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NORTHERN LIGHTS BULGARIA B.V. (a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under
the laws of The Netherlands)
USD 150,000,000 Loan Participation Notes
due 2014 Series 2012-1 on a limited recourse basis for the sole purpose of financing the purchase of the rights and obligations of the lender
and the funding of an additional drawing under a USD 150,000,000 loan to
CORPORATE COMMERCIAL BANK AD Issue Price: 100 per cent.
Northern Lights Bulgaria B.V. incorporated under the laws of the Netherlands (the "Issuer") is issuing on or about 3 October 2012 (the "Issue Date") an aggregate principal amount of USD 150,000,000 loan participation Series 2012-1 notes due 2014 (the "Notes") for the sole purpose of financing the purchase of the rights and obligations of the lender and the funding of an additional drawing under a loan (the "Loan") to Corporate Commercial Bank AD (in Bulgarian, КОРПОРАТИВНА ТЪРГОВСКА БАНКА АД) (the "Borrower" or the "Bank") pursuant to a loan agreement dated 7 August 2012 (as amended and/or supplemented from time to time) (the "Facility Agreement"). The Notes will be issued pursuant to an Asset Backed Note Programme to which the Issuer will accede on or about 3 October 2012 (the "Programme") and constituted by, subject to, and have the benefit of a principal trust deed dated 9 September 2011 (as amended and supplemented from time to time, the "Principal Trust Deed") entered into by, inter alios, BNY Mellon Corporate Trustee Services Limited as trustee (the "Trustee") as supplemented by a supplemental trust deed (the "Supplemental Trust Deed") between the Issuer and the Trustee and an accession deed dated on or about 3 October 2012 between, amongst others, the Issuer and the Trustee (the "Accession Deed" and together with the Principal Trust Deed and the Supplemental Trust Deed being referred to herein as the "Trust Deed"). Pursuant to the Trust Deed, the Issuer will charge in favour of the Trustee, for the benefit of the holders of the Notes (the "Noteholders") and the other Secured Creditors (as defined in the conditions of the Notes) as security for its payment obligations in respect of the Notes: (a) its right as lender to all payments under the Facility Agreement and (b) amounts received pursuant to the Loan in an account of the Issuer. The Issuer will also assign certain of its administrative rights under the Facility Agreement to the Trustee. The Notes are secured limited recourse obligations of the Issuer. In each case where amounts of principal, interest and additional amounts (if any) are stated to be payable in respect of the Notes, the obligation of the Issuer to make any such payment shall constitute an obligation only to account to the Noteholders, on each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of the Notes, for an amount equivalent in part to all principal, interest and additional amounts (if any) actually received and retained by or for the account of the Issuer pursuant to the Facility Agreement. The Issuer will have no other financial obligation under the Notes. Noteholders will be deemed to have accepted and agreed that they will be relying solely and exclusively on the credit and financial standing of the Bank in respect of the financial servicing of the Notes.
The rate of interest payable on the Notes shall be 8.25 per cent. per annum payable quarterly, as described under "Key Terms of the Notes".
Except as set forth herein, payments in respect of the Notes will be made without any deduction or withholding for or on account of taxes of Bulgaria or the Netherlands (save as required by law). See "Taxation". The Loan may be prepaid in whole if it becomes unlawful for the Loan or the Notes to remain outstanding or if there is a change of control of the Bank, as set out in the Facility Agreement, and thereupon (subject to the receipt of the relevant funds from the Bank) the principal amount of all outstanding Notes will be prepaid by the Issuer, together with accrued interest.
This Prospectus has been approved by the Central Bank of Ireland (the "Central Bank") as competent authority under the Directive 2003/71/EC, as amended (the "Prospectus Directive"). The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Application has been made to the Irish Stock Exchange (the "Irish Stock Exchange") for the Notes to be admitted to the Official List (the "Official List") and trading on its regulated market. This Prospectus constitutes a "prospectus" for the purpose of the Prospectus (Directive 2003/71/EC) Regulations 2005 and the Prospectus (Directive 2003/71/EC) (Amendment) Regulations 2012 (together, the "Prospectus Regulations") (which implement the Prospectus Directive in Ireland). Reference in this Prospectus to being "listed" (and all date references) shall mean that such Notes have been admitted to trading on the regulated market of the Irish Stock Exchange.
AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 2 OF THIS PROSPECTUS BEFORE INVESTING IN THE NOTES.
THE NOTES AND THE LOAN HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OF OTHER JURISDICTION OF THE UNITED STATES. THE NOTES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE NOTES ARE BEING OFFERED AND SOLD OUTSIDE THE UNITED STATES TO NON-U.S. PERSONS IN RELIANCE ON REGULATION S UNDER THE SECURITIES ACT ("REGULATION S")). FOR A DESCRIPTION OF THE RESTRICTIONS ON OFFERS, SALES AND TRANSFERS OF THE NOTES AND THE DISTRIBUTION OF THIS PROSPECTUS, SEE "SUBSCRIPTION AND SALE".
The Notes will be in bearer form and in the denomination of USD 150,000 each and integral multiples of USD 1,000 in excess thereof. The Notes will initially be in the form of a temporary global note (the "Temporary Global Note"), without interest coupons, which will be deposited on or around 3 October 2012 (the "Closing Date") with a common depositary for Euroclear Bank S.A./N.V., ("Euroclear") and Clearstream Banking, société anonyme, Luxembourg ("Clearstream, Luxembourg"). The Temporary Global Note will be exchangeable, in whole or in part, for interests in a permanent global note (the "Permanent Global Note" and each of the Temporary Global Note and the Permanent Global Note, a "Global Note"), without interest coupons, not earlier than 40 days after the Closing Date upon certification as to non-U.S. beneficial ownership. Interest payments in respect of the Notes cannot be collected without such certification of non-U.S. beneficial ownership. The Permanent Global Note will be exchangeable in certain limited circumstances in whole, but not in part, for Notes in definitive form in the denomination of USD 150,000 each. See "Key Provisions Relating to the Notes in Global Form".
The Notes will be rated Ba3 by Moody's Investors Service Limited. Moody's Investors Service Limited is established in the EEA and registered under Regulation (EU) No 1060/2009, as amended (the "CRA Regulation").
A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency.
VTB CAPITAL PLC
as Arranger and Dealer
The date of this Prospectus is 2 October 2012
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RESPONSIBILITY STATEMENT
This Prospectus constitutes a prospectus for the purpose of Article 5 of the Prospectus Directive and for the purpose of giving information with regard to the Issuer, the Bank and the Notes which, according to the particular nature of the Issuer, the Bank and the Notes, is necessary to enable prospective investors to make an informed assessment of the assets and liabilities, financial position, prospects of the Issuer and the Bank and of the rights attaching to the Notes. None of the Dealer (as defined in the section "Subscription and Sale"), the Trustee nor any of their directors, affiliates, advisers or agents has made an independent verification of the information contained in this Prospectus in connection with the issue or offering of the Notes and no representation or warranty, express or implied, is made by the Dealer, the Trustee or any of their directors, affiliates, advisers or agents with respect to the accuracy or completeness of such information. Nothing contained in this Prospectus is to be construed as, or shall be relied upon as, a promise, warranty or representation, whether to the past or the future, by the Dealer, the Trustee or any of their respective directors, affiliates, advisers or agents in any respect. The contents of this Prospectus are not to be construed as, and should not be relied on as, legal, business or tax advice and each prospective investor should consult its own legal and other advisers for any such advice relevant to it.
Each of the Issuer and the Bank accepts responsibility for the information contained in this Prospectus. To the best of the knowledge of the Issuer and the Bank (each of which has taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is in accordance with the facts and contains no omission likely to affect the import of such information.
No person is authorised to give any information or make any representation not contained in this Prospectus in connection with the issue and offering of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by any of the Issuer, the Bank, the Trustee or the Dealer or any of their directors, affiliates, advisers or agents. The delivery of this Prospectus does not imply that there has been no change in the business and affairs of the Issuer or the Bank since the date hereof or that the information herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Notes by any person in any jurisdiction where it is unlawful to make such an offer or solicitation. The distribution of this Prospectus and the offer or sale of the Notes in certain jurisdictions is restricted by law. This Prospectus may not be used for, or in connection with, and does not constitute, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstance in which such offer or solicitation is not authorised or is unlawful. In particular, this Prospectus is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). The Notes are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Notes will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Persons into whose possession this Prospectus may come are required by the Issuer, the Trustee and the Dealer to inform themselves about and to observe such restrictions. Further information with regard to restrictions on offers, sales and deliveries of the Notes and the distribution of this Prospectus and other offering material relating to the Notes is set out under "Subscription and Sale" and "Key Provisions Relating to the Notes in Global Form".
This Prospectus has been filed with and approved by the Central Bank as required by the Prospectus Regulations.
IN CONNECTION WITH THE ISSUE OF THE NOTES, VTB CAPITAL PLC AS THE STABILISING MANAGER ("STABILISING MANAGER"), FOR ITS OWN ACCOUNT (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISING ACTION. ANY STABILISING ACTION MAY BEGIN ON OR
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AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE DATE OF THE ISSUE OF THE NOTES OR 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT SHALL BE CONDUCTED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.
The language of this Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.
CONTENTS
Page
RISK FACTORS .......................................................................................................................................... 2 INVESTOR SUITABILITY ...................................................................................................................... 20 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ................................... 21 PRESENTATION OF FINANCIAL AND OTHER INFORMATION ..................................................... 23 KEY TERMS OF THE NOTES ................................................................................................................. 26 TERMS AND CONDITIONS OF THE NOTES ....................................................................................... 31 THE FACILITY AGREEMENT ................................................................................................................ 45 KEY PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM ............................................... 46 USE OF PROCEEDS ................................................................................................................................. 47 DESCRIPTION OF THE ISSUER ............................................................................................................. 48 DESCRIPTION OF THE CALCULATION AGENT ................................................................................ 50 CORPORATE COMMERCIAL BANK AD ............................................................................................. 51 SELECTED FINANCIAL INFORMATION OF THE GROUP ................................................................ 51 FINANCIAL REVIEW .............................................................................................................................. 54 BUSINESS ................................................................................................................................................. 71 MANAGEMENT ....................................................................................................................................... 84 ASSET, LIABILITY AND RISK MANAGEMENT ................................................................................. 93 SELECTED STATISTICAL INFORMATION OF THE BANK ............................................................ 104 RELATED PARTY TRANSACTIONS .................................................................................................. 110 PRINCIPAL SHAREHOLDERS ............................................................................................................. 112 THE BANKING SECTOR AND BANKING REGULATION IN BULGARIA .................................... 115 TAXATION ............................................................................................................................................. 134 SUBSCRIPTION AND SALE ................................................................................................................. 138 GENERAL INFORMATION .................................................................................................................. 140 ABBREVIATIONS AND DEFINITIONS............................................................................................... 142 APPENDIX: FINANCIAL STATEMENTS ............................................................................................ 147 ANNEX: THE FACILITY AGREEMENT .............................................................................................. 148 INDEX OF DEFINED TERMS ............................................................................................................... 149
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RISK FACTORS
Investment in the Notes involves a high degree of risk. Prospective investors may lose the value of their entire investment or part of it and should carefully review this Prospectus in its entirety. In particular, investors should consider all the risks inherent in making such an investment, including the risk factors set forth below, before making a decision to invest. Any of the following risks, individually or together, could adversely affect the Group's business, results of operations, financial condition and prospects, in which case the trading price of the Notes could decline and investors could lose all or part of their investment.
Prospective investors should note that the risks described below are not the only risks the Group faces. These are the risks the Group currently considers to be material. There may be additional risks that the Group currently considers to be immaterial or of which it is currently unaware, and any of these risks could have similar effects to those set forth below.
Risks Relating to the Group
Relatively high loan concentration of the Group's portfolio
The Group is reliant on a relatively small number of borrowers. As at 30 June 2012, the Group's fifty largest Exposures accounted for 67.4 per cent. of its total loan portfolio (69.6 per cent. and 69.9 per cent. as at 31 December 2011 and 2010 respectively). Furthermore, the Group's top thirty Exposures accounted for 47.0 per cent. of its total loan portfolio as at 30 June 2012, which, although still high, represents a decrease from 49.3 per cent. and 51.0 per cent. as at 31 December 2011 and 2010 respectively. The Group's top ten Exposures accounted for 18.6 per cent. of its total loan portfolio as at 30 June 2012 (20.4 per cent. as at 31 December 2011 and 21.7 per cent. as at 31 December 2010).
High individual borrower concentration of its loan portfolio makes the Group vulnerable to the deterioration in the financial conditions of its corporate customers as a result of a downturn, such as the recent global financial and economic crisis, in any one or more of the key industry sectors in which the Group's customers are involved. For instance, this current economic crisis has negatively affected the financial condition of almost all sectors of the Bulgarian economy and, in particular, the construction sector. The high level of concentration among the Group's key borrowers may leave the Group highly exposed in case one or more significant borrowers' default or there is a downturn in a specific industry.
While the Group believes that its provisioning levels and the collateral supporting loans granted to its largest borrowers are adequate, there can be no assurance that the Group's business, financial condition and results of operations will not be adversely affected by a default by one or more of the Group's largest borrowers. In addition, the relatively high borrower concentration of the Group's loan portfolio means that the Group's business and financial condition is largely dependent on the continuation of the Group's business with these large customers. If some or all of these customers prepay their loans or refinance their loans with the Group's competitors, this could have a material adverse effect on the Group's business, results of operations and financial condition.
Risks concerning borrower credit quality and general economic conditions are inherent in the Group's business
The Group's loans to non-financial institutions and other customers have increased significantly in the last year, growing, before provisions, by 58.4 per cent. from BGN 1,673.4 million at 31 December 2010 to BGN 2,651.6 million at 31 December 2011. As at 30 June 2012, the Group's loans to non-financial institutions and other customers before provisions amounted to BGN 3,007.3 million or 66.8 per cent. of the Group's total assets. This significant increase in credit exposure requires continued review by the management of the Bank of the quality of the credit and the adequacy of its provisioning levels, together with continued development of its risk management strategies and systems.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a large part of the Group's business. Adverse changes in the credit quality of the Group's borrowers or a general deterioration in Bulgarian, European or global economic conditions, or
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problems arising from systemic risks in the financial systems, could reduce the recoverability and value of the Group's assets and require an increase in the Group's level of provisions for bad and doubtful debts.
Any failure of the Group to grow a high quality asset base in the future in this respect, could have a material adverse effect on the Group's business, results of operations and financial condition.
Potential adverse effects of local and international financial crisis on assets' portfolio
The strategy of the Group, as described below under "Business – Strategy", focuses on: (i) development of its corporate banking profile and targeted customer base while maintaining asset quality; and (ii) maintenance of sustained and profitable growth of the Group's asset base by improving customer service and building long-lasting relationships with corporate clients.
In particular, if economic conditions in Bulgaria and the EU further deteriorate, large borrowers of the Group may encounter difficulties repaying their debts to the Bank and other creditors. Regardless of its sound risk management policies, the Bank may not be able to eliminate the possibility that its significant borrowers may fall into insolvency procedures, as has already happened earlier in 2012 with one of the Bank's top ten borrowers (see "Financial Review - Results of Operation for the Years Ended 31 December 2011 and 2010 and for the Six Months Ended 30 June 2012 and 2011 – Net Impairment Losses"). Furthermore, a new slowdown of economic growth in the Eurozone or the EU as a whole will put pressure on Bulgarian exports, due to a reduction in demand for Bulgarian goods. The Group's clients with export orientation are predominantly involved in doing business with Germany and the Netherlands; however, there can be no assurance that even these countries will not suffer from the Eurozone crisis and instability. If such developments occur, this may lead to a deterioration of the liquidity position of Bulgarian exporters, which in turn may lead to an increase in companies being unable to make timely payments or repay their debts and may result in a deterioration of the Banks' credit portfolio quality and lower bank profitability.
In addition, though the Group does not have corporate customers whose business is wholly dependent on the economic and political developments in Greece, the implementation of the Group's strategy may be adversely affected by the ongoing crisis in the neighbour country.
See also below " – Risks Related to Bulgaria - Bulgaria's economy remains vulnerable to external influence, including the recent global financial and economic crisis and those that may be caused by future significant economic difficulties of its major trading partners or by more general "contagion" effects, which could have a material adverse effect on Bulgaria's economic growth".
The Group may fail to achieve its strategic objectives in the upcoming years due to difficult market conditions which, coupled with strong competition from other banks operating in Bulgaria, could lead the Group to lose its strong position in the market, which in turn could have a material adverse effect on the Group's business, financial condition and/or results of operations.
A portion of the Group's loans are secured by real estate assets
The Bulgarian real estate market has been severely affected by the recent volatility in global financial markets, resulting in a low level of liquidity and, accordingly, in an increased threat of a decline in the value of collateral securing loans. As at 30 June 2012, 14.7 per cent. of the Group's total loans to customers were secured by interests in Bulgarian real estate (compared to 15.5 per cent. and 32.7 per cent. as at 31 December 2011 and 2010, respectively). If the Group were to experience a significant level of foreclosures, and there were to be a downturn in the Bulgarian real estate market, similar to the one caused by the recent global financial and economic crisis, and the expected value of collateral could not be recovered following such foreclosures, this could have a material adverse effect on the Group's business, results of operations and financial condition.
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The Group is sensitive to fluctuations in the market prices of the securities in its portfolio
As at 30 June 2012, the Group's securities held for trading and investment securities available for sale amounted in aggregate to BGN 487.7 million, or 10.8 per cent. of its total assets. Though the Group's risk management function has managed to prevent significant market losses in its securities portfolio so far, there can be no assurance that it will continue to do so. The Group is exposed to a number of risks, including risks related to the movement of market prices and the market liquidity of related instruments. The global financial crisis had a very severe adverse effect on the Bulgarian capital markets, which still remains unstable and prone to further potential downturns. Should the Group further increase the size of its securities portfolio and incur substantial losses from its securities exposures, it could suffer losses, which could materially and adversely affect its business, results of operations and financial condition.
Increased competition may adversely affect the Group and cause a decline in its interest margins
The Group has never been active in the retail lending market, as it has been focused since 2000 exclusively on corporate lending (see "Business - Market Position, Competition and Competitive Strengths - Competitive Strengths"). However, in the last three years, as a result of the global financial and economic crisis, competition in the Bulgarian banking sector has become more intense. Partially as a reflection of such increased competition, the Group has reduced certain fees and interest rates on Group loans have also declined. Consequently, in 2011 net interest margins of the Group shrank to 2.8 per cent., compared with 3.9 per cent. in 2010. As at 30 June 2012, net interest margins of the Group were 2.6 per cent. The increased competition, in particular for extending loans to quality corporate customers, and to a certain extent, for deposits, is expected to continue in the future and to put additional pressure on the banks' interest rate margins, and possibly, result in further decline of interest rate margins earned by the Group. In addition, an increase in competition may lead to, amongst other things, increased prepayments by the Group's customers, loss of existing customers and a reduction in the growth of the Group's loan portfolio.
As a result, the Group's success in lending to corporate customers will depend on its ability to adapt quickly to market and industry trends and, in general, to remain competitive with other financial institutions. However, there can be no assurance that increased competition will not adversely affect the Group's business, results of operations or financial condition.
The Group may face difficulties in raising additional capital to support its growth
The Group's capital requirements depend on numerous factors, including the growth of its balance sheet and earnings, regulatory capital requirements, its credit ratings and potential acquisitions. The management of the Group cannot accurately predict the timing and amount of these requirements. The Group has maintained its capital in excess of the minimum levels set by the BNB at all times. As at 30 June 2012 and 31 December 2011, the Group's total capital adequacy ratio was 12.38 per cent. and 12.39 per cent. respectively (compared to the 12 per cent. requirement, see also "Financial Review – Capital Base and Capital Adequacy Ratios"). The Bank believes that it maintains optimal capital adequacy, preserving its necessary regulatory requirements whilst maintaining a high efficiency of its invested funds. At the same time, the Bank's Internal Capital Adequacy Assessment, which is carried out on a monthly basis, shows that the amount of capital required to meet the inherent risks of the Bank's activity is below the regulatory requirements (i.e. the Bank has a surplus of capital). However, growth in the Group's loan portfolio will require further equity capital to strengthen the Group's capital base. For example, over the last 9 months the Controlling Shareholder through his wholly-owned company Bromak EOOD provided EUR 29 million funding in the form of subordinated loans in order to support growth in the Group's loan portfolio (EUR 20 million in 2011 and EUR 9 million in 2012).
Failure to increase its capital levels may adversely affect the Group's ability to implement its strategic plans. If adequate capital is not available, the Bank may be subject to increased regulatory supervision or even intervention, and its business, operating results and financial condition could be adversely affected.
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The Group may face difficulties in funding its growth; high deposit concentration
Unlike many other groups operating in Bulgaria, the Group has no access to parental funding. It has traditionally relied on customers' deposits as its primary source of funding. As at 30 June 2012 and as at 31 December 2011, deposits from non-financial institutions funded 81.4 per cent. and 83.7 per cent. respectively of its total assets. Moreover, as at 30 June 2012 and as at 31 December 2011 the Group's top twenty deposits accounted for 30.8 per cent. and 40.0 per cent. respectively of total deposits from non-financial institutions and other customers. Notwithstanding the reduction of their share for the six months ended 30 June 2012, these high concentrations increase the risks of large deposit outflow.
Failure to obtain funding may adversely affect the Group's ability to implement its strategic plans.
Negative publicity may have a material adverse effect on the Group's business, financial condition and/or results of operations
The market perception of the Group is of key importance for the Group's operations. The Group's activities may be subject to negative publicity which may evoke doubts about the reliability of the Bank and its corporate practices, regardless of whether such doubts are justified or not (e.g. any negative publicity relating to unlawful state aid received by the Bank from Bulgarian government, see "Business – Litigation - Allegations for Unlawful State Aid to the Bank"). Also, any litigation against or with the involvement of the Group may result in negative publicity regarding the Group's operations.
Such negative publicity could in particular lead to a loss of confidence in the Group and, consequently, could result in a decrease in the volume of its operations, an outflow of customers deposits or an increase of the Group's marketing and litigation costs, which could have a material adverse effect on the Group's business, financial condition and/or results of operations.
The Bank is a highly regulated entity and changes to applicable law or regulation, the interpretation or enforcement of such law or regulation
The Bank is subject to regulation and supervision designed to maintain the safety and soundness of banks, ensure their compliance with economic and other obligations and limit their exposure to risk. These regulations include Bulgarian laws and regulations, particularly those of the BNB. These regulations may limit the Group's activities, and changes in these regulations may increase the Group's cost of doing business. Changes in these laws and regulations, or in the manner in which they are interpreted or enforced, may have a material adverse effect on the Group's business, results of operations and financial condition.
The most significant change in the Bulgarian banking sector regulation is expected to take place in 2013 with the implementation of Basel III. In this respect and based on the information available so far, the Group does not expect the implementation of Basel III to cause any significant problems or adversely affect its business activities or the Bank's compliance with the capital requirements. However, it is noteworthy that as at the date of this Prospectus the specific amendments to the current regulations resulting from the Basel III implementation and the exact date of their introduction are still unclear.
The breach of regulatory requirements, including in respect of capital adequacy, could have a material adverse effect on the Group, including a potential revocation of its banking licence
Breach of regulatory guidelines could expose the Bank to potential liabilities and sanctions, including, in extreme cases, loss of licence.
Pursuant to the Credit Institutions Act, the BNB is empowered to impose on banks a number of supervisory sanctions in the case of, among the other things, any failure to comply with any legal requirement (including those set forth in respect of capital adequacy and liquidity) of the Credit Institutions Act or the secondary legislation for its application, or of the BNB recommendations, or of written commitments of a bank to the BNB. Depending on the specific case, the measures may include placing a bank under special supervision in case of a potential insolvency or even revoking a bank's licence.
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The BNB may revoke at its discretion banking licences in a broad range of cases, including if a bank in the BNB's opinion has insufficient capital as defined for regulatory purposes, or if in the BNB's opinion it cannot be considered that a bank will continue to meet its obligations to creditors, including where a bank does not ensure the security of the assets entrusted to it.
The BNB shall revoke the licence due to insolvency if the amount of a bank's capital (as defined for regulatory purposes) is negative or if a bank fails to pay under any of its obligations when due for more than seven days if that failure is directly related to the bank's financial status and at the BNB's discretion, no repayment is to be expected within a reasonable period of time.
For more information, see "The Banking Sector and Banking Regulation in Bulgaria – Licencing and Supervisory Measures".
The Group depends on experienced personnel and there is significant competition for such employees
Certain members of the Group's current senior management team have been with the Group for substantial periods of time and contribute significant experience and expertise to the Group's management. Such persons are also heavily involved in the day-to-day control and running of the business. The Group's success depends, in part, on its ability to continue to retain and motivate these individuals and other qualified and experienced banking and management personnel. Furthermore, to allow for additional growth, the Group must hire additional personnel on a regular basis. Competition in the Bulgarian labour market for qualified operating, financial and technical personnel is intense due to the relatively small number of qualified personnel available, and the Bank competes with other banks specifically, and other Bulgarian employers generally, to employ such persons. The successful implementation of the Group's business plan will, in part, depend upon its ability to hire and retain such personnel. Whilst the Group has been successful to date in recruiting and retaining highly qualified personnel, if any key members of the management or certain other specialised staff become unwilling or unable to continue in their role, or if the Group is unable to attract, promote and retain other qualified personnel, this could have a material adverse effect on the Group's business, results of operation and financial condition.
The Group's risk management policies and compliance systems might not be fully effective in all circumstances
The Bank faces a number of types of risk that could adversely affect its business, including credit, liquidity, market and operational risk. Although the Group invests substantial time and effort in its risk management strategies and systems, these strategies and systems may nevertheless fail in certain circumstances, particularly when confronted with risks that the Group did not identify correctly or in a timely fashion. The Bank's risk methodologies and techniques are based on historical data and there is no assurance that they will be fully effective if certain risks materialise in the future. Furthermore, risk methodologies and techniques may not cover the entire spectrum of risks to which the Group may be subject. If any such risks materialise, the associated losses could be greater than the Group may have anticipated, which could have a material effect on the Group's business, results of operation and financial condition.
The Group's ability to comply with all applicable laws and rules is largely dependent on the establishment and maintenance of compliance, audit and reporting systems and procedures, as well as its ability to retain qualified compliance and other risk management personnel. The management of the Group cannot assure potential investors in the Notes that these systems and procedures are fully effective. The Bank and one of its subsidiaries (CCB Asset Management AD) are subject to extensive oversight by regulatory authorities, including regular on-site inspections. In the case of actual or alleged non-compliance with regulations, the Bank or the subsidiary could be subject to investigation and judicial or administrative proceedings that may result in substantial penalties or civil lawsuits, including by customers for damages. Any of these if related to the Bank could have a material effect on the Group's business, results of operations or financial condition.
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The Group depends on complex information technology systems
The Group depends on sophisticated information technology systems, including its information management systems, to conduct its operations and the failure, ineffectiveness or disruption of these systems could have a material adverse effect on the Group.
Information technology systems in general are vulnerable to a number of problems, such as computer virus infection, malicious hacking, physical damage to vital information technology centres and software or hardware malfunctions. Any failure or interruption or breach in security of these systems could result in failures or interruptions in customer relationship management, risk management, general ledger, deposit, servicing and/or loan organisation systems. If the Group's information technology systems were to fail, even for a short period of time, the Group could be unable to serve some customers' needs on a timely basis and could thus lose their business. Likewise, a temporary shutdown of the information systems could result in extraordinary costs for information retrieval and verification. In addition, any failure to update and develop the existing information systems as effectively as the Group's competitors may result in a competitive disadvantage. Although the management of the Group believes that it has adequate security and continuity-of-business programmes and protocols in place, including maintaining a fully equipped disaster recovery centre, no assurance can be given that these will be sufficient to prevent these problems or to ensure that the Group's operations are not significantly disrupted as a consequence.
Any of these or other systems-related problems could have a material adverse effect on the Group's business, results or operations or financial condition.
The Group is subject to operational risk which is inherent to its business activities
The Group is subject to the risk of incurring losses or unforeseen costs relating to: inadequate or failed internal processes, human error, system failures or external events such as errors made during the execution of operations, clerical or record keeping errors, business disruptions (caused by various factors such as software or hardware failures and communication breakdowns), fraud, unauthorised transactions and damage to assets. Any failure of the Group's risk management system to detect or correct operational risk or the risk of third parties failing to adequately perform the activities outsourced to them could have a material adverse effect on the Group's business, financial condition or results of operations.
Influence of Principal Shareholders
The beneficial ownership of the Bank is concentrated with the Bank's Principal Shareholders (as defined under "Principal Shareholders" below), who together beneficially own approximately 83.28 per cent. of the Bank's outstanding shares with Mr. Tzvetan Vassilev beneficially owning 50.29 per cent. of the Bank's outstanding shares. The Principal Shareholders together are able to determine the most important resolutions of the Bank's shareholders, including amending the Bank's articles of association, appointing and removing members of the Supervisory Board and increasing the Bank's capital (for which a resolution passed by a 2/3 majority of those attending at a shareholders meeting shares is required), as well as resolving on mergers or other transformations of the Bank and approving certain significant transactions and related party transactions with non-current assets (for which a resolution passed by a 3/4 majority of the shares attending at a shareholders meeting is required).
All transactions executed directly or indirectly with Principal Shareholders are conducted on an arm's length basis and in compliance with the law, including the minority shareholders protective regulations (see "Related Party Transactions" and "Principal Shareholders – Control Over the Bank"). Although the management of the Group anticipates that any future transactions and agreements will be on terms no less favourable to the Group than it could obtain in comparable contracts with unaffiliated third parties, conflicts of interest could arise between the Group and the Principal Shareholders.
Limited ownership of shares and dependence on key management
Mr. Tzvetan Radoev Vassilev (the "Controlling Shareholder") indirectly holds 50.29 per cent. of the share capital of the Bank (see "Principal Shareholders – Control over the Bank"). With over 50 per cent. of the
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total number of votes at a general shareholders' meeting of the Bank, the Controlling Shareholder is able to exert significant influence over substantially all matters requiring approval by the Bank's shareholders, including amending the Bank's articles of association, appointing and removing directors and approving significant transactions (other than the approval of transactions in which the Controlling Shareholder either directly or via related parties is considered an "interested person" under Bulgarian law or financial regulation).
In the past, the Bank has also been dependent on the financial support of the Controlling Shareholder. A disposal of shares by the Controlling Shareholder, or his withdrawal from the Supervisory Board, might also have a material adverse effect on the Bank.
The Bank intends to continue to have contractual and other business relationships directly and indirectly with the Controlling Shareholder. Although the management of the Bank anticipates that any future transactions and agreements will be on arm's length terms, and have confirmed that no conflicts of interest currently exist, there can be no assurance that conflicts of interest will not arise between the Controlling Shareholder and the Bank in the future.
Risks Related to the Republic of Bulgaria
Certain of the information contained under this section "Risks relating to the Republic of Bulgaria" has been taken from recent publications by the Republic of Bulgaria.
The Group is located in Bulgaria and substantially all of its net interest income is derived from Bulgaria. There are certain risks associated with an investment in Bulgaria.
Emerging markets such as Bulgaria are subject to greater risks than more developed markets and a financial crisis could have a particularly significant adverse effect on banks, including the Bank, operating in emerging markets such as Bulgaria
Prospective investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is suitable only for sophisticated investors who are familiar with and fully appreciate the significance of the risks involved in investing in emerging markets.
