Holders of USD bonds at Bulgaria's Corporate Commercial Bank (KTB) are planning to sue the government if the bond defaults and KTB is tipped into insolvency, reports Reuters.

A default has looked increasingly likely after a run on deposits at KTB in June, which prompted the central bank to seize control of Bulgaria's fourth-largest lender, shut down its operations and block depositors from taking out money.

There is still no solution in sight for a rescue of the bank, whose closure sparked the Balkan country's worst banking crisis since the 1990s, especially after lawmakers rejected a proposed rescue package earlier in July.

The maturity of the bond, which had an original issue of USD 150 M, falls on August 8.

A group of bondholders, which includes hedge funds and institutions in the United States and Europe, have formed a committee and hired legal representation in Bulgaria in the event the government tips KTB into insolvency, two sources told Reuters.

One source, a manager at a London-based hedge fund, said the government and the central bank had reassured the bondholders at a government investor road show in June that they would be protected and their money paid back in full.

Failure to do so would send a poor signal about Bulgaria's investment climate and raise the cost of the country issuing sovereign debt in the future, the manager said, speaking on condition of anonymity.

"What these guys don't realize, is that they run the risk of turning Bulgaria into the Argentina of Europe," the manager said, referring to news this week of Argentina's second default in 12 years.

"If they don't mature these bonds in a timely fashion, several bondholders are prepared to move forward with fraud and misrepresentation claims against the Bulgarian government," the manager said.

"When we met with government officials, they were telling us, don't worry, these bonds are good," the manager said.

Days after the run on KTB, the Bulgarian government and the central bank toured several European cities and were able to successfully launch a EUR 1.5 B (USD 2.01 B) bond despite the country's worsening problems.

"... a creditors' committee has been formed and represents more than the required threshold of 25% of bondholders," a second source, also in the financial sector, said. "(The) group (comprises) hedge funds and institutions in the US and Europe and is prepared to declare bonds in default and due and payable with an eye towards August 8."

The Bulgarian finance ministry was not immediately available to comment.

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