Moratorium on bank loan payments. Opportunities for preserving and restructuring a business

To limit the spread of COVID-19, the National Assembly issued a decision declaring a state of emergency in the Republic of Bulgaria from 13 March 2020, and in order to save the economy from collapsing, there is now a proposal to impose a moratorium on loan payments.

COVID-19 has changed the world we live in, but this change also brings many new opportunities. Crises are a normal stage in the development of any economy. A crisis does not lead solely to the suspension of company activities, collapses in stock markets and fall in interest rates.

A crisis is also a period of economic transformation, business restructuring, using changes that disrupt the balance to create new opportunities. The crisis period gives the opportunity to move beyond the limits and limitations of thinking, to go through a metamorphosis of the business, to optimize it and to prepare a corporate and business short- and long-term strategy for corporate growth and expansion in the next stages of the economic cycle – the stages of rise and growth.

Right now is the moment to use the crisis to create new opportunities, to preserve the business and to prepare it for the next stages of the economic cycle.

The Measures and Actions during the State of Emergency Act puts forth a set of measures to protect the economy from the negative effects of the actions to curb the epidemic.

The Act extended the time limits for fulfilling obligations under tax and accounting laws, proposed solutions to settle relations with workers, provided that the negative consequences of late payment of debts to individuals, including interest and penalties for late payment, as well as non-monetary consequences such as early repayment, contract termination and seizure of belongings, would not apply.

One week after its promulgation, the Act was amended with clarifications that, until the state of emergency is lifted, where there is late payment of debts by private persons who are debtors under credit agreements and other forms of financing (factoring, forfeiting and others) provided by banks and financial institutions, including when receivables are obtained from other banks, financial institutions or third parties, and under leasing contracts, no interest and penalty interest can be charged, the obligation cannot be declared due early, the contract cannot be terminated due to default, and items cannot be seized.

To ensure uniform application of European Union law in all Member States, as part of its powers the European Banking Authority published a statement saying it supports all measures taken by States so far to limit COVID-19.

On 2 April 2020 the European Banking Authority published guidelines concerning the possibility for imposing moratorium on loan payments for loans from commercial banks.

On 3 April 2020 the Board of Directors of the Bulgarian National Bank adopted a decision stating that it would comply with the guidelines of the European Banking Authority.

The Association of Banks in Bulgaria has proposed a project for Procedure for deferral and settlement of liabilities payable to banks and their subsidiaries – financial institutions in relation to the state of emergency enforced by the National Assembly on 13 March 2020, which was approved by the Board of Directors of the Bulgarian National Bank with a decision from 10 April 2020.

In this way a private moratorium was introduced in Bulgaria within the meaning of the guidelines of the European Banking Authority. Commercial banks will announce on their websites and in their offices the terms for deferral and settlement of liabilities.

The moratorium introduced allows deferral of liabilities under credit agreements concluded before 31 March 2020 by changing the payment schedule, but without changing the essential conditions such as the interest rate, and you can read more about the specific measures here.

To avail themselves of the opportunity for deferral of liabilities, borrowers who have entered into contracts before 31 March 2020 and who have regularly serviced them or who have a default of no more than 90 days by 1 March 2020, must make an explicit request to their servicing bank. This request must be filed by 22 June 2020 and the bank must make a decision on it by 30 June 2020.

Deferral of liabilities can be achieved by 31 December 2020, and the end date for deferred liabilities may vary depending on the date on which the client requested to avail themselves of the deferral and the presence of overdue installments as of that date.

There shall be three standardized mechanisms:

  • Mechanism No. 1 – deferral of principal and interest for up to 6 months;
  • Mechanism No. 2 – deferral of principal for up to 6 months;
  • Mechanism No. 3, applicable to revolving products.

The liability deferral mechanism shall be selected by mutual consent between the banks and their clients.

The moratorium procedure shall also apply accordingly to financial institutions that are subsidiaries of banks.

It should also be borne in mind that outside the Bulgarian National Bank-approved procedure, banks may also negotiate individual deferral schemes other than those specified above.

To ensure maximum protection of your rights, we can prepare documents regarding the restructuring of loans granted, as well as for renegotiating the terms of contracts concluded with banks and your other counterparties.

We can assist you in planning a business retention strategy, including an analysis of the financial situation, contracts concluded, renegotiation or termination possibilities, relationships with employees, ability to meet counterparty and tax obligations, deferral options, as well as by preparing documents and negotiating with banks regarding the announced private moratorium, regarding possibilities to collect receivables from your counterparties, or regarding your participation in public procurement procedures.