Investors in emerging markets such as Bulgaria should be aware that these markets are subject to greater risk than more developed markets, including, in some cases, significant legal, economic, financial and political risks. Investors should also note that emerging economies such as the economy of Bulgaria are subject to rapid changes and that the information set out in this Prospectus may become outdated relatively quickly. Moreover, financial turmoil in any large developing country may tend to adversely affect prices in equity and debt markets of other developing countries as investors move their money to more stable and developed markets. Thus, even if the Bulgarian economy remains relatively stable, financial turmoil in other emerging market countries could have an adverse effect on the Bulgarian economy.
As a result of the recent global financial and economic crisis which started in 2007, financial problems, or an increase in the perceived risks associated with investing in emerging economies, could dampen foreign investments in Bulgaria and have an adverse effect on the Bulgarian economy as a whole. This, in turn, could have an adverse effect on most Bulgarian banks, including the Bank, due to, among other factors, declines in the creditworthiness of many borrowers and an overall decrease in demand for loans. In addition, any financial turmoil can result in severe liquidity constraints for companies that operate in emerging markets due to the withdrawal of foreign funding sources or the reluctance of foreign investors to provide financing to borrowers in such emerging markets. Accordingly, investors should exercise particular care when evaluating the risks associated with an investment in the Notes and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investments in emerging markets are only suitable for sophisticated investors who fully appreciate the significance of the risks involved in, and are familiar with, such investments, and investors are therefore urged to consult with their own legal and financial advisers before making an investment in the Notes.
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Bulgaria's economy remains vulnerable to external influence, including the recent global financial and economic crisis and those that may be caused by future significant economic difficulties of its major trading partners or by more general "contagion" effects, which could have a material adverse effect on Bulgaria's economic growth
As a small open economy, Bulgaria faces the risk of external shocks, including the recent global economic crisis. A decline in the economic growth of Bulgaria's major export partners (such as Germany, Romania, Turkey, Italy and Greece), could have a significant adverse impact on Bulgaria's exports in the future and hence affect Bulgaria's economic growth. Increases in fuel prices have diminished the competitiveness of the Bulgarian economy and the dependence on fuel imports has increased currency risk related to USD fluctuations. Bulgaria relies heavily on foreign capital inflows to fuel economic growth. However, despite the corporate tax rate of 10 per cent., in the last few years following the onset of the global financial and economic crisis the outflow of foreign investment has been significant. See also "- Lower European Fund transfers may substantially reduce revenues and thus undermine public finances in Bulgaria".
As international investors' reactions to events occurring in a single market can result in a "contagion" effect, in which an entire region or class of investment is disfavoured by international investors, Bulgaria could be adversely affected by negative economic or financial developments in other EU Member States (such as Greece, Italy, Portugal and Spain) or countries with credit ratings similar to those of Bulgaria. Following the recent global economic crisis Bulgaria's economy, including gross domestic product ("GDP") growth and employment levels, was adversely affected by such contagion effects and similar developments could affect the Bulgarian economy in the future.
Significantly higher rates on sovereign debt in some Eurozone countries have affected national economies and the risk of a squeeze on liquidity has risen across the European union (the "EU"). A further downgrade of sovereign debt ratings, including those of Bulgaria's major trading partners, may result in an enhanced risk of deleveraging and credit contraction and, in turn, could have a material adverse affect on the Bulgarian economy.
Bulgaria's economy is heavily exposed to any spill-over from the problems in Greece. The neighbouring country, which struggles with a huge budget deficit and government debt, is Bulgaria's fifth most important export partner, accounting for 7 per cent. of all Bulgarian exports in 2011. The ongoing crisis in Greece is likely to result in reduced export demand and lower investment from Greece. Moreover, Bulgaria's business has been hit hard by the strikes in Greece, as Greek farmers blocked the border checkpoints with Bulgaria for weeks, hindering exports and transportation of cargo. The crisis is likely to limit the recovery of lending growth in Bulgaria in the near term. In the event of a Greek default, the crisis could have a negative impact on the Bulgarian economy, which will be considerably magnified if contagion were to spread further across the Eurozone, through, among others, weaker external demand, reduced liquidity of European banks and credit contraction in EU and Bulgaria (See also "The Banking Sector and the Banking Regulation in Bulgaria – Introduction to the Bulgarian Banking System – History and Development of the Bulgarian Banking Sector – The Global Financial and Economic Crisis and Afterwards").
Lower European Fund transfers may substantially reduce revenue and thus undermine public finances in Bulgaria
In order to improve and stimulate domestic investment activity, the government of Bulgaria (the "Government") also utilises European finances from the Cohesion and Structural funds of the EU. As of 2005, foreign direct investment ("FDI") in export oriented sectors such as the processing industries increased considerably, while FDI in real estate and construction peaked dramatically in the run up prior to the crisis. The decline in FDI flows in those sectors following the recent crisis contributed to the substantial drop in real estate prices. After the sharp decline in FDI following the onset of the global financial and economic crisis, European funds have become the main source of FDI for the Bulgarian economy. Lower than anticipated transfers in the medium term may substantially reduce Government revenues and thus reduce public finances, which could have an adverse effect on the Bulgarian economy.
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Unfavourable macroeconomic conditions in Bulgaria could have a material adverse effect on the Group's business, financial condition and/or the results of operations
The Group's operations are dependent primarily upon the macroeconomic environment in Bulgaria. The Group's operations are affected, in particular, by Bulgaria's GDP and changes thereto, by inflation, exchange rates, unemployment levels, average wages and expected changes thereto, by the national fiscal and monetary policy as well as by reforms to public healthcare system.
Until 1989, the Bulgarian economy was administered by the central authorities. Since the end of Communist rule in 1989, successive governments have implemented policies of economic reform and stabilisation. These policies have involved liberalising prices, reducing defence expenditure and subsidies to state-owned enterprises, privatising state-owned enterprises, reforming the tax and bankruptcy systems, introducing legal structures designed to facilitate private, market-based activities, stabilising the currency and implementing measures to encourage foreign trade and investment. However, more than 20 years later, businesses in Bulgaria still have a limited operating history in free market conditions. Accordingly, when compared to companies functioning in countries with a developed market economy, such businesses are characterised by a relative lack of management experienced in responding to the market, limited capital resources with which to develop their operations and low labour efficiency.
The global financial and economic crisis has had an adverse effect on the economic environment in Bulgaria, primarily due to a decrease in exports and a drop in the flow of foreign capital, slower investment activity, the unemployment level and internal consumption.
Low labour demand and the measures initiated by most employers to reduce costs led to a significant decline in employment. Based on the Bulgarian National Employment Agency data, unemployment increased to 11.2 per cent. by the end of 2011 from 10.2 per cent. in 2010.
Part of the fiscal challenge facing the Bulgarian economy is to ensure fiscal stability of the public social security and health systems by measures aimed at reducing pressure on costs and increasing revenues in the medium and long term. In the long term a significant increase in the proportion of older people and a deterioration of the demographic structure is anticipated in Bulgaria, which poses a serious risk to fiscal sustainability and will lead to pressure on public pensions and health care spending. This process presents a challenge to the sustainability of public finances and necessitates the adherence to a conservative fiscal policy with respect to budget balance, pension reforms and improvement in the quality of public health care expenditures. In the event that the Government cannot successfully implement such policies, this could have an adverse effect on the fiscal stability of public social security and health systems, sustainability of public finances in Bulgaria and overall business activity.
The freezing of VAT refunds to businesses at the end of 2011 has effectively added to the difficulties experienced by local companies, which started experiencing severe cash shortages at a time of restricted bank lending and delays in payments from clients. Reduction of Government cash outflows to the business has restricted economic growth and worsened the liquidity problems of businesses.
Though the Bulgarian economy is performing better than some more developed economies with positive GDP growth, low public debt (16.3 per cent. of GDP in 2011) and decreasing inflation (2.8 per cent. in the end of 2011 from 4.5 per cent. in the end of 2010 (Source: BNB), the Government needs to enhance further fiscal buffers to mitigate any weakening in economic conditions and accelerate structural reforms in order to achieve a stronger and sustainable recovery in growth, job creation and incomes. Failing to implement these policies may adversely impact the business environment in which the Group operates. Unfavourable macroeconomic conditions in Bulgaria could have a material adverse effect on the Group's business, financial condition and/or results of operations.
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Any significant devaluation of the Lev could have a materially adverse effect on the Group's customers and any removal of the currency board would likely lead to significant deposit withdrawals by the Bank's customers
Bulgaria maintains a currency board arrangement ("CBA") pursuant to which the exchange rate for lev has been fixed to the Deutsche mark since 1 July 1997 and fixed to the Euro since 1 January 1999. After consultation with the International Monetary Fund, the National Assembly of Bulgaria introduced the CBA, which pegs the local currency, the Lev to the euro at a rate of 1.95583 BGN/EUR, as part of stabilisation measures that ended the 1996-97 financial crisis.
Under the CBA, the BNB is able to manage the liquidity of the banking system via a foreign exchange window, reserve requirements and other regulatory and supervisory measures, but it lacks the ability to set monetary policy by adjusting money supply and interest rates.
The lack of policy flexibility associated with the maintenance of the currency board could operate as an impediment to Bulgaria`s recovery in the context of the current economic crisis if it were to have an adverse effect on growth, and there can be no assurance that the limitations imposed by the currency board arrangement will not have an adverse affect on the Bulgarian economy in the future.
If the Bulgarian parliament voted to change the provisions of the CBA, this may have a material adverse effect upon the business and operations of the Group.
The political and social environment in Bulgaria may create more difficult business conditions for the Group
Since 1989, Bulgaria has pursued a programme of political and economic structural reform designed to establish a free market economy through the privatisation of state enterprises and the deregulation of the economy. Bulgaria joined the North Atlantic Treaty Organization ("NATO") on 29 March 2004 and, consequently, on 1 January 2007 acceded to the EU. Bulgaria now has a functioning parliamentary democracy with government policy consistently aimed towards economic and political reforms in harmony with European practices.
The latest parliamentary election in July 2009 saw a landslide victory for the Citizens for the European Development of Bulgaria, a centre-right party that was founded in 2006 by the then Mayor of Sofia, Boyko Borissov. The next parliamentary elections will be held in the middle of 2013 in order to determine the next 240 members of the National Assembly (the Bulgarian parliament).
Despite the attempts at conducting reforms, the reform process remains slower than expected and the EU continues to keep Bulgaria under close inspection, persistently demanding judicial reform and more evidential results from efforts to fight corruption and organised crime. Pursuant to the latest report dated 18 July 2012 of the European Commission on the progress in Bulgaria under the Cooperation and Verification Mechanism ("CVM") the CVM should continue in order to support the efforts to conduct reforms and make sure that the changes are sustainable and irreversible (see below "- Changes in Bulgaria's relationships with western governments and institutions may have a negative impact on its economy and on the business of the Group"). Bulgaria is presently the EU's poorest country, with GDP per capita of less than half of EU-27 average (Source: Eurostat). Deteriorating economic conditions, in particular as a result of the global economic crisis, coupled with an increasing cost of living, dissatisfaction and frustrations over prolonged economic difficulties, corruption and crime, periodically result in street demonstrations and labour unrest. Any political instability in Bulgaria or intensification of the social and labour unrest could trigger difficulties or disruption to the business and financial standing of clients of the Bank and generally harm the national economy. Consequently, the Group's operations could be restricted and an increase in non-performing loans and in withdrawal of deposits from the Bank could follow, this in turn could have a material adverse effect upon the business and operations of the Group and the Bank's ability to service the Loan.
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Legal risks could have a materially adverse effect on the business of the Group
Bulgaria continues its efforts to harmonise its legislative framework with EU practices, although reform has been slow, hampered by political influence and widespread corruption. See also "Changes in Bulgaria's relationships with western governments and institutions may have a negative impact on its economy and on the business of the Group". Additionally, the legal and regulatory systems lack an institutional history and there may be no generally observed procedural guidelines. The practice of the judiciary and administration remains problematic and parties seeking to rely on the Bulgarian courts for effective redress in respect of a breach of law or contracts, or in an ownership dispute, may find that it is difficult to obtain. The majority of Bulgarian law has been brought into line with that of the EU. However, Bulgarian law continues to evolve, occasionally in ways that do not always coincide with the development and application of the EU's legislation as well as with market developments.
As widely discussed in the media and in various forums, among the risks of the current Bulgarian legal system are: alleged lack of judicial independence from political, social and commercial forces and corruption within the judiciary and governmental authorities; problematic and time consuming enforcement of judicial orders and international arbitration awards; inconsistencies between and among primary and secondary legislation; insufficient judicial and administrative guidance on interpreting legislation; gaps in the regulatory structure due to the absence of or delay in implementing regulations; the relative inexperience of judges and courts in interpreting new principles of law, particularly in relation to financial and commercial law; certain shortcomings in bankruptcy procedures.
As a result, Bulgarian courts are not as effective in the enforcement of judgements and the settlement of disputes in relation to statutory and contractual obligations as courts in Western Europe.
Any or all of the above weaknesses could affect the Group's ability to enforce its legal rights or to defend against claims by others. In addition, court claims and prosecutions are sometimes influenced by, or used in furtherance of, private interests. The Group may be subject to such claims and may not be able to receive a fair trial. These risks could affect the Group's ability to ascertain its rights or to seek or obtain effective redress in courts, which could have a material adverse effect on the Group's business, results of operations and financial condition.
Risks related to Bulgarian taxation
The discussion below provides general information regarding Bulgarian taxes and is not intended to be inclusive of all issues. Investors should seek advice from their own tax advisors as to these tax matters before investing in the Notes. See also "Taxation".
Taxes paid by Bulgarian businesses include withholding tax, local taxes and charges, tax on corporate profit, value added tax, excises, import and export duties and property taxes. Bulgaria has taken steps to reduce the overall tax burden and improve the tax climate in recent years and has reduced the corporate profit and personal income tax rates to 10 per cent. However, the tax regulatory framework is still in development which may result in inconsistent application of existing laws and regulations and uncertainty as to the application and effect of new laws and regulations on the Group's results. Some provisions of Bulgarian tax law are ambiguous and often there is no unanimous or uniform interpretation of the law or uniform practice by the tax authorities and the courts. In certain cases tax authorities could have a high degree of discretion, for instance in relation to transfer pricing tax legislation, and at times may exercise their powers arbitrarily and enforce tax laws and regulations selectively, which could be in a manner that is contrary to the law. In addition, Bulgaria's largely ineffective tax collection system and continuing budgetary funding requirements may increase the likelihood that more onerous tax refunding procedures and penalties might be imposed and certain taxes increased, combined with an arbitrary ‘fiscal' approach of tax authorities during tax audits.
As a result of the above conditions, the risk connected with Bulgarian tax law may be greater than that under other tax jurisdictions in developed markets. These tax risks may impose additional burdens and costs on the Bank's operations, including management resources. There is no assurance that the Bulgarian tax authorities will not take a different, unfavourable interpretation of the tax provisions implemented by
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the Group and that the effective tax burden of the Group will not increase while the Notes are outstanding. These risks and uncertainties complicate the bank's tax planning and related business decisions, potentially exposing the Group to significant fines, penalties and enforcement measures, which may have an adverse effect on the business, financial condition and/or results of operations of the Group.
Changes in Bulgaria's relationships with western governments and institutions may have a negative impact on its economy and on the business of the Group
The relationship that Bulgaria maintains with western governments and institutions vary and any change in such relationships could have a negative impact on the economy of Bulgaria. In the run-up to the accession of Bulgaria to the EU in 2007, it was agreed that further work was needed in key areas to address shortcomings in judicial reform, the fight against corruption, and tackling organised crime. Afterwards the EU has continued to convey concerns on these issues, as well as on specific contraventions of commitments, such as those on water and waste management, and regarding tenders within the communications sector. In addition, Bulgaria has had problems absorbing EU funds in the past which led to the loss of some allocations in the first years following accession. In order to strengthen the administration of EU funds, the Government has implemented a more focused institutional oversight in the cabinet and the prosecutor`s office. A position was introduced for a minister without a portfolio, to be responsible for EU funds management in order to boost absorption while maintaining tight expenditure controls. As a result, the absorption rate has increased in the past two years and is expected to improve further. Nevertheless, work still remains to be done if the full allocation of EU funds is to be administered.
The latest European Commission's report dated 18 July 2012 on Progress in Bulgaria under the CVM, pointed to important progress in the basic legislative framework since Bulgaria's accession and to strong political will of the government at key moments to achieve deep and lasting reforms. However, these efforts have not yet led to significant improvements in judicial accountability and efficiency and questions remains about judicial independence and capacity. Although Bulgaria has invested considerably to improve the institutional and legal framework for the fight against organised crime since 2010, results have been limited. According to the European Commission, Bulgaria lacks independent institutions in the area of anti-corruption with the authority and the obligation to make proposals and take actions. The European Commission assessment is that the challenge now is for Bulgaria to fill some key strategic gaps and to ensure more consistent and effective direction of reforms. Pursuant to the report the CVM should continue, in order to support the efforts to conduct reforms and to keep up the momentum of change towards a sustainable and irreversible reform process – a process sufficiently strong that the external intervention of the CVM is no longer needed. The European Commission's next assessment of progress under the CVM will be at the end of 2013.
Any deterioration in Bulgaria`s relationships with the EU, which in turn could limit the amount of transfers of EU funds to Bulgaria, could have an adverse effect on the Bulgarian economy.
Risk Relating to the Issuer and the Notes
Payments under the Notes are limited to the amount of payments received under the Loan
The Issuer is only obliged to make payments under the Notes to the Noteholders in an amount equal to sums of principal, interest and additional amounts (if any) actually received by or for the account of the Issuer from the Bank pursuant to the Loan (after satisfaction of prior ranking claims). If the Bank fails to meet its payment obligations under the Loan in full or any such payment obligations are unenforceable in Bulgaria, this will result in the Noteholders receiving less than the scheduled amount of principal, interest and additional amounts (if any) on the relevant due date.
There is no direct recourse of the Noteholders to the Bank
Except as otherwise expressly provided in the "Terms and Conditions of the Notes" and in the Trust Deed, the Noteholders will not have any proprietary or other direct interest in the Issuer's rights under or in respect of the Loan. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to
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enforce any of the provisions of the relevant Loan or have direct recourse to the Bank, except through action by the Trustee under the Security (as defined in the "Terms and Conditions of the Notes").
In addition, Noteholders should be aware that neither the Issuer, the Arranger and Dealer nor the Trustee accepts any responsibility for the performance by the Bank of its obligations under the relevant Loan. See "Terms and Conditions of the Notes— Status".
The Notes may not be a suitable investment for all investors
Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
• have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Prospectus or any applicable supplement;
• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;
• have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor's currency;
• understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant financial markets; and
• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
The terms of the Notes may be modified, waived or substituted without the consent of all the Noteholders
The conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority. Any such change in the terms of the Notes may adversely affect the trading price of the Notes.
The conditions of the Notes contain a provision permitting the Notes and the conditions of the Notes to be amended without the consent of the Noteholders to correct a manifest error.
Event of Default
The conditions of the Notes contain a provision which, if an Event of Default occurs, allows the Trustee or the Trustee directed by holders of at least 25 per cent. in aggregate principal amount of the outstanding Notes to declare all the Notes to be immediately due and payable by providing notice in writing to the Issuer, whereupon the Notes shall become immediately due and payable, at their principal amount with accrued interest, without further action or formality.
English law, which governs the terms of the Notes, may change over time
The conditions of the Notes are based on English law in effect as at the date of this Prospectus. No assurance can be given as to the impact of any possible judicial decision or changes in English law or practice after the date of this Prospectus.
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Bulgarian courts may not recognise the choice of English law as the law governing the Notes
The Notes are governed by English law and the Issuer has submitted to the exclusive jurisdiction of the courts of England to settle any disputes that may arise out of or in connection with any Note. In respect of any proceedings between (i) the Issuer and a Bulgarian natural or legal person (which proceedings also includes a non Bulgarian natural or legal person) or (ii) the Issuer and a non Bulgarian natural or legal person, a Bulgarian court will ordinarily recognise and give effect to the choice of English law as the law governing the Notes except that all matters concerning capacity of such Bulgarian natural or legal person to contract, authorisation and execution by such person, as well as the bringing of any actions and the enforcement of any judgments against such person in the courts of Bulgaria or of England, will be governed by Bulgarian law. Once recognised, the foreign judgment is equivalent to the judgment of a Bulgarian court and is capable of enforcement in Bulgaria.
There may be no active trading market for the Notes
Although an application has been made for the Notes to be admitted to listing on the Official List of the Central Bank and to trading on the Regulated Market of the Irish Stock Exchange, there is no assurance that such application will be accepted or that an active trading market for the Notes will develop or, if one does develop, that it will be liquid or maintained. If an active trading market in the Notes does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected.
In addition, if the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of the Issuer. As a result of the above factors, investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market.
Fluctuations in exchange rates and interest rates may adversely affect the value of the Notes
The Issuer will pay principal and interest on the Notes in USD. This presents certain risks relating to currency conversions if an investor's financial activities are denominated principally in a currency or currency unit (the "Investor's Currency") other than USD. These include the risk that exchange rates may significantly change (including changes due to devaluation of the USD or revaluation of the Investor's Currency) and the risk that authorities with jurisdiction over the Investor's Currency may impose or modify exchange controls. An appreciation in the value of the Investor's Currency relative to USD would decrease the Investor's Currency equivalent yield on the Notes, the Investor's Currency equivalent value of the principal payable on the Notes and the Investor's Currency equivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal. In addition, investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes.
Legal investment considerations may restrict certain investments
The investment activities of certain investors are subject to legal investment laws and regulations, review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent the Notes are legal investments for it, the Notes can be used as collateral for various types of borrowing and any other restrictions that apply to its purchasing or encumbering of the Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.
Credit ratings may not reflect all risks
Moody's have assigned a credit rating to the Bank and the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, and other factors on the Bank or the Notes, or other factors
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that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time.
In general, European regulated investors are restricted under the CRA Regulation from using credit ratings for regulatory purposes, unless such ratings are issued under the CRA Regulation (and such registration has not been withdrawn or suspended), subject to transitional provisions that apply in certain circumstances whilst the registration application is pending. This general restriction will also apply in the case of credit ratings issued by non-EU credit-rating agencies, unless the relevant credit ratings are endorsed by an EU-registered credit rating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation (and such endorsement or certification, as the case may be, has not been withdrawn or suspended).
The EU Savings Directive
EC Council Directive 2003/48/EC (the "EU Savings Directive") may result in certain holders not receiving the full amount of interest on the taxation of savings income. Each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income (as defined in the EU Savings Directive) paid by a paying agent in the meaning of the EU Savings Directive within its jurisdiction to, or collected by such a paying agent for, an individual resident or certain limited types of entity established in that other Member State. However, for a transitional period, Austria and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at rates rising over time to 35 per cent., unless in the case of Luxembourg the beneficial owner of the interest payments opts for one of the two information exchange procedures available. This transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to payments.
A number of non-EU countries and certain dependent or associated territories of certain Member States, have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a paying agent within its jurisdiction to, or collected by such a paying agent for, an individual resident in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories.
The European Commission has proposed certain amendments to the EU Savings Directive, which may, if implemented, amend or broaden the scope of the requirements described above. Investors who are in any doubt as to their position should consult their professional advisers.
If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. The Issuer is required to maintain a Paying Agent in a Member State that is not obliged to withhold or deduct tax pursuant to the EU Savings Directive.
Tax Considerations
The Issuer is not currently obliged to pay any additional amount for, or on account of, any payments under the Notes that are the subject of a deduction or withholding for or on account of any tax.
Under Bulgarian law, the Borrower is obliged to make a withholding from interest payments on the Loan that it makes to the Issuer. Consequently, the Borrower is obliged to gross-up such interest payments it makes to the Issuer pursuant to the terms of the Facility Agreement. Noteholders are therefore reliant on the Borrower's continued compliance with the relevant gross-up provisions of the Facility Agreement and the enforceability of such provisions against the Borrower in order for Noteholders to receive all amounts due in respect of the Notes.
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No Regulation of the Issuer by any Regulatory Authority
The Issuer is not required to be licensed, registered or authorised under any current securities, commodities or banking laws of The Netherlands and will operate without supervision by any authority in any jurisdiction. There is no assurance, however, that regulatory authorities in one or more jurisdictions would not take a contrary view regarding the applicability of that jurisdiction's laws to the Issuer. The taking of a contrary view by such regulatory authority could have an adverse impact on the Issuer or the Noteholders.
Any investment in the Notes does not have the status of a bank deposit and is not within the scope of any deposit protection scheme.
Minimum Denomination
As the Notes have a denomination consisting of the minimum denomination of USD150,000 plus a higher integral multiple of USD1,000, it is possible that the Notes may be traded in amounts in excess of USD150,000 that are not integral multiples of USD150,000. In such case a Noteholder who, as a result of trading such amounts, holds a principal amount of less than USD150,000 may not receive a Definitive Note in respect of such holding (should Definitive Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to USD150,000.
Definitive Notes not denominated in an integral multiple of USD 150,000 or its equivalent may be illiquid and difficult to trade
The Notes have denominations consisting of USD150,000 and integral multiples of USD1,000 in excess thereof. It is possible that the Notes may be traded in amounts that are not integral multiples of USD150,000.
Limited recourse
All payments to be made by the Issuer in respect of the Notes will be made only from and to the extent of the sums received or recovered from time to time by or on behalf of the Issuer in respect of the Underlying Assets in accordance with the Priority of Payments. To the extent that such sums are less than the amount which the Noteholders may have expected to receive (the difference being referred to herein as a "shortfall"), claims against the Issuer will be limited.
Each Noteholder, by subscribing for or purchasing such Notes, will be deemed to accept and acknowledge that it is fully aware that, in the event of a shortfall: (i) the Issuer shall be under no obligation to pay such shortfall; (ii) all claims in respect of such shortfall shall be extinguished and (iii) the Trustee and the Noteholders shall have no further claim against the Issuer in respect of such unpaid amounts and will accordingly not be able to petition for the winding up of the Issuer as a consequence of such shortfall.
The Notes are direct, limited recourse obligations of the Issuer alone and are not obligations of the Arranger and Dealer, the Principal Paying Agent, the Account Bank, the Calculation Agent, the Issue Agent, the Trustee, the Administrator or the Bank. In addition, the Notes are not obligations of any officers, members, directors, employees, agents or incorporators of the Issuer, the Arranger and Dealer, the Principal Paying Agent, the Account Bank, the Calculation Agent, the Trustee, the Administrator, the Bank or any of their respective successors or assignees.
Dealer Fee
The quarterly amounts of interest due from the Borrower in respect of each Interest Period is greater than the aggregate interest amount payable on the Notes in respect of each Interest Period and the difference is intended to represent the quarterly Dealer Fee due to the Dealer pursuant to the terms of the Programme Dealer Agreement (as supplemented and amended). Interest Amounts due to Noteholders rank ahead of payment of amounts due to the Dealer by way of Dealer Fee; provided, however, that if there are any shortfalls in interest amounts paid by the Borrower and therefore a reduction in any Dealer Fee received by the Dealer, the aggregate amount of any such shortfalls in the Dealer Fees received by the Dealer shall be
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deducted from amounts of principal payable to Noteholders. Furthermore, should the Loan become subject to repayment in whole or in part prior to its scheduled date for repayment pursuant to Clauses 7.1 or 7.2 of the Facility Agreement, an amount equal to the present value of future Dealer Fees shall become due to the Dealer and such amount shall rank ahead of principal amounts payable to Noteholders.
Noteholders will be exposed to, amongst others, the credit risk of the Principal Paying Agent and the Account Bank
The ability of the Issuer to meet its obligations under the Notes will be dependent upon, among other things, the Principal Paying Agent making the relevant payments from the Issuer Account held with the Account Bank when monies are received and all parties to the Transaction Documents and the Trade Documents performing their respective obligations thereunder.
Accordingly, Noteholders are exposed to, among other things, the creditworthiness of the Principal Paying Agent and the Account Bank. The creditworthiness and/or performance of each of the Principal Paying Agent, the Account Bank and the other parties to the Transaction Documents and the Trade Documents may be dependent upon economic, political, financial and social events, locally and globally. In particular, recent disruptions in the global credit markets, coupled with the re-pricing of credit risk created increasingly difficult conditions in the financial markets and wider global economy.
Business relationships
Each of the Issuer, the Arranger and Dealer, the Agents, the Account Bank, the Trustee, their agents or any of their affiliates may have existing or future business relationships with the Bank (including, but not limited to, lending, depository, risk management, advisory and banking relationships) and they will pursue actions and take steps that each deems necessary or appropriate to protect its interests arising therefrom without regard to the consequences for a Noteholder.
Conflicts of Interest
Each of the Arranger and Dealer, the Agents, the Account Bank, the Trustee and any of their affiliates is acting or may act in a number of capacities in connection with the issue of Notes and may enter into business dealings from which it may derive revenues and profits in addition to any fees stated in various documents, without any duty to account thereof.
Various potential and actual conflicts of interest may arise between the interests of the Noteholders and either the Issuer and/or the Arranger and Dealer, the Agents, the Account Bank or the Trustee including any of their affiliates, as a result of the various businesses, management, investment and other activities of such persons, and none of such persons is required to resolve such conflicts of interest in favour of the Noteholders. The following briefly summarises some of those conflicts, but is not intended to be an exhaustive list of all such conflicts. Such persons may:
(i) deal in securities or other obligations of any type of the Bank;
(ii) enter into other derivative transactions involving the Bank;
(iii) advise and distribute securities on behalf of, arrange or manage transactions on behalf of, accept deposits from, make loans or otherwise extend credit to and generally engage in any kind of commercial or investment banking or other business with, the Bank or any other person or other entity having obligations relating to or relationships with the Bank; and
(iv) act with respect to such business in the same manner as if the Notes did not exist, regardless of whether any such relationship or action might have an adverse effect on the Bank, the Notes, or on the position of any other party to the transaction described herein or otherwise.
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Provision of information
None of the Issuer, the Arranger and Dealer, the Agents, the Account Bank or the Trustee are under any obligation to make available any information relating to, or keep under review on the Noteholders' behalf, the business, financial conditions, prospects, creditworthiness or status of affairs of the Bank or the Group or conduct any investigation or due diligence into the Bank or the Group.
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INVESTOR SUITABILITY
Prospective investors should determine whether an investment in the Notes is appropriate in their particular circumstances and should consult with such advisers as they deem necessary to determine the appropriateness, effect, risks and consequences of an investment in the Notes. Any decision by prospective investors to make an investment in the Notes should be based upon their own judgement and upon any advice from such advisers, and not upon any view expressed by the Issuer or the Arranger and Dealer.
Given the highly specialised nature of these Notes and the risks relating thereto, the Issuer and the Arranger and Dealer consider that they are only suitable for investors who:
(i) are highly sophisticated and have the requisite knowledge and experience in financial and business matters to evaluate the merits and considerable risks of an investment in the Notes and have consulted their own specialist legal advisers;
(ii) are capable of bearing the economic risk of an investment in the Notes for an indefinite period of time, which may involve a partial or complete loss of principal and interest;
(iii) are acquiring the Notes for their own account for investment, not with a view to resale, distribution or other disposition of the Notes (subject to any applicable law requiring that the disposition of the investor's property be within its control); and
(iv) recognise that it may not be possible to make any transfer of the Notes for a substantial period of time, if at all.
Consequently, if you are not an investor who falls within the description above you should not consider purchasing these Notes without taking detailed advice from a specialised professional adviser.
Investors should note that the market value of the Notes is affected by supply and demand for the Notes, and that, accordingly, it should not be assumed that there will be a significant correlation between such market value and the market value of the Loan.
