turn this crisis around and, perhaps, even create an opportunity for the state.

We believe that the proposal delivered on 29 October by the Sovereign Wealth Fund of the Sultanate of Oman, an existing KTB shareholder, Gemcorp of London, and the European Privatization & Investment Corporation of Vienna presents a reasonable and credible offer to save and rehabilitate KTB.  This proposal, in which private parties would contribute significant equity against an effective matching state guarantee of equity, is not only a reasonable solution, but the only credible and viable solution available. 

Just as the private investors stand to recover their investment, the state would stand to make a profit should banking operations be restored to healthy and normal levels.  There are numerous examples in Europe and the United States over the past several years where governments have stepped in to rescue banks and then subsequently profited from their investments. 

We respectfully urge Parliament and the other parties involved to reconsider the offer and, equally importantly, work to correct the potential misperceptions held by the public with respect to the offer's nature. 

As international observers, we were astonished to see the biased manner in which BNB Governor Ivan Irskov read and portrayed the consortium’s proposal to Parliament.  It is now regrettably clear that the central bank governor mischaracterized the costs to the Bulgarian taxpayer and economy by suggesting the economics were not clearly in favor of a rescue.

It is not our role to comment on Mr. Iskrov’s personal and political motivations.  We must, however, underscore that not only is saving the bank the only practical solution, we contend that this crisis is the direct result of the BNB’s actions and inactions under the leadership of Mr. Iskrov.

When problems emerged at KTB in late May of this year, the BNB rushed to tell the public "the bank is not bankrupt".  Senior members of the BNB and the government, including then Finance Minister Peter Chobanov and Deputy Governor of the BNB Kalin Hristov, even flew to London in late June to inform international investors "not to worry" about KTB.  Over the past months, the BNB has indeed changed its position several times, implemented stalling and diversionary tactics, selectively applied banking regulations, and issued so many conflicting and contradictory statements concerning KTB, that it is hard to even keep the BNB’s version of the facts straight anymore.  One can only observe that throughout this process, the BNB's actions and inactions have been either negligent or willfully deceptive.

The bottom line is, the BNB is either mischaracterizing the true nature of KTB or, as the competent national regulator, has been derelict in carrying out its legal obligations to depositors and creditors.

If, indeed, the asset "black hole" is as large as the BNB claims, then, as the competent national regulator, the BNB either knew or should have known the existence and extent of the problem and taken proactive steps.

If, in fact, KTB issued loans to related entities in excess of 25% of its overall loan portfolio, the BNB failed to carry out its duties by certifying on multiple occasions during the periods in question that KTB was healthy and in full compliance with all banking rules and regulations.  

The purported problems at KTB did not occur overnight and would have taken several years to materialize.  One might easily conclude that the BNB intentionally turned a blind eye and willfully neglected its duties.  What is clear is that under the leadership of Mr. Iskrov, the BNB has failed spectacularly in discharging its core function: to provide for the stability and safety of the Bulgarian banking system.  These, and other claims, will form the basis of lawsuits by depositors and creditors for years to come. 

In order to move beyond the crisis and save the Bulgarian taxpayer billions of leva, we believe the private sector must be involved with the government in developing a viable solution:

1)     The terms of the offer delivered by the consortium led by Oman need to receive prompt, fair and unbiased consideration.

2)     The consortium should be granted immediate access to the books and records of KTB so that it may conduct an accurate assessment of KTB's value and assets.  It is unreasonable for the consortium to be expected to offer more than an estimate as to costs and value at this stage. 

3)     The Bulgarian government should publicly disclose the true costs associated with placing the bank into insolvency and wiping out depositors and creditors.  These facts have been conspicuously absent from the public debate, particularly from the one party that should be transparent with these estimates, the BNB.

If the bank is rehabilitated along the lines proposed by the consortium, the government stands a reasonable chance of recovering its investment in the bank and even making a profit.  The insolvency route, however, is permanent.  Once the government pays out the insured depositors and settles the dozens of lawsuits, along with the harder to measure social costs, that money will disappear forever from public coffers.

Let’s be clear about the true costs of saving the bank.  Although the BNB has regrettably failed to disclose the information necessary to make a precise assessment, we are able to arrive at an estimate based on publicly available documents:

6’000’000’000                 Estimated Government Cost to Liquidate KTB

                  0                 Estimated Recovery Value to the Government in 5 years               

6’000’000’000                 NET COST TO LIQUIDATE


2’300’000’000                 Estimated Government Cost to Rehabilitate KTB

2’000’000’000                 Estimated Recovery Value to the Government in 5 years

    300’000’000                NET COST TO REHABILITATE

Our best-case analysis puts the cost of liquidation at 6.0 billion leva.  We believe this figure could in reality be much higher, but it is difficult to value the indirect costs such as the long-term increase in borrowing costs, social insurance payouts for the thousands who will lose their jobs, and litigation and settlement expenses.  Others in Bulgaria, for example, have estimated the total cost of closing KTB to be in excess of 13 billion leva.  Wherever the true cost lies in this range, it is the Bulgarian taxpayer that will ultimately foot the bill.

Although the numbers involved in a rescue look large, they are small compared with the cost of liquidating the bank.  KTB is worth more alive than dead.  Bold and decisive leadership by the government and constructive engagement with the international investor group led by Oman represents the last and best opportunity for Bulgaria to extricate itself from this crisis and move forward in building a prosperous society with strong and functioning institutions.


International Bondholders Group

We need your support so can keep delivering news and information about Bulgaria! Thank you!

Letters to the Editor » Be a reporter: Write and send your article

Bulgaria news (Sofia News Agency - is unique with being a real time news provider in English that informs its readers about the latest Bulgarian news. The editorial staff also publishes a daily online newspaper "Sofia Morning News." (Sofia News Agency - and Sofia Morning News publish the latest economic, political and cultural news that take place in Bulgaria. Foreign media analysis on Bulgaria and World News in Brief are also part of the web site and the online newspaper. News Bulgaria