Investors should also appreciate that:
(i) they cannot rely, and will not at any time in the future be able to rely, on the Issuer, the Arranger and Dealer or any other member of the group of companies of which the Arranger and Dealer form part to provide them with any information relating to, or to keep under review on their behalf, the business, financial condition, prospects, creditworthiness, status or affairs of the Borrower or to conduct any investigation or due diligence with respect to any such person;
(ii) in connection with the issue of the Notes, none of the Issuer, the Arranger and Dealer or any other member of the group of companies of which the Arranger and Dealer form part has made or is making any representations whatsoever as to the Borrower or any information contained in any document filed by any such person with any exchange or with any regulatory authority or governmental entity; and
(iii) the Issuer, the Arranger and Dealer and each member of the group of companies of which the Arranger and Dealer form part may deal in and accept deposits from, make loans or otherwise extend credit to, and generally engage in any kind of commercial or investment banking activities or other business including any derivatives business (howsoever defined) with the Borrower or any other person or entity having obligations relating to the Borrower and may act with respect to such activities or business without accountability to any investor in the Notes in the same manner as if the Notes did not exist, regardless of whether any such action might have an adverse effect (including, without limitation, by constituting or giving rise to any breach, event of default, credit event or termination event) on the Borrower or any investor in the Notes.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus are not historical facts and are "forward-looking". Forward-looking statements include statements concerning plans, objectives, goals, strategies, economic and regulatory conditions affecting the Bank, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "will," "may," "should" and similar expressions identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements appear in a number of places in this Prospectus including, without limitation, "Risk Factors", "Business" and "Financial Review", and include statements regarding:
• strategies, outlook and growth prospects;
• future plans, expectations, projections and potential for future growth;
• future revenues and performance;
• liquidity, capital resources and capital expenditures;
• economic outlook and industry trends;
• developments in markets in which the Bank operates;
• impact of regulatory initiatives;
• the Bank's competitive strengths and weaknesses; and
• strengths of the Bank's competitors.
The forward-looking statements in this Prospectus are based upon various assumptions, many of which are based, in turn, upon further assumptions, including, without limitation, management's examination of historical operating trends, data contained in its records and other data available from third parties. Although the Bank believes that these assumptions were reasonable when made, these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and which are beyond its control, and the Bank may not achieve or accomplish these expectations, beliefs or projections. The occurrence or non-occurrence of an assumption could cause the Bank's actual financial condition and results to differ from or fail to meet expectations expressed or implied by, such forward-looking statements. In addition to these important factors and matters discussed elsewhere herein, important factors that, in the Bank's view, could cause actual results to differ materially from those discussed in the forward-looking statements include:
• condition of the Bulgarian economy, including the condition of the Bulgarian banking sector;
• overall economic decline or protracted period of weak growth in Europe;
• the Bank's ability to increase or maintain market share for its products and services and control expenses;
• effects of, and changes in, the policy of the government of Bulgaria and regulations promulgated by the Bulgarian National Bank ("BNB");
• effects of changes in laws, regulations, taxation or accounting standards or practices and legal proceedings;
• the Bank's ability to comply with the BNB's mandatory economic ratio requirements;
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• any future expansion plans of the Bank and the likelihood of such plans being successfully implemented;
• the Bank's ability to manage its loan portfolio and overall asset quality;
• effect of inflation, interest rate and exchange rate fluctuations;
• the Bank's ability to meet its funding obligations and develop and maintain additional sources of financing;
• the effect of technological changes on the Bank; and
• the Bank's success at managing the risks associated with the aforementioned factors.
This list of important factors is not exhaustive. When reviewing forward-looking statements, investors should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which the Bank operates. Such forward-looking statements speak only as of the date on which they are made and are not intended to give any assurances as to future results. Accordingly, the Bank is not obliged, and does not intend, to update or revise any forward-looking statements made in this Prospectus whether as a result of new information, future events or otherwise and the Bank assumes no other obligation to publish additional information. None of the Bank, its management or VTB Capital plc can give any assurance regarding the future accuracy of the opinions set forth herein or as to the actual occurrence of any predicted developments. Accordingly, prospective purchasers of the Notes should not rely on the forward-looking statements in this Prospectus and investors are strongly advised to read this Prospectus in its entirety.
Forward-looking statements that may be made by the Bank from time to time (but that are not included in this Prospectus) may also include projections or expectations of revenues, income (or loss), earnings (or loss) per share, dividends, capital expenditures, capital structure or other financial items or ratios. All subsequent written or oral forward-looking statements attributable to the Bank, or persons acting on the Bank's behalf, are expressly qualified in their entirety by the cautionary statements contained throughout this Prospectus. As a result of these risks, uncertainties and assumptions, a prospective purchaser of the Notes should not place reliance on these forward-looking statements and should specifically consider the factors identified in this Prospectus that could cause actual results to differ.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Presentation of Financial Information
The following audited consolidated annual financial statements of the Group (the "Consolidated Annual Financial Statements") together with the independent auditor's reports on the audit are included in this Prospectus:
• the consolidated financial statements of the Group for the year ended 31 December 2011 together with the independent auditor's report on the audit of such consolidated financial statements (together, the "2011 Consolidated Financial Statements"); and
• the consolidated financial statements of the Group for the year ended 31 December 2010 together with independent auditor's report on the audit of such consolidated financial statements (together, the "2010 Consolidated Financial Statements").
The Consolidated Annual Financial Statements were audited by a specialised audit firm, KPMG - Bulgaria OOD ("KPMG"), with its registered office in Sofia, Bulgaria, which issued unqualified reports from the audit of the financial statements (see "Auditors" below).
Moreover, the reviewed consolidated interim financial statements of the Group for the six-month period ended 30 June 2012 (the "Consolidated Interim Financial Statements", and together with the Consolidated Annual Financial Statements, the "Consolidated Financial Statements"), are included in this Prospectus. The Consolidated Interim Financial Statements were reviewed, but not audited, by the independent certified auditor of the Bank. The Consolidated Financial Statements have been prepared in accordance with the International Financial Reporting Standards ("IFRS"), as promulgated by the International Accounting Standards Board and adopted by the European Union. The presentation of financial information in accordance with IFRS requires the management to make various estimates and assumptions which may impact the values shown in the financial statements and notes thereto. The actual values may differ from such assumptions.
The Consolidated Interim Financial Statements were prepared in compliance with International Accounting Standard 34 - Interim Financial Reporting. The accounting practice, reporting techniques, methods of calculation and principal assumptions applied in the preparation of the Consolidated Interim Financial Statements were also applied in the preparation of the last consolidated annual financial statements for 2011.
In this Prospectus, the following currency terms are used:
• U.S. Dollar or U.S.$ means the lawful currency of the United States;
• BGN or Lev means the lawful currency of the Republic of Bulgaria; and
• EUR or Euro means the lawful currency of the member states of the European Union that adopted the single currency in accordance with the Treaty of Rome establishing the European Economic Community, as amended from time to time.
BGN is the functional and reporting currency of the Bank and the presentation currency of the Group. The data in the Consolidated Financial Statements, including the notes on the Consolidated Financial Statements, is presented in thousands of Lev. Furthermore, unless otherwise indicated, the financial and statistical data included in this Prospectus is expressed in thousands of Lev.
Auditors
KPMG, a registered specialised audit firm pursuant to the Bulgarian Independent Financial Audit Law (UIK 040595851), with its registered office in Sofia, Bulgaria (45/A, Bulgaria Blvd., Sofia 1404), audited and issued an unqualified auditor's opinion on the 2011 Consolidated Annual Financial Statement and on
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the 2010 Consolidated Annual Financial Statement. KPMG reviewed the Consolidated Interim Financial Statements for the six-month period ended 30 June 2012.
KPMG is a member of the Institute of Certified Public Accountants in Bulgaria (registration No. 045). Tsvetelina Georgieva Koleva who was a Manager of KPMG and a certified auditor (member of the Institute of Certified Public Accountants in Bulgaria, registration No. 634) and Margarita Tomova Goleva, a certified auditor (member of the Institute of Certified Public Accountants in Bulgaria, registration No. 202) were in charge of the audit of the 2010 Consolidated Financial Statements and Gilbert McCaul, authorised representative, and Krassimir Asenov Hadjidinev, a certified auditor (member of the Institute of Certified Public Accountants in Bulgaria, registration No. 199), were in charge of the audit of the 2011 Consolidated Financial Statements.
Pursuant to the Articles of Association and Bulgarian laws, the auditor is authorised to audit the financial statements of the Bank and the Consolidated Financial Statements of the Group must be appointed at a General Meeting of the Bank.
During the last five years there were no instances in which a certified auditor appointed to audit the financial statements of the Bank or the Group resigned or was dismissed.
Market Information Derived from Third Parties
Certain macroeconomic and statistical data included in this Prospectus has been derived from publicly available sources, the reliability of which may vary. Macroeconomic and statistical data concerning Bulgaria is mostly based on information published by the Bulgarian National Bank (the "BNB"), the Ministry of Finance and the National Statistical Institute while statistical data relating to the Bulgarian banking sector is exclusively derived from the BNB publications (see details on these institutions in "Abbreviations and Definitions"). In any case, macroeconomic and statistical data, as well as the source data on which it is based, may not have been extracted or derived from a source in a manner analogous to that used in other countries. There is no guarantee that a third party using different methods of gathering, analysing and processing information would obtain the same results, in particular with respect to the market shares of local banks.
Market data and certain banking sector data used as well as statements made herein regarding the Group, the Bank and their position in the banking sector were estimated or derived based upon assumptions the Group deems reasonable as well as from the Group's own research, surveys or studies derived from publicly available sources (Eurostat, European Central Bank - see details on these institutions in "Abbreviations and Definitions"), industry or general publications such as reports issued by the BNB and the Bulgarian Ministry of Finance. The source of any external information is provided each time such information is used in this Prospectus. When searching for, processing and preparing macroeconomic, market, industry and other data from sources other than the Group, such as governmental publications, third-party publications, industry publications and general interest publications, the Group has not verified such data. The Group and the Issuer have accurately reproduced such information from this third-party data from published sources and, as far as the Group and the Issuer are aware and to the extent the Group can ascertain from the information published by these sources, there are no omissions that would render such reproduced information in this Prospectus inaccurate or misleading.
To the best of the Issuer's knowledge, the BNB, the Ministry of Finance and the National Statistical Institute, as well as the European Central Bank and Eurostat do not have any material interest in the Issuer.
Bulgarian Banking System Data and Loans Classification Data
Investors should be aware that the official BNB statistics regarding the Bulgarian banking sector data are based on the financial statements that banks, including the Bank, prepare and submit to the BNB on an unaudited and unconsolidated basis and according to forms as prescribed by the BNB, which differ from the IFRS financial statements format. Consequently, the consolidated financial data of the Group presented in this Prospectus differ from the unaudited and unconsolidated financial data of the Bank, which are compared to other banks' data in the BNB banking sector statistics (for details on the contribution of the
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Bank's subsidiaries in the Group's consolidated financial data see "Business – Group Structure – Dependence of the Bank on its Subsidiaries").
Also, investors should be aware that the classification of the Bank's loan portfolio according to the BNB Ordinance No. 9 requirements (see "Asset, Liability and Risk Management – Credit Risk – Risk Exposures") differs from the classification of the Bank's loan portfolio as presented according to the IFRS (see "Selected Statistical Information – Non-Performing Loans"). The difference between the IFRS and the BNB rules for banks loans portfolio classifications results from the BNB approach, which, in addition to the IAS 39 clause that a financial asset shall be impaired when there is objective evidence that this asset is impaired, also requires consideration of the probability of losses as a result of future unfavourable events.
Exchange Rates
The table below presents the average rates and the period-end rates as announced by the BNB and the European Central Bank for exchange transactions between BGN and USD and between USD and EUR, respectively.
2006 2007 2008 2009 2010 2011
To 31 July
2012
(BGN per U.S.$1.00) (1)
Year or period end .............................. 1.48506 1.33122 1.38731 1.36409 1.47276 1.51158 1.59218 Average for year or period ................. 1.55927 1.42904 1.33723 1.40670 1.47738 1.40645 1.52054 (U.S.$ per €1.00) (2)
Year or period end .............................. 1.3170 1.4721 1.3917 1.4406 1.3362 1.2939 1.2284 Average for year or period ................. 1.2556 1.3705 1.4708 1.3948 1.3257 1.3920 1.2877
_______________ (1) Source: the BNB (2) Source: European Central Bank
Rounding
Some numerical figures included in this Prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that preceded them.
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KEY TERMS OF THE NOTES
NORTHERN LIGHTS BULGARIA B.V. Asset Backed Medium Term Note Programme
issue of
USD 150,000,000
Loan Participation Notes
due 2014
Series 2012-1
(the "Notes")
The following represents the key terms of the terms and conditions (the "Conditions") of the Notes. Words and expressions defined in the Conditions shall have the same meanings in this section.
1. Issuer: Northern Lights Bulgaria B.V.
2. Arranger and Dealer: VTB Capital plc
3. Series number: Series 2012-1
4. Specified Currency: United States Dollars ("USD")
5. Aggregate/Principal Amount: USD 150,000,000
6. Authorised Denomination(s): USD 150,000 and integral multiples of USD1,000 in excess thereof
7. Issue Date: On or about 3 October 2012
8. Issue Price: 100 per cent.
9. Commission Payable: None
10. Selling Concession: None
11. Expenses: None
12. Form of Notes: Bearer. The Notes will initially be represented by a Temporary Global Note which will be exchangeable in accordance with its terms for a Permanent Global Note.
BEARER NOTES
13. Status: Unsubordinated, secured and limited recourse obligations of the Issuer
14. Temporary and/or Permanent Global Note exchangeable at the option of the bearer for Definitive Notes:
Only in the circumstances specified in the Permanent Global Note
15. Coupons to be attached to Definitive Notes: No
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16. Votes required for an Extraordinary Resolution:
75 per cent. of the Notes. Further provisions relating to the ability of Noteholders to pass an Extraordinary Resolution or give written directions to the Trustee are set out in the Trust Deed.
PROVISIONS RELATING TO INTEREST PAYABLE
17. Interest Amount: The Notes will bear interest, in respect of each Interest Period, at a rate of 8.25 per cent. per annum payable in arrear on each Interest Payment Date, subject to 'Priority of Payments (Pre-Enforcement)' below.
18. Interest Commencement Date: Issue Date
19. Interest Payment Dates: The day that is one Business Day following each interest payment date under the Loan.
REDEMPTION
20. Maturity Date: Scheduled to be the day that is one Business Day following the Loan Maturity Date in August 2014.
21. Redemption Amount: Principal Amount
MISCELLANEOUS
22. Repurchase at Issuer's option: No
23. Noteholder put option: No
24. Selling restrictions:
United States: Reg S Category 2/TEFRA D
Exchange Date is a date on or after 40 days after completion of distribution upon certification of non-US beneficial ownership.
Other: As set out on pages 138 and 139.
25. Business Day: Means a day (other than Saturdays and Sundays) on which commercial banks are open for business (including dealings in foreign exchange and foreign currency depositions): (i) in the place where the specified office of the Principal Paying Agent is located; and (ii) in London, New York and Sofia.
26. Details of additional or alternative clearance system approved by the Issuer and the Paying Agent:
Not applicable
27. Listing: Irish Stock Exchange
28. ISIN: XS0834163601
29. Common Code: 083416360
30. Settlement Procedures: Eurobond – Delivery versus Payment
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31. Common Depositary: The Bank of New York Mellon
32. Calculation Agent: VTB Capital plc
33. Charged Assets: Loan
34. Priority Secured Creditor: Noteholders
35. Security: In accordance with the Supplemental Trust Deed, the Security for the Notes shall comprise all of the following:
(1) a first fixed charge in favour of the Trustee (for itself and as trustee for the Secured Creditors) (the "Charge") over
(i) all principal, interest and/or additional amounts (if any) now or hereafter payable and/or paid by the Borrower under the Loan;
(ii) the right to receive all sums or assets which may be or become payable or deliverable by the Borrower under any claim, award or judgment relating to the Loan; and
(iii) all the rights, title and interest in and to all sums of money now or in the future deposited in the Issuer Account and the debts represented thereby,
provided that for the avoidance of doubt the Issuer shall remain the legal and beneficial owner of the Charged Assets following the granting of the Charge; and
(2) an assignment to the Trustee for itself and as Trustee for the Secured Creditors of:
(i) all the rights, interests and benefits, both present and future, which have accrued or may accrue to the Issuer as lender and beneficiary under or pursuant to the Facility Agreement (including, without limitation, the right to declare the Loan immediately due and payable and to take proceedings to enforce the obligations of the Borrower thereunder) other than the assets subject to the Charge and any amounts relating to the property subject to the Charge (the "Transferred Rights").
(ii) all of the Issuer's right, title and interest in and to the Programme
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Dealer Agreement to the extent it relates to the Notes;
(iii) all of the Issuer's right, title and interest in and to the Agency Agreement to the extent it relates to the Notes including any sums held by the Principal Paying Agent to meet payments due in respect of the Notes; and
(iv) all of the Issuer's right, title and interest in and to the Account Bank Agreement,
all of which together with the Charge shall comprise the "Underlying Assets" for the Notes.
36. Priority of Payments (Pre-Enforcement): All amounts standing to the credit of the Issuer Account shall on each Interest Payment Date be subject to payments in the following order, as directed by the Calculation Agent:
FIRST, pari passu, on a pro rata basis:
(i) in payment or satisfaction of the fees, costs, charges, expenses and liabilities properly incurred by the Trustee in relation to the exercise of its, rights, powers, discretions or obligations in relation to the Trust Deed and the Notes and any other fee, cost, charge, expense or liability of the Trustee (including legal fees and any other advisor's fees and taxes) arising under the Trust Deed, and
(ii) to the payment of Dutch taxes owing by the Issuer accrued in respect of the related due period;
SECOND, pro rata and pari passu in meeting (i) any claim of the Principal Paying Agent for reimbursement of fees, taxes or expenses or in respect of payment of principal; interest or other amount made to the relevant Noteholders and (ii) other amounts due to the Agents and the Account Bank;
THIRD, in meeting the claims of the Noteholders, on a pro rata and pari passu basis in respect of interest;
FOURTH, in meeting the claims of the Dealer for Dealer Fees, any Unpaid Dealer Fees and, if applicable, Future Dealer Fees;
FIFTH, in meeting the claims of the Noteholders, on a pro rata and pari passu basis in respect of principal and other amounts due to Noteholders; and
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SIXTH, in meeting amounts due to the Facility Agent.
37. Priority of Payments (Post Enforcement): All monies received by the Trustee in respect of the Security or the Underlying Assets shall be held by the Trustee upon trust to apply the same in accordance with the Trust Deed, in particular:
FIRST, pari passu, on a pro rata basis:
(i) in payment or satisfaction of the fees, costs, charges, expenses and liabilities properly incurred by the Trustee or any receiver in preparing and executing the trusts under the Trust Deed (including taxes required to be paid, the costs of realising any security and remuneration) and any other fee, cost, charge, expense or liability of the Trustee (including legal fees and any other advisor's fees and taxes) arising under the Trust Deed, and
(ii) to the payment of Dutch taxes owing by the Issuer accrued in respect of the related due period;
SECOND, pro rata and pari passu rateably in meeting (i) any claim of the Principal Paying Agent for reimbursement of fees, taxes or expenses or in respect of payment of principal; interest or other amount made to the relevant Noteholders and (ii) other amounts due to the Agents and the Account Bank;
THIRD, in meeting the claims of the Noteholders, on a pro rata and pari passu basis in respect of interest;
FOURTH, in meeting the claims of the Dealer for Dealer Fees, any Unpaid Dealer Fees and Future Dealer Fees;
FIFTH, in meeting the claims of the Noteholders, on a pro rata and pari passu basis in respect of principal and other amounts due to Noteholders;
SIXTH, in meeting amounts due to the Facility Agent; and
SEVENTH, in releasing the balance (if any) to the Issuer.
38. Rating of the Notes: Moody's: Ba3
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TERMS AND CONDITIONS OF THE NOTES
The terms and conditions as set out in the Principal Trust Deed shall be replaced in their entirety, for the purposes of Series 2012-1 only, by the following.
The following is the text of the terms and conditions which will be endorsed on the Notes in definitive form (if any) issued in exchange for the Global Note(s) representing Notes in bearer form. These terms and conditions will also apply to the Global Notes save as modified by the terms of the Global Notes. Text in italics in these Conditions (save for sub-headings) refers to the Global Notes alone and will not be endorsed on the Notes in definitive form. References in the terms and conditions to "Notes" are to the Notes of Series 2012-1 only, not to all Notes which may be issued under the Programme.
The USD 150,000,000 Loan Participation Notes due 2014, Series 2012-1 (the "Notes") issued on or about 3 October 2012 (the "Issue Date") by Northern Lights Bulgaria B.V. (including any permitted successor or assignee, the "Issuer") pursuant to its Asset Backed Note Programme (the "Programme") are constituted and secured by a principal trust deed dated 9 September 2011 (as amended or supplemented from time to time, the "Principal Trust Deed") entered into by, inter alios, BNY Mellon Corporate Trustee Services Limited (the "Trustee" which expression shall include all persons for the time being the trustee or trustees under the Trust Deed referred to below as supplemented by a supplemental trust deed (the "Supplemental Trust Deed") dated the Issue Date between the Issuer, the Trustee, The Bank of New York Mellon in its capacity as account bank in relation to the Notes (the "Account Bank", which expression shall include any successor to The Bank of New York Mellon in its capacity as such) and the other parties named therein and an accession deed dated the Issue Date between, amongst others, the Issuer, the Account Bank and the Trustee (the "Accession Deed" and together with the Principal Trust Deed and the Supplemental Trust Deed being referred to herein as the "Trust Deed").
The Notes will have the benefit (to the extent applicable) of an agency agreement dated 9 September 2011 to which the Issuer has acceded by virtue of the Accession Deed (and as amended or supplemented from time to time, the "Agency Agreement") between, inter alios, the Trustee, The Bank of New York Mellon in its capacity as issue agent (the "Issue Agent" which expression shall include any successor to The Bank of New York Mellon in its capacity as such), The Bank of New York Mellon in its capacity as principal paying agent (the "Principal Paying Agent", which expression shall include any successor to The Bank of New York Mellon in its capacity as such) and VTB Capital plc in its capacity as calculation agent (the "Calculation Agent", which expression shall include any successor to VTB Capital plc in its capacity as such) (the Calculation Agent, together with the Issue Agent and the Principal Paying Agent, the "Agents" and each an "Agent").
The Account Bank, the Issuer and the Trustee have entered into an account bank agreement in relation to the Notes dated the Issue Date (as amended and/or supplemented from time to time) (the "Account Bank Agreement").
Certain statements in these terms and conditions (the "Conditions") may be summaries of the detailed provisions appearing on the face of the Notes (which expression shall include the body thereof) and in the Trust Deed and the Agency Agreement. Copies of the Trust Deed and the Agency Agreement, are available for inspection at the principal office of the Issuer (presently at Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost, The Netherlands) and at the specified offices of the Principal Paying Agent.
Defined terms applicable to these Conditions are set out in Condition 17 (Definitions).
1. FORM, DENOMINATION AND TITLE
1.1 Form and Denomination
The Notes are issued in bearer form serially numbered in the denomination of USD150,000 and integral multiples of USD1,000 in excess thereof up to and including USD299,000. No Definitive Notes will be issued with a denomination above USD299,000.
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1.2 Title
Title to the Notes passes by delivery. In these Conditions, subject as provided below, "Noteholder" means the bearer of any Note. The Noteholder of any Note shall be (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership on the face of such Note) and no person shall be liable for so treating such Noteholder.
2. STATUS OF THE NOTES
2.1 Status of Notes
The Notes are limited recourse obligations of the Issuer, secured in the manner described in Condition 3 (Security for the Notes) and recourse in respect of which is limited in the manner described in Condition 10 (Limited Recourse and Enforcement) and will rank pari passu without any preference among themselves.
2.2 Priority of Payments (Pre-Enforcement)
On each Interest Payment Date prior to the service of an Enforcement Notice, the Issuer, or the Account Bank on behalf of the Issuer, shall, in accordance with the instructions of the Calculation Agent, apply all amounts standing to the credit of the Issuer Account in the following order of priority (the "Priority of Payments (Pre-Enforcement)"):
(a) FIRST, pari passu, on a pro rata basis:
(i) in payment or satisfaction of the fees, costs, charges, expenses and liabilities properly incurred by the Trustee in relation to the exercise of its rights, powers, discretions or obligations in relation to the Trust Deed and the Notes and any other fee, cost, charge, expense or liability of the Trustee (including legal fees and any other advisor's fees and taxes) arising under the Trust Deed; and
(ii) to the payment of Dutch taxes owing by the Issuer accrued in respect of the related due period;
(b) SECOND, pro rata and pari passu in meeting (i) any claim of the Principal Paying Agent for reimbursement of fees, taxes or expenses or in respect of payment of principal, interest or other amounts made to the relevant Noteholders and (ii) other amounts due to the Agents or the Account Bank;
(c) THIRD, in meeting the claims of the Noteholders, on a pro rata and pari passu basis in respect of interest;
(d) FOURTH, in meeting the claims of the Dealer for Dealer Fees, any Unpaid Dealer Fees and, if applicable, Future Dealer Fees;
(e) FIFTH, on each Interest Payment Date upon which an amount in respect of principal falls to be paid pursuant to Condition 6 (Redemption), in meeting the claims of the Noteholders, on a pro rata and pari passu basis in respect of principal and other amounts due to Noteholders; and
(f) SIXTH, in meeting amounts due to the Facility Agent.
3. SECURITY FOR THE NOTES
The Notes shall be secured in the manner prescribed by the Trust Deed, which such security shall comprise security over various rights of the Issuer in respect of the Loan and the proceeds thereof (the "Security").
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4. RESTRICTIONS
4.1 So long as any of the Notes remain outstanding, the Issuer will not, save to the extent permitted by the Transaction Documents or the Trade Documents:
(a) engage in any business other than matters incidental to the issuance of the Notes;
(b) have any employees or premises;
(c) issue any additional shares;
(d) sell or otherwise dispose of the Underlying Assets or any interest therein or agree or purport to do so;
(e) create or permit to exist upon or affect any of the Underlying Assets, any Encumbrance or any other security interest whatsoever other than as contemplated by the Supplemental Trust Deed;
(f) issue any Notes (as defined in the Master Schedule of Definitions) other than the Notes (as defined in these conditions);
(g) consolidate or merge with any other person or convey or transfer its properties or assets to any person;
(h) permit the Principal Trust Deed or the Supplemental Trust Deed to be amended, terminated, postponed or discharged, or permit any person whose obligations form part of such Security to be released from such obligations;
(i) have any subsidiaries;
(j) have its 'centre of main interest' (as such terms is defined in article 3(1) of the Council Regulation (EC) no. 1346/2000 on insolvency proceedings (the "Insolvency Regulation")) outside of The Netherlands and it shall not establish or open any branch offices or other permanent establishments (as that term is used in the Insolvency Regulation) anywhere in the world; or
(k) at any time pay any dividend or make any other distribution in respect of its shares other than from amounts standing to the credit of the Issuer Dutch Account.
4.2 The Trustee shall be entitled to rely absolutely on a certificate of a director of the Issuer in relation to any matter relating to such restrictions and to accept without liability any such certificate as sufficient evidence of the relevant fact or matter in question.
5. INTEREST AND OTHER CALCULATIONS
5.1 Interest Amounts
The Notes bear interest, in respect of each Interest Period, from the Issue Date at the rate of 8.25 per cent. per annum (the "Rate of Interest") payable in arrear on each Interest Payment Date, subject as provided in Condition 7 (Payments) and to the Priority of Payments (Pre-Enforcement) set out in Condition 2.2.
Each Note will cease to bear interest from the Loan Maturity Date unless, upon due presentation, payment of principal is improperly withheld or refused, in which case it will continue to bear interest at such rate (both before and after judgment) until whichever is the earlier of (a) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (b) the day which is seven days after the Principal Paying Agent or the
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Trustee has notified the Noteholders that it has received all sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent default in payment).
The amount of interest payable in respect of each Note shall be calculated by applying the Rate of Interest to the Calculation Amount, multiplying the product by the relevant Day Count Fraction and rounding the resulting figure to the nearest cent (half a cent being rounded upwards) and multiplying such rounded figure by a fraction equal to the denomination of such Note divided by the Calculation Amount, where "Calculation Amount" means USD1,000; and "Day Count Fraction" means, in respect of any period, the number of days in the relevant period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with 12 30-day months).
5.2 Rounding
For the purposes of any calculations required pursuant to these Conditions (unless otherwise specified):
(a) all percentages resulting from such calculations will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point (with halves being rounded up);
(b) all figures will be rounded to seven significant figures (with halves being rounded up); and
(c) all amounts which fall due and payable will be rounded to the nearest cent.
5.3 Determination or Calculation by Trustee
If the Calculation Agent does not at any time for any reason determine any interest amount or redemption amount or any other amount to be determined or calculated by it, the Trustee may (without liability for doing so) determine such interest amount or redemption amount or other amount as aforesaid at such rate or in such amount as in its absolute discretion (having regard as it shall think fit to the procedures described above, but subject to the terms of the Trust Deed) it shall deem fair and reasonable in all the circumstances or, subject as aforesaid, apply the foregoing provisions of this Condition, with any consequential amendments, to the extent that, in its sole opinion, it can do so and in all other respects it shall do so in such manner as it shall, in its absolute discretion, deem fair and reasonable in the circumstances, and each such determination or calculation shall be deemed to have been made by the Calculation Agent.
6. REDEMPTION
6.1 Redemption at maturity
Unless previously redeemed, or purchased and cancelled as provided below, each Note shall be redeemed at their principal amount on the Business Day that is one Business Day following the Loan Maturity Date, subject as provided in Condition 7 (Payments) and subject to the Priority of Payments (Pre-Enforcement) set out in Condition 2.2.
6.2 Mandatory Redemption
6.2.1 Mandatory early redemption on prepayment of the Loan in whole
If the Borrower prepays the Loan in whole in accordance with Clauses 7.1 (Illegality) or 7.2 (Change of Control) of the Facility Agreement, the Issuer shall give written notice thereof to the Trustee and the Noteholders and shall redeem the Notes in an aggregate amount equal to the Early Redemption Amount. On the Business Day following receipt by the Issuer of the principal, interest and all other amounts due from the Borrower pursuant to such prepayment of the Loan, the Issuer shall apply such amounts in accordance with the Priority of Payments (Pre-Enforcement) set out in Condition 2.2.
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6.2.2 Early redemption on acceleration of the Loan
To the extent the Issuer receives amounts of principal, interest or other amounts following acceleration of the Loan pursuant to Clause 21.21 (Acceleration) of the Facility Agreement, the Issuer shall pay the Noteholders in aggregate an amount equal to such amounts on the Business Day following such receipt, in accordance with the Priority of Payments (Pre-Enforcement) set out in Condition 2.2.
6.3 Cancellation
All Notes purchased by or on behalf of the Issuer shall be surrendered to or to the order of the Principal Paying Agent for cancellation and, if so surrendered, will, together with all Notes redeemed by the Issuer, be cancelled forthwith. Any Notes so surrendered for cancellation may not be reissued or resold and the obligations of the Issuer in respect of any such Notes shall be discharged.
7. PAYMENTS
7.1 Principal
Save as provided in Condition 7.3 (Payments in New York City) below, payments of principal shall be made only against and (provided that payment is made in full) surrender of Notes at the Specified Office of any Paying Agent outside the United States by U.S. dollar cheque drawn on, or by transfer to a U.S. dollar account maintained by the payee with, a bank in New York City.
7.2 Interest
Save as provided in Condition 7.3 (Payments in New York City) below, payments of interest shall be made only against presentation of the Notes at the Specified Office of any Paying Agent outside the United States in the manner described in Clause 7.1 (Principal) above.
7.3 Payments in New York City
Payments of principal or interest may be made at the Specified Office of a Paying Agent in New York City if (i) the Issuer has appointed Paying Agents outside the United States with the reasonable expectation that such Paying Agents will be able to make payment of the full amount of the interest on the Notes in USD when due, (ii) payment of the full amount of such interest at the offices of all such Paying Agents is illegal or effectively precluded by exchange controls or other similar restrictions and (iii) payment is permitted by applicable United States law.
7.4 Payments subject to fiscal laws
All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 8 (Taxation). No commissions or expenses shall be charged to the Noteholders in respect of such payments.
7.5 Payments on business days
If the due date for payment of any amount in respect of any Note is not a business day in the place of presentation, the holder shall not be entitled to payment in such place of the amount due until the next succeeding business day in such place and shall not be entitled to any further interest or other payment in respect of any such delay. In this paragraph, "business day" means, in respect of any place of presentation, any day on which banks are open for presentation and payment of bearer debt securities and for dealings in foreign currencies in such place of presentation, and, in the case of payment by transfer to a USD account as referred to above, on which dealings in foreign currencies may be carried on both in New York City and in such place of presentation.
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7.6 Appointment of the Principal Paying Agent, the Paying Agents, the Issue Agent, the Account Bank and the Calculation Agent
The Agents act solely as agents of the Issuer and do not assume any obligation or relationship of agency or trust for or with any Noteholder. The Account Bank has been appointed by the Issuer as account bank in relation to the Notes. The Issuer reserves the right at any time to vary or terminate the appointment of any Agent or the Account Bank, and to appoint additional or other Agents and/or Account Bank, provided that the Issuer will at all times maintain (i) a Principal Paying Agent, (ii) a Calculation Agent, (iii) an Account Bank and (iv) a Paying Agent having a specified office in a European city. The Issuer undertakes that it will ensure that it maintains a paying agent in an EU Member State that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive.
8. TAXATION
8.1 All payments of principal and interest in respect of the Notes by or on behalf of the Issuer shall be made free and clear of, and without withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of The Netherlands or any political subdivision thereof or any authority therein or thereof having power to tax, unless the withholding or deduction of such taxes, duties, assessments or governmental charges is required by law.
8.2 If the Issuer becomes subject at any time to any taxing jurisdiction other than The Netherlands, references in these Conditions to The Netherlands shall be construed as references to The Netherlands and/or such other jurisdiction.
8.3 The Issuer shall be permitted to withhold or deduct any amounts required by the rules of U.S. Internal Revenue Code Sections 1471 through 1474 (or any amended or successor provisions), pursuant to any inter-governmental agreement or implementing legislation adopted by another jurisdiction in connection with these provisions, or pursuant to any agreement with the U.S. Internal Revenue Service ("FATCA withholding") as a result of a holder, beneficial owner or an intermediary that is not an agent of the Issuer not being entitled to receive payments free of FATCA withholding. The Issuer will have no obligation to pay additional amounts or otherwise indemnify an investor for any such FATCA withholding deducted or withheld by the Issuer, the paying agent or any other party.
9. EVENTS OF DEFAULT
9.1 Occurrence of Events of Default
The Trustee at its discretion may, and if so requested in writing by 25 per cent. of the Noteholders shall (in each case, provided the Trustee is secured and/or, indemnified and/or prefunded, to its satisfaction) give notice (an "Enforcement Notice") to the Issuer that the Notes are, and they shall accordingly immediately become, due and repayable, at an amount in aggregate equal to:
(i) the principal amount of the Notes;
plus
(ii) accrued interest on the Notes,
subject to the claims of other Secured Creditors in accordance with the priority of payments set out in the Supplemental Trust Deed,
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and the Security constituted by the Trust Deed shall thereupon become enforceable (as provided in the Trust Deed) on the occurrence of any of the following events (each an "Event of Default"):
9.1.1 if default is made for a period of 7 days or more in the case of interest or principal, in the payment of any sum due in respect of such Notes or any of them; or
9.1.2 if any order shall be made by any competent court or any resolution passed for the winding-up or dissolution of the Issuer or an order is made for the Issuer's bankruptcy save for the purposes of amalgamation, merger, consolidation, reorganisation or other similar arrangement on terms approved by the Trustee; or
9.1.3 if any other proceedings are initiated against the Issuer under any applicable liquidation, bankruptcy, insolvency, composition, reorganisation, readjustment or other similar laws (but excluding the presentation of any application for an administration order) and such proceedings are not being disputed in good faith, or a receiver, administrator or other similar official (not being a receiver or manager appointed by the Trustee pursuant to the Trust Deed) is appointed in relation to the Issuer or in relation to the whole or any substantial part (in the opinion of the Trustee) of the undertaking or assets of the Issuer or an encumbrancer (not being the Trustee or any receiver or manager appointed by the Trustee) shall take possession of the whole or any substantial part (in the opinion of the Trustee) of the undertaking or assets of the Issuer or a distress or execution or other process shall be levied or enforced upon or sued out against the whole or any substantial part (in the opinion of the Trustee) of the undertaking or assets of the Issuer (other than, in any such case, by the Trustee or pursuant to any of the Transaction Documents or the Trade Documents) and in any of the foregoing cases such order, appointment, possession or process (as the case may be) is not discharged or stayed or does not cease to apply within 14 days; or
9.1.4 the Issuer becomes insolvent or is adjudicated or found bankrupt.
9.2 Confirmation of No Event of Default
The Issuer shall provide written confirmation to the Trustee annually and otherwise upon a request therefor that no Event of Default or other matter which is required to be brought to the Trustee's attention has occurred.
9.3 Realisation of the Underlying Assets upon redemption
In the event of the Security constituted under the Trust Deed becoming enforceable following an acceleration of the Notes as provided in this Condition 9, the Trustee shall, but in each case without any liability as to the consequence of such action and without having regard to the effect of, or being required to account for, such action to, the Secured Creditors, have the right to enforce its rights under the Trust Deed, provided that the Trustee shall not be required to take any action that would involve the Trustee in any personal liability or expense unless previously indemnified and/or secured and/or prefunded to its satisfaction.
10. LIMITED RECOURSE AND ENFORCEMENT
10.1 If the amounts realised from the Underlying Assets are not sufficient (after meeting the Trustee's, the Agents', the Account Bank's and any receiver's expenses, liabilities and remuneration, and any other amounts that rank in priority to the Notes as specified in the Trust Deed) to make payment of all amounts due in respect of the Notes and all other Secured Obligations, no other assets of the Issuer (including the amounts standing to the credit of the Issuer Dutch Account) will be available to meet that shortfall. Any such shortfall shall be borne in the manner specified in the Trust Deed. Any claim of the Noteholders remaining after such application shall be extinguished and such Noteholders will have no further recourse to the Issuer and any failure to make any payment in
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respect of such shortfall shall in no circumstances constitute an Event of Default under Condition 9 (Events of Default).
10.2 Only the Trustee may pursue the remedies available under the Trust Deed, the Conditions, the Transaction Documents and the Trade Documents and enforce the rights of the Secured Creditors in relation to the Charged Assets. No Secured Creditor is entitled to proceed directly against the Issuer or any assets of the Issuer unless the Trustee, having become bound to proceed in accordance with the terms of the Trust Deed, fails or neglects to do so within a reasonable period and such failure or neglect is continuing. However, the Trustee shall not be bound to take any action to enforce the Security or pursue the remedies available under the Trust Deed, the Conditions (including under Condition 9.1), any of the Transaction Documents or any of the Trade Documents or otherwise take any action unless it is indemnified and/or secured and/or prefunded to its satisfaction and has, if so required by the Conditions, been requested to do so by the Noteholders.
10.3 After realisation of the Security, neither the Trustee nor any Secured Creditor may take any further steps against the Issuer, or any of its assets to recover any sums due but unpaid in respect of the Notes and all claims and all rights to claim against the Issuer in respect of each such sum unpaid shall be extinguished.
10.4 No Secured Creditor, nor the Trustee on its behalf, may institute against, or join any person in instituting against the Issuer any bankruptcy, winding-up, re-organisation, arrangement, insolvency or liquidation proceeding (except for the appointment of a receiver and manager pursuant to the terms of the Trust Deed) or other proceeding under any similar law for so long as any Notes are outstanding or for one year plus one day, after the latest date on which any Note issued by the Issuer is due to mature. The Secured Creditors accept and agree that the only remedy of the Trustee against the Issuer after any of the Notes have become due and payable pursuant to Condition 9 is to enforce the Security pursuant to the provisions of the Trust Deed.
11. PRESCRIPTION
Claims against the Issuer for payment in respect of the Notes, shall be prescribed and become void unless made within ten years (in the case of principal) or five years (in the case of interest) from the appropriate Relevant Date in respect thereof.
In these Conditions, "Relevant Date" means whichever is the later of (1) the date on which the payment in question first becomes due and (2) if the full amount payable has not been received in London by the Principal Paying Agent or the Trustee on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders.
12. REPLACEMENT OF NOTES
If any Note is lost, stolen, mutilated, defaced or destroyed it may be replaced, subject to applicable laws and any relevant stock exchange requirements, at the specified office of the Principal Paying Agent upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may require. Mutilated or defaced Notes must be surrendered before replacements will be issued.
13. MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER, AUTHORISATION AND SUBSTITUTION
13.1 Meetings Of Noteholders, Modifications And Waiver
13.1.1 The Trust Deed contains provisions for convening meetings of Noteholders to consider matters affecting their interests, including the modification by Extraordinary Resolution of the Conditions or the provisions of the Trust Deed. The quorum at any such meeting for
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passing an Extraordinary Resolution will be two or more persons holding or representing not less than one half of the aggregate principal amount of the Notes for the time being outstanding, or at any adjourned such meeting, two or more persons being or representing Noteholders whatever the principal amount of the Notes so held or represented, except that certain terms concerning Reserved Matters may only be passed by Extraordinary Resolutions passed at a meeting the quorum at which shall be two or more persons holding or representing 75 per cent. of the principal amount of the Notes for the time being outstanding or at any adjourned such meeting, not less than 25 per cent. in Principal Amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they were present at such meeting.
13.1.2 The Principal Trust Deed also allows for a resolution in writing, signed by or on behalf of all Noteholders who for the time being are entitled to receive notice of a meeting of Noteholders, to take effect as if it were an Extraordinary Resolution. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders.
13.1.3 The holder of a Global Note will be treated as being two persons for the purposes of any quorum requirements of a meeting of Noteholders.
13.1.4 The Trustee may, without consulting the Noteholders or any other Secured Creditor, determine that an event which would otherwise be an Event of Default or a Potential Event of Default shall not be so treated or waive or authorise any breach or proposed breach by the Issuer of any of its covenants or obligations under any Transaction Document or Trade Document, the Trust Deed or the Notes but only if and in so far as in its opinion the interests of Noteholders shall not be materially prejudiced thereby, and subject as further provided in the Trust Deed.
13.1.5 In addition, the Trustee may agree without the consent of the Noteholders or other Secured Creditors, to:
(a) any modification of any of the provisions of the Trust Deed or any other of the Transaction Documents or Trade Documents to which it is a party or in respect of which it holds security which, in the opinion of the Trustee, is of a formal, minor or technical nature or is made to correct a manifest error; or
(b) any other modification (except as mentioned in the Trust Deed in respect of Reserved Matters and sub-paragraph (c) of the definition of Relevant Fraction (as defined in the Principal Trust Deed)) of any of the provisions of the Trust Deed or any of the other Transaction Documents or Trade Documents to which it is a party or in respect of which it holds security which, in the opinion of the Trustee it is proper to make provided that the Trustee is of the opinion that such modification will not be materially prejudicial to the interests of the Noteholders.
Any such modification, authorisation, waiver or determination shall be binding on the Noteholders and any other Secured Creditor and, unless the Trustee agrees otherwise with the Issuer, such modification shall be notified by the Issuer to the Noteholders as soon as practicable thereafter.
13.2 Authorisation
Prior to the occurrence of an Event of Default and the service of an Enforcement Notice, the Issuer shall only be entitled to exercise any rights in its capacity as a holder of, or person beneficially entitled to or participating in the Underlying Assets in a manner directed by the Noteholders by way of Extraordinary Resolution. If the Noteholders direct the Issuer (by way of Extraordinary Resolution) to exercise any rights in its capacity as a holder of, or person beneficially entitled to or participating in the Underlying Assets, the Issuer will act only in accordance with such directions.
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Following the occurrence of an Event of Default and the service of an Enforcement Notice, the Trustee may, but need not, exercise any rights, (including voting rights) in respect of such Underlying Assets (and in either case shall bear no liability for so exercising or electing not to exercise); provided that it shall nevertheless exercise any such rights if requested to do so by the Noteholders, subject to it being indemnified and/or secured and/ or prefunded to its satisfactions and if the Trustee does exercise any such rights pursuant to such request, it will bear no liability for so doing.
13.3 Entitlement of the Trustee
In connection with the exercise of its powers, trusts, authorities or discretions (including but not limited to those in relation to any proposed modification, waiver, authorisation or substitution as aforesaid) the Trustee shall not have regard to the consequences of such exercise for any individual Secured Creditor resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory and the Trustee shall not be entitled to require, nor shall any Secured Creditor be entitled to claim, from the Issuer any indemnification or payment in respect of any tax consequence of any such exercise upon individual Secured Creditors.
14. NOTICES
Notices to Noteholders will be valid if published in a leading English language daily newspaper published in London (which is expected to be the Financial Times) or, if in the opinion of the Trustee such publication shall not be practicable, in an English language daily newspaper of general circulation in Europe. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the first date on which publication is made.
The Issuer shall arrange for copies of all notices, requests or other information received from the Borrower to be sent to Noteholders and the Trustee as soon as reasonably practicable after receipt thereof.
15. INDEMNIFICATION OF THE TRUSTEE
15.1 Trustee's indemnity: Trustee free to enter into transactions
The Trust Deed contains provisions for indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking any actions (including the giving of an Enforcement Notice pursuant to Condition 9.1 and the taking of proceedings to enforce repayment) unless indemnified and/or secured and/or prefunded to its satisfaction. The Trustee or any of its affiliates is entitled to enter into business transactions with the Issuer, any issuer or guarantor of (or other obligor in respect of) any of the securities or other assets, rights and/or benefits comprising the Underlying Assets or the Secured Creditors or any of their respective subsidiaries or associated companies without accounting to the Secured Creditors for any profit resulting therefrom.
15.2 Exclusion of liability of Trustee
The Trustee shall not be responsible for (nor shall it have any liability with respect to any loss, diminution in value or theft of all or any part of the Charged Assets) insuring all or any part of the Charged Assets (including, in either such case, any documents evidencing, constituting or representing the same or transferring any rights, benefits and/or obligations thereunder) or procuring the same to be insured.
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16. GOVERNING LAW
16.1 Governing law
The Trust Deed, the Notes, the Agency Agreement, and any non-contractual obligations arising out of or in connection with them shall be governed by and construed in accordance with English law.
16.2 English courts
The Issuer has, in the Trust Deed, irrevocably agreed that the courts of England have exclusive jurisdiction to settle any dispute (a "Dispute") arising from or connected with the Notes.
16.3 Appropriate forum
The Issuer has, in the Trust Deed, irrevocably agreed that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary.
16.4 Rights of the Secured Creditors to take proceedings outside England
Condition 16.2 is for the benefit of the Noteholders only. As a result, nothing in this Condition 16 prevents any Noteholder from taking proceedings relating to a Dispute ("Proceedings") in any other courts with jurisdiction. To the extent allowed by law, the Noteholders may take concurrent Proceedings in any number of jurisdictions.
16.5 Process agent
The Issuer has, in the Trust Deed, agreed that the process by which any Proceedings in England are begun may be served on it by being delivered to the agent specified for service of process in the Trust Deed or its other registered office for the time being. If such person is not or ceases to be effectively appointed to accept service of process on the Issuer's behalf, the Issuer shall, on the written demand of the Trustee, appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, the Trustee shall be entitled to appoint such a person by written notice to the Issuer. The Issuer may appoint one or more additional process agents. Nothing contained herein shall affect the right of any Secured Creditor to serve process in any other manner permitted by law.
16.6 Third Party Rights
No person shall have any right to enforce any term or condition of the Notes pursuant to the Contracts (Rights of Third Parties) Act 1999.
17. DEFINITIONS
"Borrower" means Corporate Commercial Bank AD;
"Business Day" means a day (other than Saturdays and Sundays) on which commercial banks are open for business (including dealings in foreign exchange and foreign currency depositions): (i) in the place where the specified office of the Principal Paying Agent is located; and (ii) in London, New York and Sofia;
"Charged Assets" means the Loan;
"Dealer Fee" means the fee payable by the Issuer to the Dealer on each Interest Payment Date pursuant to the terms of the Programme Dealer Agreement (as supplemented or amended from time to time), which shall be an amount equal to:
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(i) the interest due on the Loan on the last day of the Interest Period preceding the relevant Interest Payment Date; less
(ii) the aggregate amount of interest due on the Notes on the relevant Interest Payment Date,
provided, however, that if such number is a negative number, no Dealer Fee shall be payable;
"Directive" means a directive of the European Union;
"Early Redemption Amount" means an amount in aggregate equal to:
(i) the principal amount of the Loan repaid;
plus
(ii) accrued interest;
plus
(iii) any amount received by the Issuer pursuant to Clause 7.3(b)(ii) of the Facility Agreement,
subject to the claims of other Secured Creditors in accordance with the Priority of Payments (Pre-Enforcement) set out in Condition 2.2;
"Encumbrance" means any mortgage, pledge, lien, hypothecation, security interest or other arrangement having similar effect;
"Event of Default" has the meaning given to it in Condition 9 (Events of Default);
"Facility Agent" means VTB Capital plc;
"Facility Agreement" means the loan agreement dated 7 August 2012 between the Original Lender (as defined therein) and the Borrower, the rights and obligations of the Original Lender thereunder being transferred to the Issuer on or about the Issue Date in accordance with the terms of the Transfer Certificate (as amended and/or supplemented from time to time);
"Future Dealer Fees" means, on any day that the Loan is repaid in whole or in part pursuant to Clauses 7.1 or 7.2 of the Facility Agreement, an amount calculated by the Calculation Agent to be equal to the present value (discounted at a rate equal to the then prevailing dollar swap rate of all future Dealer Fees that would have become due to the Dealer on all future Interest Payment Dates had such repayment not occurred);
"Global Note" means a Temporary Global Note or a Permanent Global Note;
"Interest Payment Date" means the day that is one Business Day following each Loan Interest Payment Date;
"Interest Period" has the meaning given to it in the Facility Agreement;
"Issuer Account" means the account of the Issuer with the Account Bank administered outside of The Netherlands, the details of which are:
Account No: 190879 8400 IBAN: 021 000 018
"Loan" means the loan made or to be advanced to the Borrower under the Facility Agreement;
"Loan Interest Payment Date" means the last day of each Interest Period;
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"Loan Maturity Date" has the meaning given to 'Maturity Date' in the Facility Agreement;
"Management Agreement" means the agreement dated on or about the Issue Date appointing TMF Management B.V. as managing director in relation to the Issuer;
"Master Schedule of Definitions" means the Master Schedule of Definitions, Interpretation and Construction Clauses in relation to the Programme dated 9 September 2011 (as amended and/or supplemented from time to time);
"Paying Agent" means the Principal Payment Agent or any successor or substitute to each institution in its capacity as such, notice of whose appointment or, as the case may be, nomination has been given to the Noteholders pursuant to Clause 16.1.11 of the Principal Trust Deed and Condition 14;
"Permanent Global Note" means a permanent global note in bearer form substantially in the form set out in the Trust Deed;
"Potential Event of Default" means, in relation to the Notes, any condition, event or act which, with the giving of notice and/or the lapse of time and/or the issue of a certificate, would constitute an Event of Default in relation to the Notes;
"Programme Dealer Agreement" means the programme dealer agreement in relation to the Programme dated 9 September 2011 to which the Issuer acceded pursuant to the terms of the Accession Deed (as amended and/or supplemented from time to time);
"Proposals and Advice Agreement" means the proposals and advice agreement in relation to the Programme dated 9 September 2011 to which the Issuer acceded pursuant to the terms of the Accession Deed (as amended and/or supplemented from time to time);
"Relevant Date" has the meaning ascribed to it in Condition 11 (Prescription);
"Reserved Matter" has the meaning ascribed to it in the Trust Deed;
"Secured Creditor" means the persons defined as such in the Supplemental Trust Deed, and "Secured Creditor" should be construed accordingly;
"Specified Office" in relation to any party, the office specified against its name on the signature page of the Agency Agreement;
"Temporary Global Note" means a temporary global note in bearer form substantially in the form set out in the Trust Deed;
"Trade Documents" means the Supplemental Trust Deed, the Transfer Certificate, the Account Bank Agreement, the Prospectus and the Accession Deed;
"Transaction Documents" means the Programme Dealer Agreement, the Trust Deed, the Agency Agreement, the Management Agreement, the Proposals and Advice Agreement and the Master Schedule of Definitions, Interpretation and Constructions Clauses;
"Transfer Certificate" means a certificate substantially in the form set out in Schedule 4 to the Facility Agreement dated on or about the Issue Date by which Original Lender (as defined therein) transfers its rights and obligations under the Facility Agreement to the Issuer;
"Underlying Assets" means the Charged Assets and all other assets and rights of the Issuer subject to the Security;
"Unpaid Dealer Fees" means on any day, the aggregate amount of Dealer Fees due to the Dealer but not paid on or prior to that date as a consequence of the amounts of interest received by the
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Issuer to the Issuer Account in respect of the Loan being less than the amounts scheduled to be received pursuant to the terms of the Facility Agreement; and
"USD" means the lawful currency of the United States of America.
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THE FACILITY AGREEMENT
Annexed to this Prospectus appears a copy of the Facility Agreement.
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KEY PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM
The Notes will initially be in the form of the Temporary Global Note which will be deposited on or around the Closing Date with a common depositary for Euroclear and Clearstream, Luxembourg.
The Temporary Global Note will be exchangeable in whole or in part for interests in the Permanent Global Note not earlier than 40 days after the Closing Date upon certification as to non-U.S. beneficial ownership. No payments will be made under the Temporary Global Note unless exchange for interests in the Permanent Global Note is improperly withheld or refused. In addition, interest payments in respect of the Notes cannot be collected without such certification of non-U.S. beneficial ownership.
The Permanent Global Note will become exchangeable in whole, but not in part, for Notes in definitive form ("Definitive Notes") in the denomination of USD150,000 each at the request of the bearer of the Permanent Global Note against presentation and surrender of the Permanent Global Note to the Principal Paying Agent if either of the following events (each, an "Exchange Event") occurs: (a) Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or (b) any of the circumstances described in Condition 9 (Events of Default) occurs.
So long as the Notes are represented by a Temporary Global Note or a Permanent Global Note and the relevant clearing system(s) so permit, the Notes will be tradeable only in the minimum authorised denomination of USD150,000 and higher integral multiples of USD1,000, notwithstanding that no Definitive Notes will be issued with a denomination above USD299,000.
Whenever the Permanent Global Note is to be exchanged for Definitive Notes, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Notes, duly authenticated, in an aggregate principal amount equal to the principal amount of the Permanent Global Note to the bearer of the Permanent Global Note against the surrender of the Permanent Global Note to or to the order of the Principal Paying Agent within 30 days of the occurrence of the relevant Exchange Event.
In addition, the Temporary Global Note and the Permanent Global Note will contain provisions which modify the Terms and Conditions of the Notes as they apply to the Temporary Global Note and the Permanent Global Note. The following is a description of certain of those provisions:
Payments: All payments in respect of the Temporary Global Note and the Permanent Global Note will be made against presentation and (in the case of payment of principal in full with all interest accrued thereon) surrender of the Temporary Global Note or (as the case may be) the Permanent Global Note to or to the order of any Paying Agent (as defined in the Conditions) and will be effective to satisfy and discharge the corresponding liabilities of the Issuer in respect of the Notes. On each occasion on which a payment of principal or interest is made in respect of the Temporary Global Note or (as the case may be) the Permanent Global Note, the Issuer shall procure that the payment is noted in a schedule thereto and/or the payment is entered pro rata in the records of Euroclear and Clearstream, Luxembourg.
Payments on business days: In the case of all payments made in respect of the Temporary Global Note and the Permanent Global Note "business day" means any day which is a day on which dealings in foreign currencies may be carried on in New York, Sofia and London.
Notices: Notwithstanding Condition 14 (Notices), while all the Notes are represented by the Permanent Global Note (or by the Permanent Global Note and/or the Temporary Global Note) and the Permanent Global Note is (or the Permanent Global Note and/or the Temporary Global Note are) deposited with a common depositary for Euroclear and Clearstream, Luxembourg, notices to Noteholders may be given by delivery of the relevant notice to Euroclear and Clearstream, Luxembourg and, in any case, such notices shall be deemed to have been given to the Noteholders in accordance with Condition 14 (Notices) on the date of delivery to Euroclear and Clearstream, Luxembourg except that, for so long as such Notes are admitted to trading on the Irish Stock Exchange and the guidelines of that exchange so require, they will also be filed with the Companies Announcements Office of the Irish Stock Exchange.
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USE OF PROCEEDS
The Issuer will use the proceeds of the issue of the Notes for the sole purpose of financing the purchase by the Issuer from the Original Lender (as defined in the Facility Agreement) of the Original Lender's rights and obligations under the Loan and the funding of an additional drawing under the Loan.
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DESCRIPTION OF THE ISSUER
The Issuer was incorporated in The Netherlands as a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) under the laws of The Netherlands on 11 July 2012 for an unlimited duration. The Issuer has no subsidiaries. Its statutory seat is in Amsterdam, The Netherlands.
The Issuer has been established as a special purpose vehicle for the purpose of raising money by issuing Series of Notes, Series of Alternative Investments and entering into other obligations for the purposes of purchasing assets and entering into related derivatives and other contracts.
Pursuant to Article 2 of the articles of association as contained in the deed of incorporation dated 11 July 2012, the objects of the Issuer are to raise funds, grant security and to enter into agreements in furtherance of the foregoing.
The sole shareholder of the Issuer is Stichting Northern Lights Bulgaria (the "Foundation"). The Issuer does not expect its principal shareholder to abuse its control of the Issuer. Pursuant to the terms of a management agreement between the Foundation and TMF Management B.V. and a letter of undertaking between, inter alia, the Foundation, the Managing Director of the Issuer and TMF Structured Finance Services B.V., measures will be put in place to limit and regulate the control which the Foundation has over the Issuer.
The authorised share capital of the Issuer is Euro 18,000 divided into 18 ordinary shares of Euro 1,000 each, all of which have been issued and fully paid up.
Registered Office
The registered office of the Issuer is at Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost, The Netherlands. The telephone number of the registered office is + 31 (0) 20 5755600. The Issuer is registered with the Trade Register of the Amsterdam Chamber of Commerce under number 55678297.
Management
TMF Management B.V. ("TMF") is the sole managing director of the Issuer and is responsible for the management and administration of the Issuer pursuant to the management agreement dated on or about the Issue Date (the "Management Agreement") and the law of The Netherlands. The principal outside activities of TMF are the provision of corporate, secretarial and administrative services. The Management Agreement may be terminated by the Issuer (giving at least 60 calendar days notice) or by TMF (giving at least 2 months notice). TMF has a place of business at Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost. In the event that TMF ceases to act as managing director (for whatever reason), an appropriate replacement will need to be put into place at the relevant time.
The managing director of the Issuer may engage in other activities and have other interests which may conflict with the interests of the Issuer.
Management of the managing director
The managing directors of TMF Management B.V., their respective business addresses and other principal activities as at the date hereof are:
Name Business Address Principal Activities
Mr. J.C.W. van Burg Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam Zuidoost
Managing Director
Mr. R.W. de Koning Luna Arena, Herikerbergweg 238, 1101 CM Amsterdam
Managing Director
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Zuidoost
Mr. F.W.J.J. Welman Luna Arena, Herikerbergweg 238, 1101 CM Amsterdam Zuidoost
Managing Director
Financial Statements
Since its date of incorporation, the Issuer has not commenced operations or undertaken any activities (other than those incidental to its incorporation, the accession to the Programme and the authorisation, execution, delivery and performance of the other documents to which it is or will be a party and matters which are incidental or ancillary to the foregoing) and no financial statements of the Issuer have been prepared. The Issuer will prepare annually and publish audited financial statements, with explanatory notes. These financial statements will be available at the Issuer's registered office for inspection by Noteholders. The first financial year of the Issuer ends on 31 December 2013. The Issuer will not prepare interim financial statements unless required to do so under applicable law. The auditors of the Issuer are Mazars Paardekooper Hoffman Accountants N.V. and are members of the Royal NIvRA (Koninklijk Nederlands Instituut van Register Accountants).
The Principal Trust Deed (as amended) requires the Issuer to certify to the Trustee, on an annual basis, the absence of any Event of Default, or other matter required to be brought to the attention of the Trustee.
Business of the Issuer
On the Issue Date the Issuer acceded to the Programme. Pursuant to the terms of the Programme, the Issuer may have up to USD10,000,000,000 (or its equivalent in other currencies) of Notes outstanding at any one time.
So long as any of the Notes issued by the Issuer remain outstanding, the Issuer has agreed that it will not, save to the extent permitted by the Transaction Documents or the Trade Documents (as defined in the Conditions) or with the prior written consent of the Trustee, inter alia, engage in any business (other than acquiring and holding Charged Assets, issuing Notes (or, as the case may be, entering into Alternative Investments (as defined in the Principal Trust Deed) and entering into Related Agreements (as defined in the Master Schedule of Definitions), in respect of Notes issued (or, as the case may be, entered into), acquiring and holding other assets similar to the Charged Assets (as defined in the Conditions), performing its obligations and exercising its rights thereunder and other incidental activities), have any employees or premises or have any subsidiaries.
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DESCRIPTION OF THE CALCULATION AGENT
VTB Capital plc is Calculation Agent (as defined in the Conditions) in relation to the Notes. VTB Capital plc is an entity incorporated in England and Wales authorised to conduct certain investment banking activities by the Financial Services Authority. It is a wholly owned subsidiary and part of the investment business of JSC VTB Bank.
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CORPORATE COMMERCIAL BANK AD
SELECTED FINANCIAL INFORMATION OF THE GROUP
The financial data set forth below as at and for the periods ended 30 June 2012, 30 June 2011, 31 December 2011 and 31 December 2010 has been derived from the Group's Consolidated Financial Statements.
The Group's historical financial information has been prepared in accordance with IFRS as adopted by the EU. The following information should be read in conjunction with "Financial Review", the related historical financial information and the accompanying notes thereto included elsewhere in this Prospectus. See also "Presentation of Financial and Other Information – Presentation of Financial Information".
The following table sets out the Group's net income and the principal components thereof for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011.
Six months ended 30 June Year ended 31 December
2012 2011 2011 2010
(reviewed) (audited)
(BGN 000)
Çonsolidated Statement of Comprehensive Income Income Statement Data Interest income ............................................................................. 145,295 101,637 228,227 172,201 Interest expense ............................................................................ (97,418) (63,317) (147,359) (95,345)
Net Interest Income .................................................................... 47,877 38,320 80,868 76,856
Fees and commission income ...................................................... 7,052 6,457 13,677 15,654 Fees and commission expense ..................................................... (1,143) (470) (1,048) (931)
Net fee and commission income ................................................ 5,909 5,987 12,629 14,723
Net trading income ....................................................................... 18,830 11,743 20,743 28,343 Other operating income ................................................................ 4,063 1,231 4,870 4,171
Total operating income .............................................................. 76,679 57,281 119,110 124,093
General administrative expenses .................................................. (26,877) (20,335) (43,871) (39,119) Impairment losses ......................................................................... (23,789) (4,409) (8,819) (3,052)
Profit before tax .......................................................................... 26,013 32,537 66,420 81,922
Tax expenses ................................................................................ (1,410) (3,318) (6,542) (8,312)
Profit after tax ............................................................................ 24,603 29,219 59,878 73,610
Profit attributable to: Shareholders of Bank ................................................................... 24,584 29,237 59,811 74,415 Minority interest holders ............................................................... 19 (18) 67 (805) Net Profit ..................................................................................... 24,603 29,219 59,878 73,610
Revaluation of available for sale investments ............................. (899) 3,303 1,749 191 Deferred tax on revaluation .......................................................... 90 (330) (175) (19)
Other comprehensive income .......................................................... (809) 2,973 1,574 172
Total comprehensive income attributable to: Shareholders of Bank ................................................................... 23,775 32,210 61,385 74,587 Minority interest holders .............................................................. 19 (18) 67 (805)
Total comprehensive income ..................................................... 23,794 32,192 61,452 73,782
Assets
The following table sets forth the key asset categories for the Group as at 30 June 2012 and as at 31 December 2011 and 2010.
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As at 30 June As at 31 December
2012 2011 2010
(BGN 000)
Consolidated Statement of Financial position: Assets Cash and equivalents ................................................................................................ 798,381 754,723 569,056 Securities held for trading ........................................................................................ 372,274 321,354 61,765 Derivatives held for trading ..................................................................................... 363 211 8 Held to maturity investments ................................................................................... 77,023 76,844 76,425 Investment in associates ........................................................................................... 2,962 24 8,823 Available-for-sale investments ................................................................................ 115,385 148,704 176,796 Receivables from banks and other financial institutions ......................................... 70,940 43,894 73,593 Loans to non-financial institutions and other customers ......................................... 2,961,191 2,629,062 1,659,703 Property, plant and equipment ................................................................................. 86,017 62,523 64,307 Intangible assets ....................................................................................................... 335 372 369 Other assets .............................................................................................................. 16,579 6,667 11,910
Total Assets ............................................................................................................. 4,501,450 4,044,378 2,702,755
Liabilities and Shareholder's Equity
The following table sets out the structure of the liabilities and equity of the Bank as at 30 June 2012 and as at 31 December 2011 and 2010.
As at 30 June As at 31 December
2012 2011 2010
(BGN 000)
Liabilities Derivatives held for trading ..................................................................................... – 214 324 Deposits from banks and other financial institutions .............................................. 242,214 146,515 160,882 Deposits from non-financial institutions and other customers 3,665,471 3,383,156 2,164,455 Other borrowed funds .............................................................................................. 123,145 86,630 40,539 Subordinated term debt ............................................................................................ 58,732 39,709 – Other liabilities ......................................................................................................... 3,869 3,875 13,109
Total liabilities ........................................................................................................ 4,093,431 3,660,099 2,379,309
Equity and Reserves Share capital ............................................................................................................. 60,000 60,000 60,000 Reserves .................................................................................................................... 347,814 323,803 262,417
Total equity and reserves ...................................................................................... 407,814 383,803 322,417
Total liabilities and shareholder equity .................................................................... 4,501,245 4,043,902 2,701,726 Minority interest ....................................................................................................... 205 476 1,029 Total group liabilities and shareholder equity .................................................... 4,501,450 4,044,378 2,702,755
Cash flows
The following table sets forth the cash flows of the Group for the six months ended 30 June 2012 and 2011, and for the year ended 31 December 2011 and 2010.
Six months ended 30 June Year ended 31 December
2012 2011 2011 2010
(reviewed) (audited)
(BGN 000)
Çonsolidated Statement of Cash Flow Net cash flow from operating activities Profit after taxation ......................................................................... 24,603 29,219 59,878 73,610 Impairment losses ............................................................................ 23,789 4,409 8,819 3,052 Depreciation .................................................................................... 2,114 2,130 4,272 4,362 Loss/(profit) from sale of non-current assets, net ........................... (73) (9) (7) 223 Unrealised (gains)/losses from dealing securities ........................... (2,753) (208) 72 (2)
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Six months ended 30 June Year ended 31 December
2012 2011 2011 2010
(reviewed) (audited)
(BGN 000)
Tax expense ..................................................................................... 1,410 3,318 6,542 8,312
49,090 38,859 79,576 89,557
Changes in operating assets (Increase) in securities held for trading .......................................... (52,714) (70,878) (259,385) (49,204) (Increase)/Decrease in receivables from banks and other financial institutions ........................................................................ (27,081) (4,969) 29,485 (14,513) (Increase) in loans to non-financial institutions .............................. (356,035) (300,788) (978,167) (274,998) (Increase)/Decrease in other assets .................................................... (5,383) 3,574 7,641 8,089
(441,213) (373,061) (1,200,426) (330,626)
Changes in operating liabilities Increase in due to customers ........................................................... 396,823 461,823 1,204,043 618,598 Increase/(Decrease) in other borrowed funds ................................. 36,551 41,137 86,160 (303) (Decrease) in other liabilities .......................................................... (412) (9,228) (9,537) (8,006) Income taxes paid ............................................................................ (5,863) (4,681) (8,921) (7,842)
427,099 489,051 1,271,745 602,447
Net cash flow from operating activities ....................................... 34,976 154,849 150,895 361,378
Cash flow from investing activities (Acquisition/Disposal) of property, plant and equipment .............. (25,498) (1,102) (2,484) (6,800) Sale/(Purchase) of investments ....................................................... 39,608 (68,267) 37,945 (105,321) Acquisition of shares in a subsidiary, net in cash ........................... (2,400) – – – Set up of investments accounted pursuant to the equity method .... (2,938) – – –
Net cash flow from investing activities ........................................ 8,772 (69,369) 35,461 (112,121)
Cash flow from financing activities (Payments) of finance lease liabilities ............................................ (36) (18) (69) (38) Dividends paid ................................................................................. (54) (620) (620) (31,492)
Net cash flow from financing activities ....................................... (90) (638) (689) (31,530)
Net increase in cash and cash equivalents ...................................... 43,658 84,842 185,667 217,727 Cash and cash equivalents as at the beginning of the period.......... 754,723 569,056 569,056 351,329
Cash and cash equivalents as at the end of the period .............. 798,381 653,898 754,723 569,056
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FINANCIAL REVIEW
Overview
The Bank holds a universal banking licence and, together with its 3 subsidiaries, is focused on providing customised lending services to its corporate clients typically complemented by additional financial services such as trade finance, payments, payroll and investment services, as well as certain other business services delivered by the Bank's subsidiaries. The Group accepts deposits from both corporate and retail customers.
As calculated on the basis of the statistics published by the BNB, as at the end of 2011 the Bank was ranked seventh in terms of total assets among the banks operating in Bulgaria. With respect to deposits from non-financial institutions, for 2011 the Bank was ranked seventh with a market share of 6.4 per cent. and with respect to loans to non-financial institutions the Bank was ranked fifth with a market share of 7.2 per cent. As at 30 June 2012 the Bank continues to rank seventh in terms of total assets with a market share of 5.7 per cent. and fourth in terms of net profit with a market share of 7.6 per cent. With respect to deposits from non-financial institutions in the end of the first half of 2012 the Bank continues to rank seventh with a market share of 6.9 per cent. and with respect of loans to non-financial institutions the Bank ranked fourth with a market share of 8.0 per cent.
The Bank is among the most profitable banks in Bulgaria. Based on statistics published by the BNB, in 2011 the Bank ranked third for the year ended 31 December 2011 and fourth for the six-month period ended 30 June 2012 in terms of net profit among banks operating in Bulgaria. Despite the rapid growth of its asset base, profitability indicators of the Bank remain among the highest in the market. See " - Factors Affecting Results of Operation – Effect on Strategy Focused on Large Customers and Profitable Assets Growth" below. Mainly due to the Bank's conservative lending policy and focus on sectors less affected by the downturn, including energy and power and infrastructure, the Bank seeks to maintain superior asset quality, with classified loans well below the industry average. The Bank's non-performing loans (past due over 90 days) accounted for 1.6 per cent. of total loan portfolio as at 30 June 2012 compared to over 16 per cent for the banking system. See also "Business – Market Position, Competition and Competitive Strengths - Competitive Strengths and Strategies".
A substantial proportion of the Bank’s total assets comprise liquid funds. The Group's loans to deposits ratio was 80.8 per cent. as at 30 June 2012 (compared to the 100.55 per cent. Bulgarian banking system average according to the BNB statistical data). See more details in "- Liquidity and Capital Resources" below.
The Bank's cost-to-income-ratio is one of the lowest among the banks operating in Bulgaria: for the first half of 2012 the Bank's cost-to-income-ratio was 35.1 per cent., as compared to 72.7 per cent. for the banking system according to the BNB statistical data. See more data in " - Factors Affecting Results of Operation – Effect on Strategy Focused on Large Customers and Profitable Assets Growth" below.
The Bank reports its results of operations in Lev.
Factors Affecting Results of Operations
The Group's results of operations are affected by a number of factors, including the Bank's strategy, as well as the macroeconomic conditions in Bulgaria, interest rate environment and funding and the impact of financial markets.
Effect of Strategy Focused on Large Customers and Profitable Assets Growth
During the last years the Group has implemented its strategy to focus in particular on servicing large prominent corporations, generally perceived by the Group as less risky customers, and to sustain asset growth. In the last two financial years, the Bank's total assets nearly doubled, from BGN 2,041.8 million as at 31 December 2009 to BGN 4,044.4 million as at 31 December 2011, further increasing to BGN 4,501.5 million as at 30 June 2012. Loans to non-financial customers (net) comprise the Bank's principal asset on its balance sheet; these have also doubled in the last two financial years, from BGN 1,387.8 million at
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31 December 2009 to BGN 2,629.1 million at 31 December 2011, further increasing to BGN 2,961.2 million as at 30 June 2012.
The Bank has also achieved significant growth in profitability during 2009 and 2010. Net profit was below BGN 10 million for the year ended 31 December 2006, the Bank increased this more than seven times during the following years, reaching BGN 65.3 million and BGN 73.6 million for the years ended 31 December 2009 and 31 December 2010, respectively.
The Bank's return on assets was 3.0 per cent., 3.3 per cent. and 1.8 per cent. (as compared to 1.1 per cent., 0.8 per cent. and 0.8 per cent. for the banking system according to statistics published by the BNB) for the years ended 31 December 2009, 31 December 2010 and 31 December 2011 respectively, and return on equity was 25.8 per cent., 25.3 per cent., 16.9 per cent. respectively (as compared to 8.3 per cent., 6.2 per cent. and 5.6 per cent. for the banking system according to statistics published by the BNB) for the years ended 31 December 2009, 31 December 2010 and 31 December 2011 respectively. For the first half of 2012, the Bank's return on assets was 1.2 per cent. (0.8 per cent for the banking system) and the Bank's return on equity was 12.2 per cent. (6.1 per cent. for the banking system). At the same time the Bank improved its cost efficiency: the cost-to-income-ratio being 71.6 per cent. for the year ended 31 December 2006 was reduced to 31.9 per cent., 31.5 per cent. and 36.8 per cent., respectively (as compared to 68.67 per cent., 73.5 per cent. and 74.7 per cent. for the banking system according to statistics published by the BNB) for the years ended 31 December 2009, 31 December 2010 and 31 December 2011, respectively. For the first half of 2012 the Bank's cost-to-income-ratio was 35.1 per cent. (72.7 per cent for the banking system). Mainly due to the significant increase in total assets, decline in net interest margin and increased share of lower yielding assets due to the change in the asset mix, the Bank's profitability weakened in 2011, as compared to 2010: net profit fell to BGN 59.9 million for the year ended 31 December 2011 from BGN 73.6 million for the year ended 31 December 2010; as shown above the return on assets decreased to 1.8 per cent. for the year ended 31 December 2011 from 3.26 per cent. for the year ended 31 December 2010 and return on equity decreased to 16.85 per cent. for the year ended 31 December 2011 from 25.25 per cent. for the year ended 31 December 2010. Despite this decline in profitability, the Group is still well above the Bulgarian banks average.
Macroeconomic Conditions in Bulgaria
The Group operates in Bulgaria and its revenues are generated in Bulgarian Lev. The operations of the Group are linked with the overall economic situation in the country, GDP growth and purchasing power of Bulgarian consumers. The continued implementation of market economy policies and the successful implementation of the pending electricity power liberalisation, structural reforms in education, health sector and court system should have a beneficial impact on the Bulgarian economy and improve the environment in which the Group operates. See also "Risk Factors – Risk Related to Bulgaria".
Bulgaria was among the many countries adversely affected by the global financial crisis. During the few years before the launch of the crisis in 2009, Bulgaria enjoyed rapid GDP growth averaging 6 per cent. annually. After a decline of more than 5 per cent. in 2009, Bulgaria's economy reached 1.7 per cent. growth in 2011. However, mainly due to the deteriorating outlook in the Eurozone, worsening growth prospects of key trading partners and stagnant domestic demand, Bulgaria's economic growth is expected to further slow down to 1.4 per cent. according to the Government or even more, to 0.7 per cent. and 0.5 per cent. as forecasted by the BNB and the European Commission, respectively (compared to 0.3 per cent. for Eurozone and 0.5 per cent. EU average as forcasted by the European Commission).
Bulgaria's public debt represented 16.3 per cent. of GDP, which is significantly lower than the European average, demonstrating the country's fiscal prudence. In addition, the current account balance returned to surplus in 2011 (0.9 per cent. in 2011) and although there is a current account deficit in respect of the six months ended 30 June 2012 (-1.2 per cent.), it is expected to return to surplus in the end of 2012 (0.6 per cent.) according to the European Economic Forecasts by the European Commission made in Spring 2012.
Bulgarian exports, which traditionally have been the major driving force behind any recovery, consist primarily of raw materials and are directed generally to EU countries; therefore, its levels for the year will depend on the developments in the Eurozone and the prices on international markets, but generally are
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expected to be below the levels of last year. Net capital inflows remain negative in 2010 and in 2011, and net foreign direct investments in 2011 were close to 60 per cent. of their level in 2010. Domestic demand is constrained by growing uncertainty, rising unemployment (currently over 11 per cent.) and a lack of investment. Households and businesses, attracted also by high interest rates on deposits, prefer to save in banks instead of spending or investing. During the last 12 months ending 30 June 2012, deposits of households have increased by 15.3 per cent. compared to deposits of corporate clients by 3.5 per cent. This is a positive trend for the Group resulting in further growth in its deposit base.
The economic downturn has resulted in a significant reduction in investment and construction projects and an overall decrease in demand for credit. Economic sectors, including construction/real estate and motor vehicles trading, remain depressed with currently very little hope for revival in the near future. However, the Group has limited exposure to these sectors as it has traditionally focused on energy & power, infrastructure and other sectors less affected by the downturn.
The Group has benefited from the households and businesses high propensity to save as well as deposit outflow from Greek banks resulting in significant growth in its deposit base since 2009. The Bank's non-financial customers loan portfolio has also increased since 2009 in line with growth in its deposit base, despite the overall decrease in demand for credit. The Bank's ability to grow its loan portfolio in a fragile economic environment, while maintaining superior asset quality, is principally due to its conservative lending policy and close business relations with important customers (see "Effect of Strategy Focused on Large Customers and Profitable Assets Growth" above).
Interest Rate Environment and Funding
Changes in interest rates affect the Group's operations. For the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011 movements in short- and long-term interest rates have affected both the Group's interest income and interest expense, as well as the group's level of gains and losses on the securities portfolio.
As a result of competition for deposits between the banks operating in Bulgaria in 2009 and 2010 interest rates on deposits have increased considerably, now representing the highest levels in the EU. Correspondingly, interest on bank loans in Bulgaria has grown up among the highest in the EU. However, with the increase of liquidity in the banking system and the continuing increase of deposits in the banks, since the beginning of 2011 there has been a trend for slight reduction in the interest rates offered by banks on deposits.
The Group annual net interest margin decreased from 3.92 per cent. in 2010 to 2.80 per cent. in 2011, as a result of the rapid growth in deposits, hence, the higher interest expenses, the increased competition in the market, and also the change in asset mix from higher-risk to lower-risk (and, correspondingly, less profitable) interest-earning assets. Average interest rates of total interest-earning assets for 2011 was 7.99 per cent., declining from 8.81 per cent. for 2010 and the average interest rate of total interest-bearing liabilities for 2011 was 5.11 per cent., slightly increasing from 4.94 per cent. for 2010.
Impact of Financial Markets
The value of the Group's securities portfolio has fluctuated in the past and will likely fluctuate in the future. This may have a direct impact on the Group's results of operations and the structure of the balance sheet. The Group recognises certain of its assets (investments held for trading and available-for-sale investments) at fair value and the fair value of certain assets may be materially affected by volatile market conditions (for more information see item 2 (o)(ii) of Consolidated Interim Financial Statements on page F – 21 herein).
In addition, the Group's investment service business has been affected by the Bulgarian capital market disruption and particularly by the fall in prices, the contraction of trading volumes and the absence of new offerings on the market. Mainly due to lower trading gains, the Group's non-interest income for 2011 decreased by 19 per cent., as compared to 2010. Debt securities and other financial instruments revaluation gains/losses fluctuated during the last two financial years and also for the first half of 2012, compared to
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the first half of 2011. The value of the Group's securities portfolio, including securities held for trading and securities available for sale amounted in aggregate to BGN 487.7 million and represented 10.83 per cent. of total assets as at 30 June 2012, however, the securities portfolio may be materially affected by volatile market conditions.
Results of Operations for the Years Ended 31 December 2011 and 2010 and for the Six Months Ended 30 June 2012 and 2011
The following table sets out the Group's net income and the principal components thereof for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Çonsolidated Statement of Comprehensive Income Income Statement Data Interest income ........................................................ 145,295 101,637 228,227 172,201 42.95 32.54 Interest expense ....................................................... (97,418) (63,317) (147,359) (95,345) 53.86 54.55
Net Interest Income ............................................... 47,877 38,320 80,868 76,856 24.94 5.22
Fees and commission income ................................. 7,052 6,457 13,677 15,654 9.21 (12.63) Fees and commission expense ................................ (1,143) (470) (1,048) (931) 143.19 12.57
Net fee and commission income ........................... 5,909 5,987 12,629 14,723 (1.30) (14.22)
Net trading income .................................................. 18,830 11,743 20,743 28,343 60.35 (26.81) Other operating income ........................................... 4,063 1,231 4,870 4,171 230.06 16.76
Total operating income ......................................... 76,679 57,281 119,110 124,093 33.86 (4.02)
General administrative expenses ............................. (26,877) (20,335) (43,871) (39,119) 32.17 12.15 Impairment losses ................................................... (23,789) (4,409) (8,819) (3,052) 439.56 188.96
Profit before tax .................................................... 26,013 32,537 66,420 81,922 (20.05) (18.92)
Tax expenses ........................................................... (1,410) (3,318) (6,542) (8,312) (57.50) (21.29)
Profit after tax ....................................................... 24,603 29,219 59,878 73,610 (15.80) (18.66)
Profit attributable to: Shareholders of Bank .............................................. 24,584 29,237 59,811 74,415 (15.91) (19.63) Minority interest holders ......................................... 19 (18) 67 (805) (205.56) (108.32)
Net Profit ................................................................ 24,603 29,219 59,878 73,610 (15.80) (18.66)
Revaluation of available for sale investments ........ (899) 3,303 1,749 191 (127.22) 815.71 Deferred tax on revaluation..................................... 90 (330) (175) (19) (127.27) 821.05
Other comprehensive income ................................. (809) 2,973 1,574 172 (127.21) 815.12
Total comprehensive income attributable to: Shareholders of Bank .............................................. 23,775 32,210 61,385 74,587 (26.19) (17.70)Minority interest holders ......................................... 19 (18) 67 (805) (205.56) (108.32)
Total comprehensive income ................................ 23,794 32,192 61,452 73,782 (26.09) (16.71)
Operating Income
The operating income of the Group decreased by BGN 5.0 million, or 4.0 per cent., from BGN 124.1 million for the year ended 31 December 2010 to BGN 119.1 million for the year ended 31 December 2011, and increased by BGN 19.4 million, or 33.9 per cent., from BGN 57.3 million for the six months ended 30 June 2011 to BGN 76.7 million for the six months ended 30 June 2012. A number of factors affected the Group's operating income, the most important being net interest income. Net interest income represented 67.9 per cent. and 61.9 per cent. of operating income for 2011 and 2010, respectively, and 62.4 per cent.
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and 66.9 per cent. of operating income for the first half of 2012 and 2011 respectively. The operating income also comprises net fee and commissions income, net trading income and other operating income.
Net Interest Income
A number of factors affect the Group's net interest income. It is primarily determined by the volume of interest-earning assets, such as loans to customers, interest-earning securities which the Group holds and the volume of interest-bearing liabilities, such as deposits from customers and financial institutions, as well as the difference between rates the Bank earned on interest-earning assets, and rates the Bank paid on interest-bearing liabilities. Changes in the Group's net interest income result mainly from changes in the average amounts of interest assets and liabilities, their structure and interest rate levels.
The following table sets out the Group's net income for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Interest income ........................................................ 145,295 101,637 228,227 172,201 43.0 32.5 Interest expense ....................................................... (97,418) (63,317) (147,359) (95,345) 53.9 54.6
Net Interest Income ............................................... 47,877 38,320 80,868 76,856 24.9 5.2
For the year ended 31 December 2011, the Group's net interest income continued to comprise a larger share in its revenue from operations: 67.9 per cent. (an increase of 6 percentage points compared to the year ended 31 December 2010).
Net interest income for year ended 31 December 2011 amounted to BGN 80.9 million and represented an increase of BGN 4.0 million, or 5.2 per cent. compared to BGN 76.9 million for the year ended 31 December 2010. Net interest income for the six months ended 30 June 2012 amounted to BGN 47.9 million and represented an increase of BGN 9.6 million, or 24.94 per cent. compared to BGN 38.3 million for the six months ended 30 June 2011. The increase in both periods was primarily due to the greater increase in interest income (this was mainly due to the increase of the volume of interest-bearing assets) than the corresponding increase in interest expense for the corresponding period (see also " – Interest Income" and " - Interest Expenses" below).
Interest Income
Interest income is comprised primarily of interest from loans to non-financial institutions and other customers. It also includes interest earned on financial instruments held for trading and available-for-sale and receivables from banks.
The following table sets forth the principal components of the Group's interest income for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Interest income arises from: Receivables from banks .......................................... 598 813 1,749 839 (26.4) 108.5 Loans to non-financial institutions and other customers ................................................................. 134,352 93,027 207,858 161,290 44.4 28.9Financial instruments held for trading and available-for-sale ..................................................... 10,345 7,797 18,360 9,996 32.7 83.7
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Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Receivables on repurchase agreements ................... 340 76 – 347.4
Interest income ...................................................... 145,295 101,637 228,227 172,201 43.0 32.54
Interest income increased by BGN 56.0 million, or 32.5 per cent., from 172.2 million in the year ended 31 December 2010 to BGN 228.2 million in the year ended 31 December 2011, which was as a result of the increased amount of the interest-earning assets.
Interest income increased by BGN 43.7 million, or 43.0 per cent., from 101.6 million in the six months ended 30 June 2011 to BGN 145.3 million in the six months ended 30 June 2012. This increase was as a result of a higher average volume of interest-bearing assets for the first half of 2012 as compared to the first half of 2011.
Interest Expense
Interest expense comprises primarily amounts paid by the Bank as interest on funds deposited by customers, which are non-financial institutions and also as interest on bank deposits and other borrowed funds.
The following table sets forth the principal components of the Group's interest expense for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Interest expense arises from: Deposits from banks ................................................ (3,179) (1,895) (5,291) (1,606) 67.8 229.5 Deposits from other customers ............................... (94,227) (61,375) (140,529) (93,712) 53.5 50.0Depreciations of securities premiums ..................... (12) (47) (946) (27) (74.5) 3,403.7 Subordinated term debt ........................................... – – (593) –
Interest expense ..................................................... (97,418) (63,317) (147,359) (95,345) 53.9 54.6
Interest expense increased by BGN 52 million, or 54.6 per cent., from BGN 95.3 million in the year ended 31 December 2010 to BGN 147.4 million in the year ended 31 December 2011. Interest expense increased by BGN 34.1 million, or 53.9 per cent., from BGN 63.3 million in the six months ended 30 June 2011 to BGN 97.4 million in the six months ended 30 June 2012. The increase resulted from a higher average volume of interest-bearing liabilities for the first half of 2012 as compared to the first half of 2011, and the same trend respectively for the full year 2011 as compared to 2010; in addition, higher-cost resources (mainly term deposits) increased whereas the average volume of lower cost demand deposits decreased.
Net Interest Margin
The Group's annual net interest margin (which is calculated as the net interest income (before provision for impairment losses on interest-bearing assets) divided by the sum of the Group's average interest-bearing assets for the period) declined by 1.1 percentage points, from 3.9 per cent. for the year ended 31 December 2010 to 2.8 per cent. for the year ended 31 December 2011. The Group's net interest margin for the last 12 months (which is calculated as the net interest income, before provision for impairment losses on interest-bearing assets, divided by the sum of the Group's average interest-bearing assets for the period) declined by 0.3 percentage points from 2.9 per cent. for the six months ended 30 June 2011 to 2.7 per cent. for six months ended 30 June 2012.
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The decline in the Group's net interest margin for the above periods reflects the slower growth of net interest income as compared to the rapid growth of the average interest-earning assets (see below "- Assets") and the increase of the Group's lower risk assets (and lower interest-earning assets, correspondingly) in the Group's portfolio primarily results from the lower interest charged on the Bank's loans to its targeted first-class corporate client base, in line with the current economic conditions in Bulgaria and the flexible approach of the Bank toward its customers. In addition, the Bank's priority to further diversify its deposit base by increasing retail deposits relates to offering relatively high interest rates on its deposit products.
Non-Interest Income
The Group's non-interest income for the year ended 31 December 2011 amounted to BGN 38.2 million, a decrease of BGN 9.0 million or 19.0 per cent., compared with 2010, reflecting primarily the lower gains from foreign exchange transactions. The Group's non-interest income for the six months ended 30 June 2012 increased to BGN 28.8 million, by BGN 9.8 million or 51.9 per cent., compared to BGN 19.0 million for the six months ended 30 June 2011, reflecting primarily the increase and improved efficiency of trading portfolio management.
Net Fees and Commissions Income
Fees and commissions income is composed of fees received from servicing of bank cards, income from bank services such as maintenance of accounts, cash and non-cash services and management and issuance of bank guarantees. Fees and commissions expense comprises amounts paid by the Group in relation to servicing bank cards, fees for banking services, including maintenance of accounts, cash and non-cash services and fees paid in respect of loans granted to the Group.
The following table sets out the principal components of the Group's net fees and commission income for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Fees and commission income ................................. 7,052 6,457 13,677 15,654 9.2 (12.63)Fees and commission expense ................................ (1,143) (470) (1,048) (931) 143.2 12.57
Net fee and commission income ........................... 5,909 5,987 12,629 14,723 (1.3) (14.22)
Net fee and commission income decreased by BGN 2.1 million, or 14.2 per cent., from BGN 14.7 million during the year ended 31 December 2010 to BGN 12.6 million for the year ended 31 December 2011. This decrease was primarily due to a decrease in income from loan related fees and fees from documentary transactions.
For the six months ended 30 June 2012, the net fee and commission income amounted to BGN 5.9 million, remaining at the level for the six months ended 30 June 2011 (BGN 6.0 million).
Net Trading Income
Other non-interest income consists of realised gains or losses from foreign currency and securities trading, and gains or losses from foreign currency and financial instruments revaluation.
The following table sets forth the principal components of the Group's net trading income for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
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Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'1
1 2011/2010
(reviewed) (audited)
(BGN 000) (percentage)
Net trading income Net trading income arises from: Trade in debt instruments and similar derivatives .. 7,388 4,346 6,154 3,713 70 65.74 Revaluation of debt instruments and similar derivatives ............................................................... 2,753 208 4 (2) 1,223.6 (300)
10,141 4,554 6,158 3,711 122.7 65.94
Gains from foreign currency transactions ............... 1,603 (4,506) 1,152 17,934 135.6 (93.58)Gains from foreign currency revaluations .............. 7,086 11,695 13,433 6,698 (39.4) 100.55
Net trading income ................................................ 18,830 11,743 20,743 28,343 60.4 (26.81)
Net trading income decreased by BGN 7.6 million, or 26.8 per cent., from BGN 28.3 million in the year ended 31 December 2010 to BGN 20.7 million in the year ended 31 December 2011. This decrease was primarily due to realised gains by the Group in 2010 from certain large financial transactions.
For the six months ended 30 June 2012, the net trading income increased by BGN 7.1 million, or 60.4 per cent., from BGN 11.7 million for the six months ended 30 June 2011 to BGN 18.8 million for the six months ended 30 June 2012. This increase resulted from the higher volume of financial instruments in the Group's portfolio and more efficient management of the portfolio (for more information on the type of the securities held and the trends related to the portfolio of financial instruments see " – Analysis of Financial Condition as at 30 June 2012 and as at 31 December 2011 and 2010" below).
Other Operating Income
Other operating income over the period consists of gains from other non-financial services sold such as fees for safety vaults, fax and telex fees, research and opinion on loans applications as well as fees related to services rendered as an investment intermediary, lease of buildings and income from the sale of precious goods. Other operating income increased by BGN 0.8 million, or 16.8 per cent., from BGN 4.2 million for the year ended 31 December 2010 to BGN 4.9 million for the year ended 31 December 2011. For the six months ended 30 June 2012, the other operating income amounted to BGN 4.1 million, representing a 230 per cent. increase from BGN 1.2 million for the six months ended 30 June 2011. This increase in income resulted mainly from dividends.
General Administrative Expenses
General administrative expenses comprised personnel cost, materials, rent and hired services, depreciation, marketing expenses and other operating expenses. Total administrative expenses increased by BGN 4.8 million, or 12.2 per cent., from BGN 39.1 million for the year ended 31 December 2010 to BGN 43.9 million during the year ended 31 December 2011, and by BGN 6.5 million, or 32.5 per cent., from BGN 20.3 million for the six months ended 30 June 2011 to BGN 26.9 million during the six months ended 30 June 2012. The increased administrative expenses for both periods reflect the expansion of the Group's operations and the opening of new branch offices as well as the increased contributions to the Deposit Guarantee Fund as a result of the increase of the Bank's deposit base.
Despite the above increase in general administrative expenses, the Group's operating efficiency remained considerably high: the Bank's cost to income ratio was 35.1 per cent., 36.8 per cent. and 31.5 per cent. (as compared to 72.7 per cent., 74.7 per cent. and 73.5 per cent. for the Bulgarian banking system (Source: BNB's statistic information) for the first half of 2012 and for the years ended 31 December 2011 and 2010, respectively. Similarly, the Bank's administrative expenses to average assets ratio was 1.3 per cent., 1.3 per cent. and 1.7 per cent. (as compared to 2.5, 2.6 and 2.7 per cent. for the Bulgarian banking system according to the BNB data) for the first half of 2012 and for the years ended 31 December 2011 and 2010, respectively. The following table sets forth the principal components of the Group's general administrative
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expenses for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'11
2011/2010
(unaudited) (audited)
(BGN 000) (%)
Personnel cost......................................................... (10,108) (8,497) (18,581) (15,551) 18.96 19.48 Materials, rent and hired services .......................... (5,032) (4,065) (8,724) (7,941) 23.79 9.86Depreciation ........................................................... (2,114) (2,130) (4,272) (4,362) (0.75) (2.06)Administrative, marketing and other expenses ...... (9,623) (5,643) (12,294) (11,265) 70.53 9.13
General administrative expenses ........................ (26,877) (20,335) (43,871) (39,119) 32.17 12.15
Net Impairment Losses
The Group establishes provisions (allowances) for impairment losses on interest-bearing assets when there is objective evidence that an interest-bearing asset or group of assets is impaired.
The following table sets forth the principal components of the Group's net impairment losses for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
Six months ended 30 June Year ended 31 December Variation
2012 2011 2011 2010 H1'12/H1'11 2011/2010
(reviewed) (audited)
(BGN 000) (%)
Increases Impairment losses on loans extended .................... (29,680) (8,376) (15,186) (8,357) 254.3 81.72Reversals on loan impairment ............................... 5,891 3,967 6,367 5,305 48.5 20.19
Net impairment losses .......................................... (23,789) (4,409) (8,819) (3,052) 439.6 188.96
For the year ended 31 December 2011, the net impairment losses amounted to BGN 8.8 million, representing a 189.0 per cent. increase from BGN 3.1 million for the year ended 31 December 2010.
For the six months ended 30 June 2012, the net impairment losses amounted to BGN 23.8 million, compared to BGN 4.4 million for the six months ended 30 June 2011, The increase of net impairment losses in the first half of 2012 principally results from the increase of the impairment losses attributable to the Bank's Exposure toward one of its large customers, who recently went into bankruptcy proceedings. Approximately 3/4 of total impairment losses are attributable to this Exposure, which amounts to BGN 26.3 million as at 30 June 2012 and the impairment losses set aside in relation to it amounted to BGN 18.4 million. To a lesser degree, the increase of the net impairment losses for the six months ended 30 June 2012 was attributable to the increased amount of Bank's provisions on Standard loans (on portfolio basis) as a result of the more than 50 per cent. increase of the loan portfolio in the first half of 2012 as compared to the same period in 2011
Income Tax
Income tax expense comprises the current tax expense and the deferred tax expense. During the period covered by the Consolidated Financial Statements, the Group was subject to a tax rate of 10.0 per cent. The Group's income taxes decreased by BGN 1.8 million, or 21.3 per cent., from BGN 8.3 million for the year ended 31 December 2010 to BGN 6.5 million for the year ended 31 December 2011, and decreased by BGN 1.9 million, or 57.5 per cent., from BGN 3.3 million for the six months ended 30 June 2011 to BGN 1.4 million for the six months ended 30 June 2012. These decreases in the Group's income tax expense were primarily attributable to decreases in taxable operating profits.
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For more information on the Group's reconciliation between the annual accounting profit before taxation and tax expenses, see Note 11 of the Consolidated Financial Statements on page F – 50, F – 107 and F - 160 herein.
Analysis of Financial Condition as at 30 June 2012 and as at 31 December 2011 and 2010
Assets
The following table sets forth the key asset categories for the Group as at 30 June 2012 and as at 31 December 2011 and 2010, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Consolidated Statement of Financial position: Assets Cash and equivalents ................................... 798,381 754,723 569,056 5.78 32.63 Securities held for trading ........................... 372,274 321,354 61,765 15.85 420.28 Derivatives held for trading ........................ 363 211 8 72.04 2537.50 Held to maturity investments ...................... 77,023 76,844 76,425 0.23 0.55 Investment in associates .............................. 2,962 24 8,823 12,241.67 (99.73) Available-for-sale investments ................... 115,385 148,704 176,796 (22.41) (15.89) Receivables from banks and other financial institutions ................................................... 70,940 43,894 73,593 61.62 (40.36) Loans to non-financial institutions and other customers ........................................... 2,961,191 2,629,062 1,659,703 12.63 58.41 Property, plant and equipment .................... 86,017 62,523 64,307 37.58 (2.77) Intangible assets .......................................... 335 372 369 (9.95) 0.81 Other assets ................................................. 16,579 6,667 11,910 148.67 (44.02)
Total Assets ................................................ 4,501,450 4,044,378 2,702,755 11.30 49.64
The Group had total assets of BGN 4,501.5 million as at 30 June 2012, an increase of BGN 457.1 million, or 11.3 per cent., from its total assets of BGN 4,044.4 million as at 31 December 2011, the latter representing an increase of BGN 1,341.6 million, or 49.6 per cent., from BGN 2,702.8 million as at 31 December 2010. This increase in assets over the period was principally due to the increase in loans to customers and the securities held for trading.
Loans to Non-Financial Institutions and Other Customers. Allowances for Impairment Losses
Loans to non-financial institutions and other customers increased by BGN 332.1 million, or 12.6 per cent., from BGN 2,629.1 million as at 31 December 2011 to BGN 2,961.2 million as at 30 June 2012, and by BGN 969.4 million, or 58.4 per cent., from 1,659.7 million as at 31 December 2010 to BGN 2,629.1 million as at 31 December 2011. The growth in loans and advances to customers reflects the increased deposit base of the Group and the increased demand for the Group's lending products.
The following table sets forth the principal allocation of the Group's loans to non-financial institutions and other customers for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012 and 2011, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Loans to non-financial institutions and other customers Retail customers .......................................... 20,693 19,327 15,644 7.1 23.5 Corporate customers .................................... 2,986,561 2,632,239 1,657,768 13.5 58.8
Total receivables from customers ............ 3,007,254 2,651,566 1,673,412 13.4 58.5
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As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Allowances for impairment losses .............. (46,063) (22,504) (13,709) 104.7 64.2
2,961,191 2,629,062 1,659,703 12.6 58.4
The allowances for impairment losses set aside by the Bank consist of two components: (i) provisions for individually impaired Exposures; and (ii) provisions for "Standard" Exposures on a portfolio basis. The latter are intended to provide additional protection and to cover existing losses and risks which may not be specifically determined for each individual Exposure. See also "Selected Statistical Information – Allowances for Impairment Losses".
The level of the allowances for impairment losses as a percentage of total gross loans (receivables from customers) of the Bank increased, amounting to 1.53 per cent. as at 30 June 2012, compared to 0.85 per cent. and 0.82 per cent. as at 31 December 2011 and 31 December 2010, respectively (see "Selected Statistical Information – Non-Performing Loans"). For additional details on impairment losses see " – Results of Operation for the Years Ended 31 December 2011 and 2010 and for the Six Months Ended 30 June 2012 and 2011 – Net Impairment Losses" above.
Pursuant to the Credit Institutions Act and the BNB Ordinance No. 7, the exposure towards one person or economically related persons may not exceed 25 per cent. of the own funds of a bank or a banking group (for more information see "The Banking Sector and Banking Regulation in Bulgaria - Large Exposures"). There are certain exposures of the Group which are close to this limit. The Group constantly watches its exposures as required by applicable law and complies with the limits set forth in the BNB regulations.
As at 30 June 2012, 31 December 2011 and 2010, the Group's largest 20 Exposures comprised 33.6 per cent., 36.0 per cent. and 37.8 per cent., respectively, of the Group's total loans to customers (before allowances for impairment losses).
Cash and Cash Equivalents
For the purpose of cash flow reporting, cash and cash equivalents include cash in hand, balances on current accounts with the BNB, and deposits with a maturity of up to 3 months.
The following table sets forth the principal components of the Group's cash and cash equivalents as at 30 June 2012 and as at 31 December 2011 and 2010, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Cash and cash equivalents Cash on hand (in BGN and foreign currency) ...................................................... 175,390 70,878 173,760 147.5 (59.20) Current account with the BNB .................... 448,647 436,849 166,015 2.7 163.14 Current account and balances with local banks with a maturity up to 3 months ......... 62,843 80,918 149,881 (22.3) (46.01) Current account and balances with foreign banks with a maturity up to 3 months ......... 111,501 166,078 79,400 (32.9) 109.17
Total cash and cash equivalents ............... 798,381 754,723 569,056 5.8 32.62
The current account with the BNB is used for direct participation in money and securities markets, as well as for settlement. The balance on the current account with the BNB also includes the Group's minimum required reserves, amounting to BGN 272.1 million, BGN 296.01 million and BGN 130.95 million as at 30 June 2012 and as at 31 December 2011 and 2010, respectively. The minimum required reserve is based on a percentage of the Group's deposits and does not bear interest.
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Cash and cash equivalents increased by BGN 43.7 million, or 5.8 per cent., from BGN 754.7 million as at 31 December 2011 to BGN 798.4 million as at 30 June 2012, and by BGN 185.7 million, or 32.6 per cent., from 569.1 million as at 31 December 2010 to BGN 754.7 million as at 31 December 2011. These increases were proportional to the increases in total assets for the same periods and were driven by liquidity management reasons.
Securities Held for Trading
Securities held for trading increased by BGN 50.9 million, or 15.9 per cent., from BGN 321.4 million as at 31 December 2011 to BGN 372.3 million as at 30 June 2012, and by BGN 259.6 million, or 420.3 per cent., from 61.8 million as at 31 December 2010 to BGN 321.4 million as at 31 December 2011. These increases were primarily as a result of the management's decision to improve liquidity of the Group by making a short-term investment in Bulgarian government securities of a portion of the increased deposit base of the Group.
The following table sets forth the principal components of the Group's securities held for trading as at 31 December 2011 and 2010 and as at 30 June 2012 and 2011, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Securities held for trading Bulgarian government bonds ...................... 247,836 193,808 57,780 27.9 235.4 including ...................................................... Medium-term ............................................... 99,365 105,064 44,184 (5.4) 137.8 Long-term .................................................... 148,471 88,744 13,596 67.3 552.7 Foreign securities ........................................ 8,263 – 3,985 100.0 (100) Corporate bonds .......................................... 116,175 127,546 – (8.9) –
Total securities held for trading .............. 372,274 321,354 61,765 15.9 420.3
Available-for-Sale Investments
Investment securities available for sale decreased by BGN 28.1 million, or 15.9 per cent., from 176.8 million as at 31 December 2010 to BGN 148.7 million as at 31 December 2011 and further decreased by BGN 33.3 million, or 22.4 per cent., from BGN 148.7 million as at 31 December 2011 to BGN 115.4 million as at 30 June 2012. These changes reflected the investment management decisions of the Group in the periods indicated and in particular for the decrease in the first half of 2012, the maturity of a significant portion of the bonds in which the Group has invested.
The following table sets forth the principal components of the Group's available-for-sale investments as at 31 December 2011 and 2010 and as at 30 June 2012 and 2011, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Available-for-sale investments Bulgarian government bonds ...................... 1,279 1,270 1,017 0.7 24.9 Foreign government bonds .......................... – – 73,464 – (100) Corporate bonds denominated in BGN ....... – – 6,456 – (100) Corporate bonds denominated in foreign currency ....................................................... 62,032 106,135 84,241 (41.6) 26.0 Equity investments ...................................... 52,074 41,299 11,618 26.1 255.5
Total securities held for trading .............. 115,385 148,704 176,796 (22.4) (15.9)
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Liabilities and Shareholder's Equity
The following table sets out the structure of the liabilities and equity of the Group as at 30 June 2012 and at 31 December 2011 and 2010, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Liabilities Derivatives held for trading ........................ – 214 324 (100) (33.95) Deposits from banks and other financial institutions ................................................... 242,214 146,515 160,882 65.32 (8.93) Deposits from non-financial institutions and other customers ..................................... 3,665,471 3,383,156 2,164,455 8.34 56.31 Other borrowed funds ................................. 123,145 86,630 40,539 42.15 113.70 Subordinated term debt ............................... 58,732 39,709 – 47.91 – Other liabilities ............................................ 3,869 3,875 13,109 (0.15) (70.44)
Total liabilities ........................................... 4,093,431 3,660,099 2,379,309 11.84 53.83
Equity and Reserves Share capital ................................................ 60,000 60,000 60,000 – – Reserves ....................................................... 347,814 323,803 262,417 7.42 23.39
Total equity and reserves ......................... 407,814 383,803 322,417 6.26 19.04 Total liabilities and shareholder equity ....... 4,501,245 4,043,902 2,701,726 11.31 49.68 Minority interest .......................................... 205 476 1,029 (56.93) (53.74) Total group liabilities and shareholder equity .......................................................... 4,501,450 4,044,378 2,702,755 11.30 49.64
Deposits from Non-Financial Institutions and Other Customers
Deposits from non-financial institutions and other customers increased by BGN 282.3 million, or 8.3 per cent., from BGN 3,383.2 million as at 31 December 2011 to BGN 3,665.5 million as at 30 June 2012, and by BGN 1.218.7 million, or 56.3 per cent., from 2,164.5 million as at 31 December 2010 to BGN 3,383.2 million as at 31 December 2011. The increases were principally as a result of the corresponding increases in the volume of individual and corporate customers' deposits accounts.
The following table sets forth the principal allocation of the Group's deposits from non-financial institutions and other customers as at 30 June 2012 and at 31 December 2011 and 2010, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Deposits from non-financial institutions and other customers Private individuals ....................................... 1,911,986 1,478,077 894,827 29.4 65.2 Corporate customers .................................... 1,753,485 1,905,079 1,269,628 (8.0) 50.1
Total ............................................................ 3,665,471 3,383,156 2,164,455 8.3 56.3
As at 30 June 2012 and at 31 December 2011, respectively, the Group's top twenty deposits accounted for 30.8 per cent. and 40.0 per cent. of deposits from non-financial institutions and other customers.
Deposits from Banks and Other Financial Institutions
Deposits from banks and other financial institutions increased by BGN 95.7 million, or 65.3 per cent., from BGN 146.5 million as at 31 December 2011 to BGN 242.2 million as at 30 June 2012 and decreased by BGN 14.4 million, or 8.9 per cent., from 160.9 million as at 31 December 2010 to BGN 146.5 million as at
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31 December 2011. These changes reflect the dynamics of the interbank market. Furthermore, the policy of diversification of the Group's deposit base in particular has led to an increase of deposits from banks and other financial institutions for the first half of 2012.
Commitments and Contingent Liabilities
The Group's commitments and contingent liabilities comprised predominantly of issued guarantees and letters of credit. These commitments and contingent liabilities carry off-balance sheet risk in the ordinary course of business to meet the financial needs of its customers. Those instruments involve, to various degrees, elements of credit risk. Issued guarantees are secured by fixed assets, deposits and other assets pledged in favour of the Group. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part; therefore, the amounts do not represent expected future cash flows.
The following table shows the Group's off-balance sheet liabilities as at 30 June 2012 and as at 31 December 2011 and 2010, as well as the percentage variation within each line item.
As at 30 June As at 31 December Variation
2012 2011 2010 H1'12/2011 2011/2010
(BGN 000) (%)
Commitments and contingent liabilities Bank guarantees .......................................... 138,768 144,687 170,447 (4.1) (15.1) Letter of credits ........................................... 6,199 8,667 1,204 (28.5) 619.9
Total ............................................................ 144,967 153,354 171,651 (5.5) (10.7)
Total commitments and contingent liabilities decreased by BGN 8.4 million, or 5.5 per cent., from BGN 153.4 million as at 31 December 2011 to BGN 145.0 million as at 30 June 2012 and decreased by BGN 18.3 million, or 10.7 per cent., from BGN 171.7 million as at 31 December 2010 to BGN 153.4 million as at 31 December 2011. The decreases in the Group's commitments and contingent liabilities during the relevant periods indicated reflected the lower demand for such banking products from the Group's customers, which aimed to minimise their transaction costs.
Liquidity and Capital Resources
The majority of the Group's funding comes from customers' accounts. Other financing sources include funds raised at the inter-bank market and subordinated loans from Bromak EOOD (which owns directly 50.29 per cent. of the Bank's share capital and is wholly owned by Mr. Tzvetan Vassilev - the "Controlling shareholder"). See below "– Funding".
The Group must also comply with certain liquidity requirements established by the BNB, including for maintenance of the ratios (such as liquid assets ratio and liquidity ratios by maturity time bands) for monitoring liquidity. See "The Banking Sector and Banking Regulation in Bulgaria - Liquidity". The Group has always been in compliance with all applicable liquidity requirements.
As at 30 June 2012, the Group's cash and cash equivalent amounted to BGN 798.4 million, compared to BGN 754.7 million as at 31 December 2011, and BGN 569.1 million as at 31 December 2010, respectively.
The Group's loans to deposits ratio was 80.8 per cent., 77.7 per cent. and 76.7 per cent as at 30 June 2012, and 31 December 2011 and 2010, respectively (compared to the 100.55 per cent., 102.38 per cent. and 111.20 per cent. Bulgarian banking system average as at 30 June 2012, and 31 December 2011 and 2010, respectively (Source: The BNB supervisory data)).
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Funding
Equity Capital
The Group's capital comprises core ("Tier 1") and supplementary ("Tier 2") capital. Tier 1 capital comprises capital contributions from shareholders, retained earnings and reserves, and Tier 2 capital comprises subordinated debt, real estate revaluation reserves and other equity components that comply with Basel II and the BNB requirements. The Bank's capital adequacy ratios comply with all requirements imposed by the BNB. See also " – Capital Adequacy Ratios" below.
According to the Consolidated Financial Statements, as at 30 June 2012 the Group's equity amounted to BGN 407.8 million, compared to BGN 383.8 million as at 31 December 2011, and BGN 322.4 million as at 31 December 2010, respectively. The increase of equity as at 31 December 2011 by 19.0 per cent. was primarily attributable to the profit generated by the Group. In order to support the rapid growth of the Bank's deposit base, outpacing its equity growth, in October 2011 the Controlling Shareholder through his wholly-owned company Bromak EOOD extended a six year unsecured subordinated loan of EUR 20 million (approximately equal to BGN 39.1 million) to the Bank and in June 2012 extended an additional six year unsecured subordinated loan of EUR 9 million (approximately equal to BGN 17.6 million).
In order for the Bulgarian banking system to maintain high capital buffers, the BNB currently recommends that the banks may distribute dividends in respect of their profits for 2011 only if they comply with at least one of the following requirements: a) their total capital adequacy ratio exceeds 15 per cent., or b) their Tier 1 capital adequacy ratio exceeds 13 per cent., or c) the complex CAMELOS rating rated by the Banking Supervision Department of the BNB in respect of the activities of the bank in 2011 is at least 2, or d) (in respect of subsidiary credit institutions only) Tier 1 capital adequacy ratio of the parent bank exceeds 9 per cent., i.e. the parent bank is not a subject to recapitalisation pursuant to the recommendation by the European Banking Authority. This recommendation makes it very difficult for the majority of Bulgarian banks, including the Bank, and local subsidiaries of foreign banks to distribute dividends to their shareholders.
Deposits
The Group views deposits, in particular from non-financial institutions and other customers, as its main funding source. From 1 January 2010 to 31 December 2011 the deposits of the Group doubled.
As at 30 June 2012, deposits from non-financial institutions and other customers amounted to BGN 3,665.5 million and comprised 89.5 per cent. of total liabilities of the Group, compared to BGN 3,383.2 million or 92.4 per cent. of total liabilities as at 31 December 2011 and BGN 2,164.5 million or 91.0 per cent. of total liabilities as at 31 December 2010. As at 30 June 2012, deposits from private individuals comprised 52.2 per cent. of total deposits from non-financial institutions and other customers and deposits from corporate customers comprised 47.8 per cent. of total deposits from non-financial institutions and other customers (compared to 43.7 per cent. and 56.3 per cent., respectively, as at 31 December 2011, and 41.3 per cent. and 58.7 per cent., respectively, as at 31 December 2010).
Term deposits and saving deposits comprise almost 81 per cent. of the total deposits of the Group as at 30 June 2012.
As at 30 June 2012, deposits from banks and other financial institutions amounted to BGN 242.2 million and comprised 5.9 per cent. of total liabilities of the Group, compared to BGN 146.5 million or 4.0 per cent. of total liabilities as at 31 December 2011 and BGN 160.9 million or 6.8 per cent. of total liabilities as at 31 December 2010.
For more information on the Group's deposits, see "Selected Statistical Information".
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Interbank Loans
The Bank has been granted the following loans from international and local banks: a EUR 21.0 million loan (equal to BGN 41.1 million) from Société Générale, Paris under a contract for target financing of small and medium enterprises; a EUR 18.3 million (equal to BGN 35.8 million) loan from Citibank, London; and a loan of over EUR 20.0 million (equal to BGN 39.1 million) from Bulgarian Development Bank under a programme for target financing of commercial banks to provide for medium-term, long-term and project financing of small and medium-sized enterprises. Another EUR 2.5 million loan (equal to BGN 4.9 million) has been granted by the German bank KFW, through the Bulgarian Development Bank under a programme for funding of SMEs. In addition, the Bank has been granted numerous commercial lines for documentary transactions from Italian, German, Austrian and Chinese banks.
As at 30 June 2012, loans from banks amounted to BGN 123.2 million and comprised 3.0 per cent. of total liabilities, compared to BGN 86.6 million or 2.4 per cent. of total liabilities as at 31 December 2011 and BGN 40.5 million or 1.7 per cent. of total liabilities as at 31 December 2010. The increase of the loans from banks as at 30 June 2012 as compared to their amount as at 31 December 2011 is due to the Citibank loan, which was taken in the beginning of 2012.
Capital Base and Capital Adequacy Ratios
Pursuant to the International Convergence of Capital Measurement and Capital Standards − A Revised Framework released by the Basel Committee on Banking Supervision ("Basel II", or the "New Basel Accord") and pursuant to the European directives on capital adequacy, the capital adequacy requirements are as follows:
• Total Capital Adequacy Ratio: total capital (Tier 1 capital and Tier 2 capital) of at least 8 per cent. of the bank's risk-weighted assets, and
• Tier 1 Capital Adequacy Ratio: Tier 1 Capital of at least 4 per cent. of the bank's risk-weighted assets.
However, the BNB has utilised its discretionary right to increase by up to 50 per cent. the Basel II capital adequacy requirements and currently the Bulgarian capital adequacy requirements are as follows:
• Total Capital Adequacy Ratio: at least 12 per cent. of the bank's risk-weighted assets, and
• Tier 1 Capital Adequacy Ratio: at least 6 per cent. of the bank's risk-weighted assets.
The manner of calculation of the banks' capital adequacy positions under the BNB requirements does not differ from that set forth by Basel II.
The table below sets out the capital base of the Bank on unconsolidated basis as at 30 June 2012, 31 December 2011 and 2010, respectively, calculated in line with the BNB regulations.
As at 30 June As at 31 December
2012 2011 2010
(BGN 000, except percentages)
Share capital ............................................................................. 60,000 60,000 60,000 Share premium ......................................................................... 48,500 48,500 48,500 Reserve Fund ............................................................................ 248,531 187,580 113,043 Audited current profit1 ............................................................. – 30,530 37,997 Other reserves ........................................................................... 135 135 135
Total capital and reserves ...................................................... 357,166 326,745 259,675
1 Since the net profit of the Bank for the first half of June 2012, amounting to BGN 23,794 thousand, has not been audited as at 30 June 2012, according to the BNB regulations it was not able to be included in the capital base of the Bank.
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As at 30 June As at 31 December
2012 2011 2010
(BGN 000, except percentages)
Deductions Unrealized loss on available-for-sale securities ....................... (1,852) (2,121) (3,429) Intangible assets ....................................................................... (334) (370) (365)
Total deductions ..................................................................... (2,186) (2,491) (3,794)
Total Tier 1 Capital ................................................................ 354,980 324,254 255,881
Revaluation reserve on property used by the Bank ................. 25,536 25,536 25,536 Subordinated term debt ............................................................ 56,719 39,117 –
Total Tier 2 Capital ................................................................ 82,255 64,653 25,536
Additional deductions to Tier 1 Capital and Tier 2 Capital Investments in shares and other participation .......................... (3,156) (165) (8,984) Specific provisions for credit risk ............................................ (15,146) (13,498) (10,456)
Total additional deductions to Tier 1 Capital and Tier 2 Capital ..................................................................................... (18,302) (13,663) (19,440)
Total capital base .................................................................... 418,933 375,244 261,977
Tier 1 Capital Adequacy Ratio ............................................. 10.22% 10.48% 11.88%
Total Capital Adequacy Ratio .............................................. 12.38% 12.39% 12.64%
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BUSINESS
Overview
Corporate Commercial Bank AD (the "Bank") is a universal bank organised as a joint-stock company under the laws of the Republic of Bulgaria. The Bank, together with its subsidiaries (the "Group") is focused on providing customised lending services to its corporate clients typically complemented by additional financial services such as trade finance, payments, payroll and investment services, as well as certain other business services delivered by the Bank's subsidiaries.
Historically, the Bank's corporate banking has been the core business of the Group. The Bank is particularly focused on building long-term relationships with large corporate customers, which are leaders in their respective industries. The Bank's target client groups also include fast-growing export oriented SMEs. The Bank's prevailing orientation is on companies engaged in export and companies with short production cycles, to which the Bank aims to provide a full range of services. In recent years, the Bank has been expanding its target client base to include high net worth individuals. The Bank has concentrated its efforts on strengthening its position in selected market segments which are of strategic importance not only to Bulgaria, but also to the region as a whole such as energy (including fuels trading), infrastructure constructions and the defence industry.
As calculated on the basis of the statistics published by the BNB, as at the end of 2011 the Bank was ranked third among the banks operating in Bulgaria in terms of net profit and seventh in terms of total assets. With respect to deposits from non-financial institutions, for 2011 the Bank was ranked seventh with a market share of 6.4 per cent. and with respect to loans to non-financial institutions the Bank was ranked fifth with a market share of 7.22 per cent. As at 30 June 2012, the Bank continued to rank seventh in terms of total assets with a market share of 5.7 per cent. and fourth in terms of net profit with a market share of 7.63 per cent. With respect to deposits from non-financial institutions in the end of the first half of 2012 the Bank continues to rank seventh with a market share of 6.9 per cent. and with respect to loans to non-financial institutions the Bank ranked fourth with a market share of 8.0 per cent.
The Bank is currently rated Ba3/NP/D-/stable outlook by Moody's Investors Service Cyprus Ltd. Moody's Investors Service Cyprus Ltd. is established in the EEA and registered under the CRA Regulation. The Bank was first rated by Moody's Investors Service Inc., USA, in 2008 and after 1 January 2010 by Moody's Investors Service Cyprus Ltd., Cyprus. The Bank’s ratings have remained unchanged since 2008.
In addition, the Bank is rated by the Bulgarian Credit Rating Agency, which in 2012 assigned to the Bank a BBB- long term rating and a A-3 short term rating, with a stable outlook. The ratings assigned by BCRA are recognised throughout the EU and they coincide with the rating scale used by Standard & Poors.
The Bank was incorporated by a resolution of the foundation meeting dated 28 May 1993 and entered in the Bulgarian commercial register as a result of the Sofia City Court resolution dated 6 May 1994. The Bank has its seat and registered address at 10 Graf Ignatiev Str., Sredets Region, 1000, Sofia, +359 2 93 75 607, [email protected]. The Bank is registered at the Bulgarian Registry Agency under identification number 831184677.
History
The Bank was established in 1994 as a joint venture of the Bulgarian Foreign Trade Bank (later renamed to Bulbank and, currently, UniCredit Bulbank) and The Bank for Foreign Economic Affairs of the USSR (Vnesheconombank) and has been granted banking licence No. 22 by the BNB. In 1995, the Bulgarian Foreign Trade Bank acquired the stake of Vnesheconombank and became holder of 99.9 per cent. of the Bank's shares.
In 2000, Bulbank (still state-owned) sold its stake in the Bank to private investors, including the Bank's current Controlling Shareholder Mr. Tzvetan Vassilev. At the time of its privatisation, the Bank was a small bank with marginal presence in the Bulgarian banking market. The new management team of the Bank (the
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core of which has remained unchanged) initiated a significant reorganisation of the Bank's structure and adopted new strategy, which set the foundation of the rapid growth of the Bank in the following years.
Since 2000, the registered capital of the Bank has been subject to five increases prior to the Bank's initial public offering in 2007 and the admission of its shares to trading on the Bulgarian Stock Exchange.
In 2009, a 30 per cent. stake in the Bank was acquired by the State General Reserve Fund of the Sultanate of Oman through Bulgarian Acquisition Company II, Luxembourg.
Market Position, Competition and Competitive Strengths
According to the BNB, as at the date of this Prospectus 31 banks were operating in Bulgaria, including 7 branches of foreign banks and 16 subsidiaries of foreign credit institutions. As at 30 June 2012, around three-quarters of the Bulgarian banking system's assets were controlled by foreign-owned banks (subsidiaries and branches of foreign banks, mainly from Greece, Italy and Austria). The top 5 banks (Unicredit Bulbank, Bank DSK, United Bulgarian Bank, Raiffeisenbank Bulgaria and First Investment Bank) control approximately 77 per cent. of the banking system's assets.
The Bank's market position, according to published BNB statistics, is shown below. These comparisons are based on the financial statements that banks prepare and submit to the BNB on an unaudited and unconsolidated basis (see "Presentation of Financial and Other Information - Bulgarian Banking System Data and Loans Classification Data").
Total Assets – Top 10 Bank Ranking
As at
30 June As at
31 December As at
30 June As at
31 December
2012 2011 2010 2012 2011 2010
(BGN’000) Market share (%)
UniCredit Bulbank ..................................... 12,174,929 11,906,377 11,275,640 15.3 15.5 15.3 DSK Bank................................................... 8,998,075 8,559,030 8,563,281 11.3 11.1 11.6 Raiffeisenbank (Bulgaria) .......................... 6,796,452 6,448,320 6,562,135 8.6 8.4 8.9 First Investment Bank ................................ 6,566,229 6,101,669 4,943,973 8.3 7.9 6.7 United Bulgarian Bank ............................... 6,553,897 6,715,464 7,460,917 8.3 8.7 10.1 Eurobank EFG Bulgaria ............................. 5,816,282 5,998,483 6,309,255 7.3 7.8 8.6 Corporate Commercial Bank .................. 4,500,385 4,043,060 2,699,427 5.7 5.3 3.7 Societe Generale Expressbank ................... 3,357,930 3,288,653 2,922,076 4.2 4.3 4.0 Central Cooperative Bank .......................... 3,117,050 3,003,354 2,285,083 3.9 3.9 3.1 Piraeus Bank Bulgaria ................................ 3,084,667 3,209,747 4,077,093 3.9 4.2 5.5
_______________ Source: The BNB
Total Equity – Top 10 Bank Ranking
As at
30 June As at
31 December As at
30 June As at
31 December
2012 2011 2010 2012 2011 2010
(BGN’000) Market share (%)
UniCredit Bulbank ..................................... 1,986,482 2,009,826 1,781,173 18.8 19.2 17.8 DSK Bank................................................... 1,439,385 1,321,779 1,541,065 13.6 12.7 15.4 United Bulgarian Bank ............................... 1,109,187 1,122,783 1,100,839 10.5 10.7 11.0 Raiffeisenbank (Bulgaria) .......................... 976,815 947,672 926,238 9.7 9.1 9.2 Eurobank EFG Bulgaria ............................. 791,325 794,671 782,424 7.5 7.6 7.8 Bulgarian Development Bank .................... 678,184 670,713 662,341 6.4 6.4 6.6 Piraeus Bank Bulgaria ................................ 625,932 618,430 563,628 5.9 5.9 5.6 First Investment Bank ................................ 492,992 477,044 439,763 4.7 4.6 4.4 Societe Generale Expressbank ................... 451,978 427,640 380,152 4.3 4.1 3.8 Corporate Commercial Bank .................. 406,958 383,098 320,403 3.9 3.7 3.2
_______________ Source: The BNB
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Net Profit – Top 10 Bank Ranking
As at
30 June As at
31 December As at
30 June As at
31 December
2012 2011 2010 2012 2011 2010
(BGN’000) Market share (%)
DSK Bank................................................... 116,931 85,318 130,579 36.2 14.6 21.2 UniCredit Bulbank ..................................... 95,936 232,041 158,744 29.7 39.6 25.7 Raiffeisenbank (Bulgaria) .......................... 29,379 51,036 44,214 9.08 8.7 7.2 Corporate Commercial Bank .................. 24,669 60,951 74,367 7.6 10.4 12.1 Societe Generale Expressbank ................... 23,894 47,262 30,064 7.4 8.1 4.9 First Investment Bank ................................ 15,260 36,503 30,838 4.7 6.2 5.0 Bulgarian Development Bank .................... 12 794 11,412 28,740 4.0 1.9 4.3 ProCredit Bank Bulgaria ............................ 9 430 8 388 3,378 2.9 1.4 0.5 Citibank NA – Sofia Branch ...................... 8.673 13,904 21,237 2.7 2.4 3.4 Piraeus Bank Bulgaria ................................ 7,726 52,933 44,053 2.4 9.0 7.1
_______________ Source: The BNB
Loans to non-financial institutions * – Top 10 Bank Ranking
As at
30 June As at
31 December As at
30 June As at
31 December
2012 2011 2010 2012 2011 2010
(BGN’000) Market share (%)
UniCredit Bulbank ..................................... 6,307,495 6,004,339 5,652,902 16.5 16.3 16.3 First Investment Bank ................................ 3,734,078 3,501,558 2,757,507 9.8 9.5 7.9 Raiffeisenbank (Bulgaria) .......................... 3,537,075 3,614,710 3,320,443 9.3 9.8 9.6 Corporate Commercial Bank .................. 3,046,170 2,667,860 1,699,041 8.0 7.2 4.9 United Bulgarian Bank ............................... 2,914,275 2,877,209 3,480,177 7.6 7.8 10.0 Eurobank EFG Bulgaria ............................. 2,574,714 2,574,468 2,437,065 6.8 7.0 7.0 Piraeus Bank Bulgaria ................................ 2,238,257 2,313,800 2,554,414 5.9 6.3 7.4 DSK Bank................................................... 2,173,934 2,145,066 2,028,362 5.7 5.8 5.8 Societe Generale Expressbank ................... 1,884,382 1,804,300 1,651,103 4.9 4.9 4.8 Central Cooperative Bank .......................... 1,312,915 1,199,932 919,113 3.4 3.3 2.6
_______________ Source: The BNB * Loans to non-financial institutions include: loans to corporate and loans to non-credit institutions.
Deposits from non-financial institutions* – Top 10 Bank Ranking
As at
30 June As at
31 December As at
30 June As at 31
December
2012 2011 2010 2012 2011 2010
(BGN’000) Market share (%)
UniCredit Bulbank .................................... 7,592,508 7,288,420 6,539,298 13.9 13.8 13.9 DSK Bank.................................................. 6,639,739 6,441,466 5,994,022 12.1 12.2 12.8 First Investment Bank ............................... 5,740,644 5,286,891 4,205,020 10.5 10.0 9.0 Eurobank EFG Bulgaria ............................ 4,591,248 4,717,748 4,641,511 8.4 8.9 9.9 Raiffeisenbank (Bulgaria) ......................... 4,478,681 4,355,199 4,116,116 8.2 8.3 8.8 United Bulgarian Bank .............................. 4,419,107 4,310,575 4,400,704 8.1 8.2 9.4 Corporate Commercial Bank ................. 3,790,061 3,377,344 2,260,483 6.9 6.4 4.8 Central Cooperative Bank ......................... 2,671,276 2,576,830 1,924,786 4.9 4.9 4.1 Societe Generale Expressbank .................. 2,066,243 2,045,994 1,697,449 3.8 3.9 3.6 Alianz Bank Bulgaria ................................ 1,583,420 1,393,087 1,283,968 2.9 2.6 2.7
_______________ Source: The BNB
* Deposits from non-financial institutions include: deposits from companies other than credit institutions and deposits from individuals and households.
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Return on Equity – Top 10 Bank Ranking
As at
30 June As at
31 December
2012 2011 2010
(%)
DSK Bank............................................................................................................................. 16.25 6.45 8.47 ProCredit Bank Bulgaria ...................................................................................................... 13.03 6.20 2.67 Corporate Commercial Bank ............................................................................................ 12.12 15.91 23.21 Societe Generale Expressbank ............................................................................................. 10.57 11.05 7.91 UniCredit Bulbank ............................................................................................................... 9.66 11.55 8.91 First Investment Bank .......................................................................................................... 6.19 7.65 7.01 Raiffeisenbank (Bulgaria) .................................................................................................... 6.02 5.39 4.77 Allianz Bank Bulgaria .......................................................................................................... 4.12 7.54 2.52 Municipal Bank .................................................................................................................... 3.82 4.62 3.03 Bulgarian Development Bank .............................................................................................. 3.77 1.70 4.34
_______________ Source: The BNB
Return on Assets – Top 10 Bank Ranking
As at
30 June As at
31 December
2012 2011 2010
(%) Citi Bank N.A. – Sofia Branch ........................................................................................... 2.68 2.52 4.29 DSK Bank............................................................................................................................ 2.60 1.00 1.52 UniCredit Bulbank .............................................................................................................. 1.58 1.95 1.41 Bulgarian Development Bank ............................................................................................. 1.56 0.61 2.09 ProCredit Bank Bulgaria ..................................................................................................... 1.44 0.67 0.29 Societe Generale Expressbank ............................................................................................ 1.42 1.44 1.03 Corporate Commercial Bank ........................................................................................... 1.10 1.51 2.75 Raiffeisenbank (Bulgaria) ................................................................................................... 0.86 0.79 0.67 T. C. Ziraat Bankasi – Sofia Branch ................................................................................... 0.60 (0.25) (1.64) Piraeus Bank Bulgaria ......................................................................................................... 0.50 1.65 1.08
_______________ Source: The BNB
As at 30 June 2012, the Bank ranks fifth by cost-income ratio (calculated as administration costs plus depreciation, divided to interest income and financial and operating income and expenses after deduction of impairment losses and provisions) with 35.1 per cent., compared to 72.71 per cent. cost-income ratio for the banking system in Bulgaria.
Competitive Strengths and Strategies
There is significant competition between the banks operating in Bulgaria. However, the Bank believes that it is well positioned within the Bulgarian banking market due to its:
Lending Focus on Large Corporate Customers in Strategic Economic Sectors
The Bank is a universal commercial bank with its corporate banking making up a significant portion of its assets and liabilities. Servicing large companies, which are leaders in their respective industries, has historically been the core business of the Bank. According to the Bank's data, a considerable portion of the Bank's corporate customer base comprises prominent business brands operating in energy, infrastructure, construction and export oriented sectors, which the Bank considers to be relatively low risk economic sectors..
The Group considers retail lending operations in Bulgaria to bear high risk and, in contrast to most other banks in Bulgaria, is not actively involved in retail banking operations, except deposit taking activities. In line with this, according to the Bank's data, as at 30 June 2012 retail loans account to only 0.7 per cent. of
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the Bank's total loan portfolio. However, as of 30 June 2012, retail deposits comprise 48.9 per cent. of Bank's total deposits and 52.2 per cent. of Bank's total deposits to non-financial institutions and other customers.
Focus on Individual Approach and Building Long-lasting Relationships with Customers
The Bank offers its customers a broad range of banking services and products in addition to lending products, such as trade finance products, investment banking and pay-roll services, but it believes its main advantage is providing tailored solutions to meet its corporate customers' needs. All lending products are customised to a particular borrower's needs. Credit extensions are based on an in-depth understanding of the client and its business, rather than relying solely on standardised credit scoring criteria. Furthermore, the Bank aims at building long-lasting mutually beneficial relationships with its corporate clients, going beyond pure lending operations and including comprehensive servicing and support of clients' businesses.
The Bank believes that its individual approach to customers and understanding of their needs, as well as prompt and flexible services are important advantages, in particular with respect to the larger foreign-owned banks operating in Bulgaria. The Bank believes that it has strong positions in the energy sector (serving most of the main sector's players like powerplants, mines and fuel companies, and their suppliers and customers) and in-depth knowledge of the industry, allowing it to offer comprehensive services at highly competitive price, thus saving time and money for its customers.
Conservative Lending and Risk Management Policies Resulting in High Asset Quality
The Bank's conservative lending policy and credit risk assessment and monitoring systems have enabled it to maintain a low ratio of non-performing loans. The Bank's non-performing loans (past due over 90 days) accounted for 1.6 per cent. of the total loan portfolio as at 30 June 2012 compared to over 16 per cent for the banking system. As at 31 December 2011 and as at 31 December 2010 non-performing loans were 0.4 per cent. and 0.2 per cent. respectively. As at 30 June 2012 4.8 per cent. of the Bank's outstanding loans to non-financial institutions were other than "Standard", compared to approximately 24.3 per cent. for the banking system according to the statistics published by the BNB.
To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk, the Bank applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. More specifically, the Bank maintains two types of credit ratings to its borrowers – internal rating and complex rating, the latter being reviewed and updated on a monthly basis. The Bank measures total business risk or risk of change in external factors for credit borrowers, specific (non-systemic) risk reflecting the management quality and borrower's financial stability, as well as an assessment of risk based on the Bank's historical experience relating to that customer. The Bank's credit portfolio stress tests are based on its individual borrowers' status and not just on an aggregate basis. Stress tests scenario and incoming data are subject to monthly review and update. In addition, each loan is analysed in the context of the overall risks borne by the Bank, which comprise assessment on the loan impact on the Bank's capital and the maturity structure of its loan portfolio.
Shareholder Support
Historically, the Controlling Shareholder has provided financial support to the Bank in the form of equity capital injections and two subordinated loans to maintain and increase its capital base and grow its business. The Bank has been dependent on such support for its growth.
Stable, Qualified and Motivated Management and Staff
Senior management has extensive expertise and knowledge in the financial services sector and Bulgarian business environment. A considerable part of the Bank's senior management team and staff have been at the Bank for a significant length of time and have gained considerable experience in their respective areas.
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Profitability
Based on statistics published by the BNB, in 2011 the Bank ranked third for the year ended 31 December 2011 and fourth for the six-month period ended 30 June 2012 in terms of net profit among banks operating in Bulgaria. Despite the rapid growth of its asset base, profitability indicators of the Bank remain among the highest in the market: for the six-month period ended 30 June 2012 and for the periods ended 31 December 2011 and 2010 the Bank's return on assets was 1.2 per cent., 1.8 per cent. and 3.3 per cent. respectively (as compared to 0.8 per cent., 0.8 per cent. and 0.8 for the banking system according to statistics published by the BNB), and its return on equity was 12.2 per cent., 16.9 per cent., 25.3 per cent. respectively (as compared to 6.1 per cent., 5.6 per cent. and 6.2 for the banking system according to statistics published by the BNB). See also "Financial Review – Factors Affecting Results of Operations – Effect on Strategy Focused on Large Customers and Profitable Assets Growth".
Asset Quality
The Bank's conservative lending policy and credit risk assessment and monitoring systems have helped to maintain a low ratio of non-performing loans. The Bank's non-performing loans (past due over 90 days) accounted for 1.6 per cent. of total loan portfolio as at 30 June 2012 compared to over 16 per cent for the banking system. As at 30 June 2012, as presented according to the IFRS, the Bank's loans other than "Standard" were 2.16 per cent. of its outstanding loans (according to the BNB Ordinance No. 9 classification, the Bank's loans other than "Standard" were 4.8 per cent., compared to approximately 24.3 per cent. for the banking system according to the statistics published by the BNB). See more details in "Results of Operations for the Years Ended 31 December 2011 and 2010 and for the Six Months Ended 30 June 2012 and 2011 – Net Impairment Losses" below and in "Asset, Liability and Risk Management – Credit Risk – Risk Exposures".
Cost Efficiency
Since the Bank's focus is on the corporate sector and in particular, on large corporate customers, the Bank achieves significant economies of scale by managing sizable financial resources with optimal number of personnel and offices. The Bank's cost to income ratio was 35.1 per cent., 36.8 per cent. and 31.5 per cent. (as compared to 72.7 per cent., 74.7 per cent. and 73.5 per cent. for the Bulgarian banking system (Source: BNB's statistic information) for the first half of 2012 and for the years ended 31 December 2011 and 2010, respectively. See also "Financial Review – Factors Affecting Results of Operations – Effect on Strategy Focused on Large Customers and Profitable Assets Growth".
Strategy
The Group's overall strategy is to focus on large corporate clients operating in key sectors such as energy, infrastructure and export oriented activity. In general, the Group does not lend to retail customers, but in order to diversify its deposit base is offers deposit products to retail customers, in particular to high net worth individuals.
In pursuit of its strategy, the Group seeks to achieve the following:
Development of its Corporate Banking Profile and Targeted Customer Base While Maintaining Asset Quality
Historically, the Bank has sought to establish a corporate client base primarily consisting of prominent commercial enterprises in order to maintain the quality of its loan portfolio (see "Market Position, Competition and Competitive Strengths – Competitive Strengths - Focus on Large Corporate Customers in Strategic Economic Sectors"). Now the Bank aims at continuing to strengthen its relationships with the current corporate customers and further develop its large corporate client base. The Bank actively seeks to expand specific areas of its corporate banking services including project finance and SMEs finance, in particular to enterprises with export activities or short production cycles. In addition, the Bank intends to further strengthen its position in serving high net worth individuals, possessing medium and long-term savings. At the same time, the Bank is committed to maintaining high asset quality by placing a strong
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emphasis on conservative risk management policies and further enhancing its capital base to provide sufficient risk coverage.
Sustained Development of the Bank's Asset Base by Improvement of Customer Service and Building Long-lasting Relationships with Corporate Clients
The Bank is particularly focused on its relationships with corporate customers, to whom it aims to provide a full range of services, including a personal approach, prompt and quality services, and a comprehensive and competitive product range tailored to the specific clients' needs (see "Market Position, Competition and Competitive Strengths – Competitive Strengths - Focus on Individual Approach and Building Long-lasting Relationships with Customers. The Bank continuously improves its information technology systems as it recognises that these are key to ensuring low-cost and high quality services to its clients and developing remote banking as a preferred distribution channel. In addition, the Bank recognises that its employees at every level are a crucial component of its competitive advantage in the marketplace and, therefore, pays particular attention to upgrading its employee selection, training and motivation policies.
While the Bank believes that the strategy set out above is adequate in light of its mission and targets, the Bank regularly reviews its strategy to adjust it to the changes and opportunities in the business environment.
Group Structure
The Bank is the parent company within the Group and has three subsidiaries as listed below:
Subsidiary Country of incorporation Holding of the Bank (%)
Velder Consult OOD .................................. Bulgaria 99.93 Dar 02 OOD ............................................... Bulgaria 90.00 CCB Asset Management AD ..................... Bulgaria 51.00 Set out below is a brief description of these subsidiaries:
Velder Consult OOD
Velder Consult OOD was established in 2007 for the purpose of assisting the Bank's clients by providing advisory services and project management services related to EU funded programmes.
Minority shareholders in Velder Consult OOD are Ivan Petrov Djidjev and Valentin Kirov, holding 0.04 per cent. and 0.03 per cent., respectively, of the registered capital of the company.
Dar 02 OOD
Dar 02 OOD was founded in 2002 because the Bank decided to separate the activities related to physical security of its buildings, premises and other property. The company provides services in the security sector to the Bank as well as to some of the Bank's clients. The company has the necessary permits issued by the Bulgarian Ministry of Interior Affairs, through the National Service "Police" for performance of these activities.
Minority shareholders in Dar 02 OOD are Hristo Dinev Petkov and Ognjan Todorov Vylchev, each of them holding 5.00 per cent. of the registered capital of the company.
CCB Asset Management AD
CCB Asset Management AD was founded in 2007 to offer asset management services. Its scope of activities includes management of collective investment schemes, management of individual portfolios of financial instruments and investment advice regarding financial instruments. The company was licensed by the Bulgarian Financial Supervision Commission in 2007. In 2008, it was granted permissions to organise and manage two contractual (mutual) funds (CCB Equity Fund and CCB Balanced Fund) by the Bulgarian
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Financial Supervision Commission. In the end of July 2012, CCB Asset Management AD also obtained a permission to organise and manage a money market fund (CCB Money Market Fund).
Minority shareholders in CCB Asset Management AD are Orlin Nikolov Roussev, Terradjuni EOOD and Trajan Antonov Karshutski, holding 16.34 per cent., 16.33 per cent. and 16.33 per cent., respectively, of the registered capital of the company.
Dependence of the Bank on its Subsidiaries
The Bank does not depend on its subsidiaries, which are either involved in rendering complementary services to the Bank's customers (in particular, Velder Consult OOD and Dar 02 OOD) or financial services, which cannot be directly provided by the Bank because of regulatory reasons such as mutual funds management (effected by CCB Asset Management AD).
As shown in the table below, the share of the Bank's subsidiaries in the total assets, total income and net profits of the Group is insignificant.
Six months ended
30 June Year ended
31 December
2012 2011 2010
(BGN 000) (%) (BGN 000) (%) (BGN 000) (%)
Velder Consult OOD - total assets ................................................. 3,163 0.07 923 0.02 2,686 0.10 - total income ............................................... 76 0.10 374 0.31 2,413 1.94 - net profit(loss) ........................................... (61) (0.25) 41 0.07 1,958 2.66 Dar 02 OOD - total assets ................................................. 555 0.01 496 0.01 379 0.01 - total income ............................................... 1,609 2.10 2,550 2.14 2,081 1.68 - net profit(loss) ........................................... 14 0.06 (3) (0.01) 1 – CCB Asset Management AD - total assets ................................................. 388 0.01 498 0.01 433 0.02 - total income ............................................... 190 0.25 544 0.46 458 0.37 - net profit(loss) ........................................... 37 0.15 110 0.18 83 0.11 The Group - total assets ................................................. 4,501,450 100.00 4,044,378 100.00 2,702,755 100.00 - total income ............................................... 76,679 100.00 119,110 100.00 124,093 100.00 - net profit(loss).......................................... 24,603 100.00 59,878 100.00 73,610 100.00
Potential Acquisitions
The management of the Bank may from time to time consider certain acquisitions in the region in order to expand its banking network and/or diversify its operations.
In particular, the Bank is considering a possible acquisition of a financial institution in the South Eastern European region. Such acquisition would add less than five per cent of the current asset value of the Bank. Consideration of such acquisition is at an early stage and there is no assurance that a transaction will take place.
Also, the Bank and VTB Capital Plc. entered into an agreement with the Bulgarian Telecommunications Company AD ("BTC"), its parent company and the creditors, to implement the BTC group recapitalisation and restructuring through an English law scheme of arrangement. The scheme of arrangement was sanctioned by the court on 6 September 2012. Subject to the satisfaction of all conditions precedent the restructuring is expected to be completed in 2012. As a result of this arrangement, the Bank may acquire an equity stake in BTC, which would be for the purposes of investment only and the Bank would not be involved in the operations of BTC. The Bank may also provide financing to BTC, subject to compliance with all applicable regulatory provisions. There is no assurance that such acquisition will proceed.
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Principal Business Activities
The Group's core business is corporate lending, which is highly customised and typically complemented by a range of ancillary services that include, among others, investment services, documentary credit services, cards, payments (domestic and cross-border) and correspondent banking. Certain financial, consultancy and other services to the Bank’s corporate customers are delivered by its subsidiaries (see above " – Group Structure").
However, on the funding side, the Bank accepts deposits both from corporate and retail customers and in recent years has aimed to increase its retail deposits in order to further diversify its deposit base.
Corporate Business
Corporate Lending
The Bank's lending activities are almost exclusively related to the corporate sector, which accounts for approximately 99 per cent. of the total loan portfolio of the Bank. Even during the global financial and economic crisis the Bank achieved growth of its loan portfolio. As at 30 June 2012 total loans (before allowances for impairment losses) amounted to BGN 3,007.3 million (including BGN 2,986.6 million in respect of loans to corporate customers loans), compared to BGN 2,651.6 million (including BGN 2,632.2 million in respect of loans to corporate customers) as at 31 December 2011 and BGN 1,673.4 million (including BGN 1,657.8 million in respect of loans to corporate customers) as at 31 December 2010.
The Bank's policy is to fund large and reputable corporate clients, which are perceived as market leaders and relatively low risk borrowers, and to carefully select projects it chooses to finance. In addition, the Bank plans to further develop its portfolio of lending to export oriented SMEs. The only loan products specifically targeted to individuals are loans to employees of the Bank's corporate customers (overdrafts on card accounts) and loans to employees of the Bank. Total loans to individuals stand at 1 per cent. of the Bank's loan portfolio, according to the Bank's operational data.
Like other banks focused on corporate lending, its loan exposures are relatively concentrated. The share of the ten largest Exposures on a group basis in the Group's total loan portfolio (before allowances for impairment losses) amounted to 18.6 per cent. of the total loan portfolio as at 30 June 2012. Also, as at 30 June 2012, 31 December 2011 and 2010, the Group's largest 20 Exposures comprised 33.6 per cent., 36.0 per cent. and 37.8 per cent., respectively, of the Group's total loans to customers (before allowances for impairment losses).
The Bank provides primarily custom-made loans to its customers as it views a loan extension not as a single operation, but as an element in an integral financial service designed to meet the specific needs of its clients. The size, pricing, term and amortisation schedule of each loan is customised to meet the individual circumstances of the borrower and its projected cash flows. Typically, the Bank's loans are extended for financing of particular projects, construction and renovation of non-current assets, acquisition of businesses and stakes in companies. The Bank also extends working capital loans for acquiring current assets, covering the shortage of clients' working capital in making a particular transaction, as well as for covering costs incurred in the client's core activity. The Bank requires from the borrowers and typically from their shareholders as a security for the loans granted real estate mortgages, as well as pledges of movables, securities and receivables. In addition, the Bank requires from the borrowers and/or third parties personal guarantees like promissory notes and sureties. Depending on circumstance, corporate loans are extended in the form of standard loans, credit lines, revolving credits, overdraft facilities or a combination of these.
Complementary Services
In response to requests from borrowers and in line with its strategic plans, the Group also provides a range of general banking services, including payment services, trade finance, investment services, debit cards and public vault services. Such services are principally rendered to corporate clients of the Group, as well as to their managers and employees; however, some of these services (such as payment and investment services, cards and vault services) are also available to other depositors of the Bank.
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• Payment Services
The Bank makes domestic and international payments through direct participation in clearing systems or international prime-rate correspondent banks. The Bank's current account service allows its clients to make and receive non-cash transfers in national and foreign currency, including automatic payment of utility bills. A current account may be opened at any branch or sub-branch of the Bank. The Bank employs an integrated accounting and information system operating in real time which enables transactions in current account funds from any financial centre, as well as through internet banking which is accessible to be conducted worldwide. As an alternative to wire transfers, the Bank offers cheque services (issuance and collection).
• Trade Finance
As part of its corporate banking business, the Bank issues letters of credit and guarantees on behalf of its clients. The Bank provides pre-export financing and import financing. It has been granted numerous commercial lines for documentary transactions from Italian, German, Austrian and Chinese banks and has financed transactions secured by the Czech export-import agency. The Bank intends to further expand its trade financing activities.
• Investment and Foreign Exchange Services
The Bank holds a licence for rendering investment services and is a member of the Bulgarian Stock Exchange and the Bulgarian Central Depository. As such, the Bank offers standard brokerage services, underwriting and custody services, investment and other related advice to its clients. The Bank also renders foreign exchange services and has been granted foreign exchange lines by its foreign partners in the money and foreign exchange markets.
In addition, the Bank is engaged in proprietary trading in debt securities and other financial instruments.
• Debit and Credit Cards
The Bank launched its debit card business in 2001 with a national Maestro type card. Since 2004, the Bank has also offered different types of Visa debit cards and since 2009 the Bank has offered VPay debit cards. Debit cards can be set up with or without an overdraft. As at 30 June 2012, the Bank had around 161,500 active debit cards (both BORIKA and VPAY). Also, as at 30 June 2012, the Bank operated 60 ATMs and 205 POS terminals. In addition, the Bank also offers VISA credit cards but this business is supplementary and does not materially contribute to the Bank's income.
• Public Vault Services
The Bank offers to its clients public vault services. Clients can keep valuables and other articles in safe deposit boxes of various sizes.
Deposit-taking
The Bank actively pursues deposits as a principal funding source. Since the beginning of 2010, its deposit base nearly doubled, mainly due to the increase in deposits from non-financial institutions. As at 30 June 2012, total deposits from non-financial institutions amounted to BGN 3,665.5 million (including BGN 1,753.5 million from corporate customers and BGN 1,912 million from retail clients), as compared to BGN 3,383.2 million (including BGN 1,905.1 million from corporate customers and BGN 1,478.1 million from retail clients) as at 31 December 2011 and BGN 2,164.5 million (including BGN 1,269.6 million from corporate customers and BGN 894,8 million from retail clients), as at 31 December 2010. Deposits from banks and other financial institutions increased by 95.7 million or 65.3 per cent. from BGN 146.5 million as at 31 December 2011 to BGN 242.2 million as at 30 June 2012, but remained an insignificant part of total liabilities – 5.9 per cent.
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Since customer deposits are the main source of funding for the Group's activities, the Bank attracts deposits from both corporate and retail customers, competing for these funds with other banks in Bulgaria. The share of deposits from retail customers increased over the last 2 financial years and the first six months of 2012 following the Bank's management policy for offering relatively higher interest rates on retail deposit products, thus aiming for further diversification of the Bank's funding base. Their share gradually increased from 41.9 per cent. of total deposits from non-financial institutions as at 31 December 2010 up to 43.7 per cent. as at 31 December 2011 and 52.2 per cent. as at 30 June 2012, respectively.
The Bank's deposit-taking services include repayable on-demand and term deposits denominated in BGN, EUR and/or USD. Approximately three-quarters of deposit accounts are term and saving deposits. As at 30 June 2012, the bank's demand and saving deposits (without deposits from banks but plus deposits from other financial institutions) amounted to BGN 2,235.5 million, while term deposits accounted for BGN 1.568.8 million.
Deposit products are the only structured products of the Bank. The Bank is currently marketing six deposit products, including a rolling four-month term deposit, a flexible high interest demand deposit, a deposit pegged with investments in AAA-rated bonds and a children's savings account. Since the Group is targeting depositors with relatively high financial status, all deposits have a minimum required amount of deposited funds which is usually 1,500 currency units. A common feature of the Bank's deposit products is their flexibility and relatively high interest rate compared to similar products on the market.
Interest rates payable by the Bank on deposits depend on the currency and the amount of deposited funds. Demand deposits bear a low interest rate and may be withdrawn at any time. Time deposits are offered on fixed terms at higher interest rates. Notwithstanding the fixed term, under current Bulgarian law, time deposits may be withdrawn at any time, but if this occurs before maturity the interest rate is reduced. For certain large deposits, the Bank's treasury department negotiates rates on a case-by-case basis and offers customised deposit terms.
New Services
The Group is planning to offer mobile payment services through Celum Bulgaria AD, which is a joint-venture between the Group and two Hungarian companies. The Bank holds directly and indirectly (through its subsidiary Velder Consult OOD) 50 per cent. in the capital of Celum Bulgaria AD, which was established in December 2011.
Celum Bulgaria AD will be offering services in the field of mobile payments, trading through mobile devices (telephone). Celum Bulgaria AD may become the first company that shall offer this type of payment services in Bulgaria and the Bank believes that the company shall benefit from the experience of the Hungarian partners in the joint-venture that have successfully developed this type of activities in Hungary.
Distribution Network
The Bank serves its clients through its head office, 26 financial centres (branch offices) and 28 remote working stations ("RWS"), whereas each RWS is subordinated to the relevant financial centre. Financial centres are headed by managers who report to the Executive Directors of the Bank. The Bank's head office is in Sofia, and it maintains financial centres (branch offices) in all major Bulgarian economic centres including the cities of Varna, Plovdiv, Bourgas, Stara Zagora and others. All branch offices and RWS provide full bank services to their clients.
The Bank does not plan to aggressively expand its distribution network as many of its larger competitors have done. Instead, the Bank prioritises further development of remote banking services, supplemented by a careful increase in the number of its branch/sub-branch offices.
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Employees
As at 30 June 2012, the Group had 839 employees (502 of them being employees of the Bank), as compared to 795 employees as at 31 December 2011 (481 employees of the Bank). The number of employees of the Group has not changed materially since 30 June 2012.
As at 30 June 2012, the number of the employees of the Group and each company within the Group was as follows:
The table below presents the number of employees employed by the Group as at 31 December 2011 and 2010 and as at 30 June 2012.
As at 30 June As at 31 December
2012 2011 2010
The Bank ............................................................................................................. 502 481 456 Dar 02 EOOD ...................................................................................................... 322 300 235 CCB Asset Management AD .............................................................................. 9 8 9 Velder Consult OOD ........................................................................................... 6 6 6
Total .................................................................................................................... 839 795 706
For the six months ended 30 June 2012 the Group's personnel costs (including wages, salaries and related social and health security contributions, as required by applicable law) amounted to BGN 10,108 million, or 37.6 per cent. of its total administrative expenses (depreciation included), as compared to BGN 8,497 million, or 41.8 per cent. of its operating expenses for the six months ended 30 June 2011. The Group's personnel cost for the year ended 31 December 2011 and for the year ended 31 December 2010 were BGN 18.6 million and BGN 15.6 million respectively, or 42.4 per cent. and 39.8 per cent. of the Group's operating expenses, respectively.
Pursuant to the shareholders' agreement, the salaries were not increased in 2009 and 2010. Therefore, in 2011 the salaries were increased, including for the purpose of reflecting the inflation for the period of the two preceding years.
The Bank believes that its employees play a key role in the development of its business and the achievement of common corporate goals and consequently pays special attention to the development of general strategy and policies regarding human resources management. The Bank's policies in this regard are aimed towards achieving responsibility and commitment from its personnel towards the performance of assigned tasks and goals.
The Bank applies certain criteria to selection of personnel and has a professional and motivated team capable of pursuing defined strategic and operational goals. The Bank invests in various training programmes for its employees, providing opportunities for professional growth.
As far as the Bank is aware, none of its employees are members of a trade union. The Bank has not experienced any industrial action on the part of its own staff.
Information Technology
The primary banking system of the Bank is based on MS SQL – a database which automates all banking operations. The Bank maintains a fully equipped chief IT centre and a subsidiary IT centre, both located in Sofia. The two centres are connected via a reserved and encrypted connection. Such connection exists also between the head office of the Bank and all other offices, as well as between the Bank and the BNB, the Bulgarian Stock Exchange and other institutions.
The Bank has backup and disaster recovery policies. The Bank has an off-site backup and recovery centre. Core system's database backups are performed every three minutes, thus ensuring full database recovery. In the event that the main servers and storage shut down, the time for switching to the back-up system is less than 30 minutes.
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The Bank uses a range of modern programmes for protection against viruses and all kinds of IT threats and for that purpose on-going monitoring is carried out. The Bank ensures secured access to the internet and e-mail to provide protection against spam. In addition, the Bank has implemented an emergency plan in case of the failure of computer systems or communications. The head office is supported by a diesel generator and the other offices are supported by powerful uninterruptible power supply (UPS) devices which allow the working process to continue in the event of power outage.
The Bank aims to maintain an IT infrastructure that is modern and appropriate to its scale of activities. Workstations and servers are consistently replaced and updated.
Insurance
The Bank believes that the Group's insurance policies use standard terms that are consistent with industry practice in Bulgaria and that are appropriate to protect the Group from material losses in light of the activities it conducts.
In particular, the Bank's fixed assets and electronic equipment are covered by general insurance arrangements covering normal risk. Property and building insurance in respect of material damage (an "All Risks Policy") are effective in respect of the Bank's main building and office buildings, owned by the Group. Real estate which is provided as security for loans provided by the Bank is required to be covered by fire and asset protection.
In common with other banks in Bulgaria, the Bank does not have business interruption insurance.
Litigation
The Bank is involved in litigation that arises in the ordinary course of its banking business. However, as of the date of this Prospectus and for the 12 months preceding the date of this Prospectus, the Bank and its subsidiaries are not involved in any governmental, legal or arbitration proceedings pending, instituted or decided or threatened against the Bank or any of its subsidiaries, which may have or have had in the recent past, significant effects on the financial position of the Bank or the Group or their operating results. The Bank is not aware of any threatened governmental, legal or arbitration proceedings that could have a material adverse effect on the Group's financial position or operating results.
Allegations for Unlawful State Aid to the Bank
The European Commission has received allegations that the government of the Republic of Bulgaria may have provided unlawful state aid to the Bank related to deposits made with the Bank by state-owned companies. The Ministry of Finance of the Republic of Bulgaria has responded to the questions of the European Commission and the Bank has been fully cooperating with that process so far and will continue to cooperate in the future, if necessary. The European Commission is dealing directly with the Ministry of Finance since the allegations are focused on the Republic of Bulgaria and not the Group.
The response of the government of the Republic of Bulgaria, given by the Ministry of Finance, including also the position of the BNB, the respective state-owned companies and of the Bank itself, has been that all deposits with the Bank of state-owned companies have always been made in compliance with all applicable laws, regulations and good practices, and in particular with the principles of fair competition.
Since the inquiry is directly with the Republic of Bulgaria, and the Bank considers the above allegations to be unfounded, and, therefore, that any further action is unlikely to be taken, the Bank has not made, and does not intend to make, any provision in its accounts in respect thereof.
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MANAGEMENT
Management Structure
The following chart sets out the Bank's principal organisational structure.
GENERAL MEETING OF SHAREHOLDERS
MANAGEMENT BOARD
SUPERVISORY BOARD
Executive Directors
Central Office Management
Branch Offices Management
Specialized Internal Audit Administration
Credit Committee
Operational Risk Management Board
Procurators
Audit Committee
Liquidity Management Committee
Investment Services Internal Control Department
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The Bank has a corporate governance structure, which is typical for a Bulgarian bank: it is governed by its shareholders through their annual general meeting ("AGM") and extraordinary general meeting ("EGM", and together with AGM, the "General Shareholders’ Meetings"), its supervisory board (the "Supervisory Board") and its management board (the "Management Board").
A brief description of the General Shareholders' Meetings, the Supervisory Board and the Management Board is set out below.
General Shareholders' Meetings
The General Shareholders' Meetings are the supreme governing and management body of the Bank. An AGM must be held every year (not later than 6 months after the end of the fiscal year) and an EGM can be called by the Management Board. An EGM can also be called by the Supervisory Board or by shareholders holding at least 5 per cent of the registered capital of the Bank.
The authority of the General Shareholders' Meetings includes:
• Amendment or supplement to the Bank's Articles of Association;
• Increase or decrease of the Bank's share capital;
• Reorganisation or termination of the Bank;
• Election and early termination of the tenure of members of the Supervisory Board and the members of the Audit committee;
• Determination of the remuneration of the members of the Supervisory Board and the members of the Management Board, as well as the applicable term for which they are owed by the Bank;
• Election of the auditors;
• Approval of the annual reports and financial statements of the Bank;
• Issuance of bonds as well as their conversion into shares and redemption of shares by the Bank;
• Distribution of the Bank's profits (including payment of dividends);
• Release from liability of the members of the Supervisory Board and Management Board;
• Approval of certain major transactions or interested party transactions;
• Election and early termination of the head of the specialised internal audit department of the Bank and determination of his/her remuneration;
• Appointment of the liquidators upon the Bank's winding-up, except in the case of a mandatory winding-up or bankruptcy;
• All other matters within its competence as set forth by the applicable Bulgarian law (including the Bulgarian Commercial Act 1991, as amended and the Bulgarian Public Offering of Securities Act 2000, as amended) or the Bank's Articles of Association.
The powers listed above lie within the exclusive scope of the authority of the General Shareholders' Meetings and may not be delegated to the other governing bodies of the Bank.
Supervisory Board
The Supervisory Board approves certain resolutions taken by the Management Board but may not otherwise participate directly in the management of the Bank. The Supervisory Board only represents the Bank in its relations with the Management Board.
The Supervisory Board elects and dismisses the members of the Management Board.
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The preliminary approval of the Supervisory Board is necessary for the following resolutions of the Management Board:
• Widening the Bank's scope of activities;
• Substantial reorganisational changes;
• Opening and closing of branches, offices and representative offices in Bulgaria or abroad;
• Acquisition and disposal of real estate and property rights over them, as well as letting of real estate;
• Changes in the accounting policy and practice applied by the Bank unless it is necessary for the compliance with the accounting practice generally accepted in Bulgaria;
• Substantial changes (or termination) related to commercial activity of the Bank or to the adopted Business Plan as well as adoption of a draft Business Plan in respect of the financial years after 2010;
• Performance of commercial activities by the Bank outside of Bulgaria;
• Changes in the approved budget as well as adoption of a draft budget in respect of the financial years after 2010;
• The Bank entering into an agreement which is unusual or burdensome or otherwise outside of the ordinary course of business of the Bank, and its value exceeds EUR 75,000;
• Payments by the Bank upon conditions different from the standard ones (including donations);
• The Bank entering into:
• new loan agreements where the Bank is granted the loan,
• change in the conditions under loan agreements as entered into,
• issuance of bonds,
• redemption of bonds before their maturity date,
• repayment by the Bank of loans prior to the initially stipulated maturity dates, if the amount exceeds 25 per cent. of the value of the own funds and the reserves of the Bank as shown in the audited financial statement for the preceding financial year (this requirement shall not apply to loan agreements between the members of the same one-person owned group or to a loan granted by the Bank to another member of the Bank's solely owned group);
• The Bank entering into an agreement, the value of which exceeds 25 per cent. of the sum of the own funds /the capital base/ and reserves of the Bank as shown in the audited financial statement for the preceding year;
• Adoption of resolutions which lead to a large exposure to one person or to economically related persons within the meaning of the Credit Institutions Act 2006, as amended, if the large exposure exceeds 15 per cent. of the value of own funds /the capital base/ and reserves of the Bank as shown in the last audited financial statement;
• Issuance of guarantees for a third party debt (outside the ordinary course of the business or if the third party does not belong to the Bank's solely owned group;
• The Bank providing a security outside of the Bank's ordinary course of business;
• Certain major transactions or interested party transactions;
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• Certain employee incentive programmes or changes to such programmes;
• The Bank entering into new agreements with shareholders in the Bank or changes to such agreements with shareholders in the Bank or persons related to the shareholders;
• Any changes of substantial provisions of the management agreements entered into between the Bank and members of its Management Board;
• Conduct of any court or arbitration proceedings by the Bank or a member of its wholly owned group except for in cases related to collection of receivables in the ordinary course of business or proceedings where the claim does not exceed 5 per cent. of the sum of the own funds /the capital base/ and reserves of the Bank as shown in the audited financial statement for the preceding financial year, and
• The Bank entering into negotiations with another person (outside of the members of its wholly owned group) with respect to any of the questions listed above.
The requirements for a preliminary approval by the Supervisory Board do not apply if the specific action or deal is explicitly provided for in a business plan or budget adopted by the Supervisory Board.
Pursuant to the Commercial Act 1991 and the Bank's Articles of Association the following resolutions of the Management Board also require the approval by the Supervisory Board:
• Authorisation of certain members of the Management Board /the executive directors/ to represent the Bank; and
• The internal rules regulating the activities of the Management Board.
The Bank's Articles of Association require the Supervisory Board to comprise five members.
Pursuant to the Commercial Act 1991 and the Bank's Articles of Association the members of the Supervisory Board are elected by the General Shareholders' Meeting for a 5-year period and may be re-elected for an unlimited number of times.
The meetings of the Supervisory Board are held at least once every three months. Meetings of the Supervisory Board are called by its chairman or at the request of another member of the Supervisory Board, of the Management Board or the head of the internal audit department.
The current members of the Supervisory Board are as follows:
Name Year of
appointment Date of expiry of
current office Position
Tzvetan Radoev Vassilev .................................................. 2003 27 May 2014 Chairman Zlatozar Krystev Surlekov ................................................. 2000 27 May 2014 Independent Member Yancho Panayotov Angelov .............................................. 2005 27 May 2014 Independent Member Warith Mubarak Said Al Kharusi ...................................... 2009 27 May 2014 Member Faisal Amur Mohamed Al Riyami .................................... 2009 27 May 2014 Member On 27 May 2009, the AGM of the shareholders of the Bank re-elected all the existing members of the Supervisory Board for a new 5-year term of office. The dates of expiry of their current office are shown in the above table. The years of appointment in the above table relate to the initial appointment of each person in the specified position.
Mr. Yancho Angelov passed away in August 2012.
In order to comply with the requirements for minimum number of the Supervisory Board's members set forth in the Articles of Association, the Bank shall take the necessary measures to elect a new Supervisory Board member, including obtaining the preliminary approval of the new member by the BNB and passing of a resolution by the General Shareholders' Meeting for his election as a Supervisory Board member.
The business address of the members of the Supervisory Board is the registered office of the Bank: 10 Graf Ignatiev Street, Sofia 1000, Bulgaria.
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Tzvetan Vassilev (born 1959) has been the chairman of the Supervisory Board of the Bank since August, 2003. In 1985, Mr. Vassilev graduated from the Karl Marx Higher Institute of Economics in Sofia (now the University of National and World Economy) with a degree in International Economic Relations. In 1992, Mr. Vassilev founded Bromak and Fina S finance and brokerage companies. Between 1995 and 1999 he was the Head of the Foreign Exchange Operations and Liquidity Department of Central Cooperative Bank AD, and since November 1997 he was also a member of the bank's Board of Directors. For a short period of time (between October, 1999 and December, 1999) Mr. Vassilev headed the Markets and Liquidity Department at Commercial Bank Bulgaria Invest (now Allianz Bulgaria Commercial Bank). As from June, 2000 until July, 2003, Mr. Vassilev was a chairman of the Management Board and an executive director of the Bank. Since 2003, he is a majority owner of the Bank and a chairman of the Supervisory Board.
Zlatozar Surlekov (born 1964) has been a member of the Supervisory Board since September 2000. Mr. Surlekov graduated from the University of National and World Economy in Sofia, majoring in International Economic Relations. Mr. Surlekov started his professional career in telecommunications and between 1993 and 1994 he was a sales director at Incoms Kapsh OOD - the first joint-venture in telecommunications in Eastern Europe. After that he was a Commercial Director at Straits Int. Ltd., London, a company trading with petroleum derivatives. From 1996 to 2000, he was a privatisation consultant. In June 2000, he was appointed a procurator of the Bank.
Warith Mubarak Said Al Kharusi (born 1952) has been a member of the Supervisory Board since 2009. Mr. Al Kharusi has a degree in Business Administration. From 1977 to 1984 Mr. Al Kharusi was a Director of Treasury Department in the Ministry of Finance of Oman. Since 1984 he has been the Chief Executive Officer of the State General Reserve Fund of the Sultanate of Oman. Mr. Al Kharusi was appointed a member of the Supervisory Board on 25 March 2009.
Faisal Amur Mohamed Al Riyami (born 1976) has been a member of the Supervisory Board since 2009. Mr. Al Riyami holds a masters degree in Business Administration. Mr. Al Riyami has professional experience as an internal auditor in Bank Muscat SAOG, as a financial controller in Omani Qatari Telecom Company SAOC and as a financial director of RTS Solutions. Since 2007 he has been the head of the Direct Investments Section in the State Reserve Fund of the Sultanate of Oman, and on 25 March 2009 was appointed a member of the Supervisory Board. Faisal Al Riyami is a Member of the Institute of Chartered Financial Analysts and of the Institute of Chartered Analysts of Alternative Investments.
Management Board
The day-to-day management of the Bank (with the exception of those matters which are allocated by law or the Bank's Articles of Association to the exclusive authority of the Supervisory Board or the General Shareholders' Meetings) is carried out by the Management Board. Some of the resolutions of the Management Board have to be approved by the Supervisory Board as required by law and/or the Bank's Articles of Association (as indicated above). The Management Board is accountable to both General Shareholders' Meetings and the Supervisory Board on a regular basis. According to the Bank's Articles of Association, the Management Board (subject to the approval by the Supervisory Board) authorises at least two of its members (executive directors) to manage and represent the Bank jointly. The executive directors represent the Bank in relation to third parties, organise the activities of the Bank and perform its day-to-day management, enter into on behalf of the Bank and terminate the labour contracts between the Bank and its employees, etc. The executive directors, subject to the approval by the Management Board, may authorise procurators to manage the Bank. According to the Bank's Articles of Association, the Bank shall not undertake obligations only though the signatures of procurators. It shall undertake obligations only through the signatures of either two executive directors or one executive director and one procurator.
The meetings of the Management Board are called by its chairman or at the request of another member of the Management Board, of a member of the Supervisory Board or of the Head of the Internal Audit Department.
Pursuant to the Commercial Act and the Bank's Articles of Association, the Management Board shall comprise three to nine members. The actual number is determined by the Supervisory Board. The members of the Management Board are elected by the Supervisory Board for a five-year period and may be re-elected for an unlimited number of times.
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The current composition of the Management Board is as follows:
Name Year of
appointment Date of expiry of
current office Position
Orlin Nikolov Russev ............................. 2005 27 May 2014 Chairman and Chief Executive Director Ilian Atanassov Zafirov .......................... 2003 27 May 2014 Member and Executive Director Georgi Pankov Hristov ........................... 2008 27 May 2014 Member and Executive Director On the 27 May 2009, the Supervisory Board of the Bank re-elected the members of the Management Board for a new five-year term of office. The dates of expiry of their current office are shown in the above table. The years of appointment in the above table relate to the initial appointment of each person in the specified position.
The business address of the members of the Management Board is the registered office of the Bank: 10 Graf Ignatiev Street, Sofia 1000, Bulgaria.
Orlin Russev (born 1967) has been the chairman of the Management Board since 4 February 2005. Mr. Russev holds a masters degree from the University of National and World Economy in Sofia. Mr. Russev started his career at the Central Cooperative Bank in 1993 when he was appointed as an expert and later a director of the Money Market and Securities Division. In 1999, Mr. Russev headed the Treasury and Markets Division at Commercial Bank Bulgaria Invest. In 2000, he was appointed Head of the Treasury and Securities Department at the Bank and between 2002 - 2003 was a procurator of the Bank. As of 21 July 2003 Mr. Russev is an Executive Director of the Bank. As an executive director he is in charge of liquidity, security, accounting, service of clients and operations associated with statistics and bank regulators.
Ilian Zafirov (born 1964) has been a member of the Management Board since 2003. Mr. Zafirov graduated from the Karl Marx Higher Institute of Economics in Sofia (now the University of National and World Economy) and holds a degree in International Economic Relations. Mr. Zafirov started his bank career at the Bulgarian Foreign Trade Bank in 1989. Until 2000 he headed international operations in Central Cooperative Bank, Commercial Bank Bulgaria Invest and SIRBank. In 2000 Mr. Zafirov was appointed a head of Foreign Exchange Operations of the Bank and a year later as a procurator of the Bank. Mr. Zafirov was in charge of international operations, correspondent banking, information technologies, risk management, card payments, marketing, advertising and public relations. As of 21 July 2003 Mr. Zafirov is an executive director of the Bank and member of the Management Board. Additionally, Mr. Zafirov is a member of the board of directors of the Association of Bulgarian Banks and a part-time lecturer at the International Banking Institute.
Georgi Hristov (born 1969) has been a member of the Management Board since 2008. Mr. Hristov graduated with honours from the St. Kliment Ohridski, Sofia University and holds a masters degree in Law. Between 1994 and 1996 Mr. Hristov was a trainee judge and a lawyer in Sofia. Between 1996 and 2000 he worked as a legal adviser and senior legal adviser at Bank for Agricultural Credit, senior legal adviser at Central Cooperative Bank and a legal adviser at Commercial Bank Bulgaria Invest and Fina S Co. In 2000, he was appointed Head of the Legal Department of the Bank and in 2007 he was appointed as a procurator of the Bank. As a member of the Management Board, Mr. Hristov is in charge of the Legal Department and the Human Resources Department.
Senior Management
Other members of the senior management of the Bank include:
Name Position
Alexander Pantaleev Procurator
The procurator can be contacted through the Bank's registered office at 10 Graf Ignatiev Street, Sofia 1000, Bulgaria.
Alexander Pantaleev (born 1970) has been a procurator of the Bank since 2009. Mr. Pantaleev started his professional career in 1995 as a loan officer in Investment Credits Department in Central Cooperative Bank. Mr. Pantaleev joined the Bank in 2000 as a loan officer and from June 2003 is Head of the Credit Department of the Bank. He was appointed as a procurator in December 2009. Mr. Pantaleev has a
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masters degree in Marketing and Management from the University of National and World Economy in Sofia and postgraduate qualifications in International Accounting Standards, credit risk management and payment systems.
Directorships and partnerships of members of the Supervisory Board and Management Board and the procurator
The table below presents a list of the companies and partnerships in which members of the Supervisory Board and the Management Board as well as the procurator: (i) serve on the governing or supervisory bodies or as procurators; or (ii) hold interest/stock equal to or exceeding 25 per cent. of the share capital.
Name Company/Partnership Position held
Tzvetan Radoev Vassilev
Insurance Company Victoria AD Member of the Supervisory Board
Mel Finance EAD Chairman of the Board of Directors Bulgarian Bridge Federation
Association Chairman of the collective management body
Bromak EOOD Sole owner of the capital Fina-C EOOD Sole owner of the capital Trust Vassilevi OOD Shareholder holding 40% of the share
capital Sezoni 3 OOD Shareholder holding 33.33% of the share
capital Estejd OOD Shareholder holding 50% of the share
capital Bromak Finance EAD Indirectly (through Bromak EOOD) holds
100% of the share capital Bromak Gabrovo EOOD Indirectly (through Bromak EOOD) holds
100% of the share capital Pirin Corporation EOOD Indirectly (through Bromak EOOD) holds
100% of the share capital Pirin Property Investments Indirectly (through Pirin Corporation
EOOD) holds 40% of the share capital Fintur 98 OOD Indirectly (through Bromak EOOD) holds
60% of the share capital TM Imoti OOD Indirectly (through Bromak EOOD) holds
50% of the share capital Invest Management OOD Indirectly (through Trust Vassilevi OOD)
holds 90.1% of the share capital Sunlight Air EAD Indirectly (through Trust Vassilevi OOD)
holds 100% of the share capital KV - Real EOOD Indirectly (through Invest Management
OOD) holds 100% of the share capital Zlatozar Krystev Surlekov
Proacta EOOD, Sofia Manager and sole owner of the capital
Warith Mubarak Said Al Kharusi
Bulco Acquisition AD Member of the Board of Directors
Spartak Tours AD Member of the Board of Directors Cherry Gardens OOD Manager Borovetz Investments EAD Member of the Board of Directors Rila – Samokov 2004 AD Member of the Board of Directors SEE Capital Management S.à r.l. Member of the management body Bulgarian Acquisition Company
VI S.а.r.l. Member of the management body
The European Acquisition Company S.à r.l.
Member of the management body
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Name Company/Partnership Position held
The European Acquisition Company 2 S.à r.l.
Member of the management body
Eagle Properties (G.P.) (No. 3) Limited
Member of the management body
Eagle Properties (G.P.) (No. 4) Limited
Member of the management body
Eagle Properties (No. 6) Limited Member of the management body Eagle Properties (No. 7) Limited Member of the management body Wopac No.1 Limited Member of the management body Print (GP) Limited Member of the management body Normandy (GP) Limited Member of the management body Palm Properties Member of the management body National Investment Fund
(NIFCO) SAOC Member of the management body
Oman International Exchange Co Member of the management body Oman Investment Fund Member of the management body Migros Türk TAŞ Member of the management body Vietnam Oman Investment
Company Member of the management body
Trans Balkan Investments Limited
Member of the management body
Faisal Amur Mohamed Al Riyami
SEE Capital Management S.à.r.l. Member of the management body
Bulgarian Acquisition Company VI S.à r.l.
Member of the management body
Bulco Acquisition AD Member of the Board of Directors Spartak Tours AD Member of the Board of Directors Borovetz Investments EAD Member of the Board of Directors Orlin Nikolov Russev TM Imoti OOD, Sofia Manager Elenski Balkan Imoti EOOD,
Sofia Manager and sole owner of the capital
Ilian Atanassov Zafirov
Association of Banks in Bulgaria Member of the Management Board
International Banking Institute OOD, Sofia
Manager
Celum Bulgaria AD, Sofia Member of the Board of Directors Georgi Pankov Hristov
Damax EOOD, Sofia Manager and sole owner of the capital
Mel finance EAD, Sliven Member of the Board of Directors Alexander Pantaleev "Bulgafrost" AD, Village of
Kochevo Member of the Board of Directors
Conflicts of interest
With respect to all the members of the Supervisory Board and the Management Board, in accordance with the representations made by them, there are no actual or potential conflicts of interest arising from their personal interests or other duties and duties or obligations towards the Bank.
The management and employment agreements signed between the board members and the Bank or its subsidiaries do not contain non-compete clauses. However, according to Bulgarian law, with respect to the Bank, the board members declared following their election by the general meeting that they do not participate and would not participate in the management of companies which carry out activities competitive to the Bank. In addition, according to the legal requirements, the members of the Supervisory Board and the Management Board must act under a duty of loyalty and must give priority to the Bank's
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interests instead of their own private interests; moreover they must make efforts to avoid concrete conflict-of-interest situations. If, nevertheless, a conflict-of-interest situation occurs, the interested Management Board member or Supervisory Board member is legally obliged to fully disclose in due time before the Management Board, respectively before the Supervisory Board such conflict and to not participate in the decision making process regarding the relevant item on the board meeting agenda, as well as to not influence other board members as to how to vote on such matter.
Corporate Governance
In 2007, the Bank has adopted a programme for the application of the internationally recognised standards for good corporate governance. The Supervisory Board and the Management Boards made a decision in November 2007 that the Bank shall adopt and comply with the Bulgarian National Corporate Governance Code. As of the date of adoption of the National Corporate Governance Code, the Bank has performed its activities in compliance with the principles and provisions set forth in the Bulgarian National Corporate Governance Code. Nevertheless, the Bank continued to prepare a programme for good corporate governance, which was updated in 2009. The programme is in compliance with the principles and recommendations set forth in the Bulgarian National Corporate Governance Code.
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ASSET, LIABILITY AND RISK MANAGEMENT
Introduction
The purpose of the Bank's risk management procedures is to identify, monitor and manage appropriate risk levels for the Bank's operations based on a risk policy that is approved by the Management Board. The risk management policy sets standards for various types of risks, including credit risk, liquidity risk, market risk and operational risk. The Bank's risk management policies are designed to identify and analyse risks faced by the Bank, to determine appropriate risk limits and controls and to oversee compliance with set limits. Risk management policies and systems are regularly reviewed to reflect changes in market conditions, products and provided services. Through its training programmes, management standards and procedures, the Bank aims to develop a strict and effective control environment in which all employees understand their role and responsibilities.
Management is responsible for the preparation and implementation of these general provisions of the Bank's risk management. The Supervisory Board on the proposal by the Management Board establishes the Liquidity Management Committee, Credit Committee and Operational Risk Management Council that are responsible for implementing the Bank's risk management policies in their specific areas. These bodies regularly report to the Management Board on their work. The Bank's risk management policies are designed to identify and analyse risks faced by the Bank, to determine appropriate risk limits and controls and to oversee the compliance with the set limits. Risk management policies and systems are regularly reviewed to reflect changes in market conditions, products and provided services. Through its training programmes, management standards and procedures, the Bank aims to develop a strict and effective control environment in which all employees understand their role and responsibilities.
Compliance with the various requirements in the risk policy is reviewed on a regular basis, depending on the level of risk and potential impact on the Bank's operations. The Bank also reviews its risk policy on an annual basis based on an analysis of the economic trends and business environment in Bulgaria and in particular business sectors, financed by the Bank. The Bank's internal audit department oversees and assesses the efficiency of the risk management systems, as well as risks and controls associated with management, operations and information systems of the Bank. The internal audit monitors the compliance of implemented risk management policies with the approved risk management policies and to what degree the risk faced by the Bank complies with the adopted levels of bank risks. The results of the independent audits are reported to the Supervisory and Management Board.
Credit Risk
General
Credit risk is the potential loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations. The Bank is subject to credit risk through its lending, trading and investing activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees. The risk that counterparties to both derivative and other instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Bank deals with counterparties that it considers to be of good credit standing.
The Bank's primary exposure to credit risk arises through its loans and advances. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the statement of financial position. The Bank is additionally exposed to credit risk through commitments to extend credit and guarantees issued. Also, credit risk exposures exist in the Bank's trading book, which includes financial assets held for trading purposes.
The Bank's lending policy is based on principles of profitability, liquidity and security. Lending activity is also based on the principles of economy, segregation of functions and competences in conducting analysis, concluding, managing and controlling loan transaction in order to minimise credit risk. Depending on the degree of credit risk in concluding credit transactions the Bank follows the principle of sufficiency and liquidity of accepted security in order to minimise risk. The Bank's lending policy is oriented mostly towards corporate customers but the bank will also provide financing to other borrowers with a proven record of loan repayment.
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The Bank mitigates its counterparty risk and settlement risk with regard to the deals in the trading book by dealing with clients it considers to be of good standing. For many such clients the Bank has approved credit limits.
To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk the Bank applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. The rating is determined in accordance with the internally published "Methods of Determining Credit Risk".
The internal rating system divides customers in to different groups by conducting a qualitative evaluation of credit risk with regard to potential changes in the economic environment and its financial stability. For this purpose the Bank measures:
• Total business risk including systemic risk or risk of change in external factors for credit borrowers and specific or non-systemic risks reflecting the management quality and borrower's financial stability, and
• Risk ensuing from the Bank's historical experience with regard to the respective customer.
The internal rating system is also used to determine whether it is necessary to accrue impairment loss for particular credit exposures. This framework for grading risk includes 11 grades reflecting inherent risk and other factors related to credit risk.
The Bank manages the credit risk level by establishing limits for any individual credit borrower and groups of economically related persons, as well as other limits in accordance with the nature, size and complexity of its lending operations and in accordance with the BNB supervisory requirements.
Credit Risk Management
The major specialised credit risk management bodies include:
• Credit Risk Division
The Credit Risk Division has been established within the Analysis and Control of Risk Department of the Bank. It carries out analyses over the financial position and the creditworthiness of potential borrowers, the subject and the purpose of the loan, the collateral offered and the economic relatedness of potential borrowers. The Credit Risk Division attributes credit ratings to borrowers and ensures that these are regularly updated. The division also evaluates the impact of newly offered loans for compliance with the BNB Ordinance No. 8 requirements and the approved internal limits. In addition, an independent opinion for the appropriateness of the new loans as a risk generation factor in the context of the risks the Bank has already been exposed to.
• Credit Committee
The Credit Committee is a specialised internal body for monitoring, evaluating, classifying and provisioning against risk exposures, including those of concluded credit transactions. The Management Board determines the number and the staff of the Credit Committee. The Credit Committee acts under the rules and procedures adopted by the Management Board and approved by the Supervisory Board. The Bank monitors the state of individual loans and the adequacy of allocated funds for covering credit risk on an ongoing basis.
All risk exposures of the Bank, including credit exposures are evaluated on a monthly basis by the Bank's Credit Committee in accordance with the Bank's "Rules of Review, Evaluation and Classification of Risk Exposures".
Credit Approval Procedures
When a loan application is received from a potential borrower by the respective branch or sub-branch of the Bank, it is allocated to a loan officer, who initially analyses the loan application and submits an opinion on the loan application to the Credit Risk Division for further credit risk analysis. This involves researching the borrower's business, negotiating terms and pricing, performing a credit analysis, preparing a credit proposal, drafting the loan documents and making an initial check that all of the Bank's
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requirements have been satisfied before disbursement of the loan funds. Once a loan has been made, the loan officer is responsible for managing the ongoing relationship with the client, monitoring its financial results, and dealing with arrears, problems, restructurings and work-out situations.
Once a loan application has passed through the credit analysis process, including a legal analysis of the documentation and in particular, the potential collateral, a credit proposal is prepared by the Credit Risk Division and submitted for approval to the Executive Directors of the Bank. Subject to the legal and internal requirements, the Executive Directors make a decision on the loan application or refer the matter to be resolved by the Management Board (in certain cases, with the approval of the Supervisory Board).
Due to the nature of the Bank's lending strategy and target customer base, under the credit risk policy, no loans can be automatically approved under a credit scoring system.
The loan approval process is highly centralised. Branches are granted with small limits for simple low risk transactions (mainly consumer loans). The process for loan approval is as follows:
• The customer submits its loan application & supporting documents to the Bank – a full set of documents is distributed to the Loan, Legal & Risk Departments through the Secretariat & Record Office Division;
• If needed, the Loan, Legal & Risk Departments request additional information (the Chief Risk Officer ("CRO") and Risk Department are not allowed to contact the customer directly);
• The customer replies, by submitting additional documents – a full set of documents is distributed to the Loan, Legal & Risk Departments through the Secretariat & Record Office Division;
• The head of Loan Department provides the Management Board with its Economic Analysis of the application and opinion for approval;
• The head of Legal Department provides the Management Board with its legal analysis of the application and opinion for approval;
• The CRO – Head of Risk Analyses & Control Department provides the Management Board with its independent Risk Analysis of the application, the internal rating assigned to the customer and opinion for approval;
• The Management Board decides whether the deal is to be approved, based on the opinions submitted.
When the loan is approved, in most cases the loan agreement is signed on behalf of the Bank by two of the executive directors.
Collateral Valuation
In compliance with the implemented Bank's policy prior to extending the approved loans, customers are required to provide appropriate collateral. According to the Bank's requirements the total amount of extended loans, plus a margin determined by the Bank, should be fully secured. The Bank's guarantees and letters of credits are also subject to strict preliminary study.
Loans advanced by the Bank are normally secured by all or certain of the borrower's assets and, in some cases, security is taken over the assets of third parties such as the directors or shareholders of the corporate borrower. Collateral on loans, guarantees and letters of credits most often include cash, property, plants and equipments, registered securities or any other property. As a rule, the Bank should be the first ranking secured creditor. Collateral property must be insured in favour of the Bank.
Prior to advancing a loan, the Bank values the loan collateral both at fair market and liquidation value taking into account comparable market values, the cost/replacement value of an asset and the capitalisation of income method, as applicable. All real estate, current assets and securities accepted as collateral are valued by a specialised external appraiser or duly qualified internal appraisers of the Bank.
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The following table shows the amount in Lev of the Bank's receivables secured by different types of security or unsecured and their respective share in the total amount of the Bank's receivables (expressed in percentages):
Six months ended
30 June 2012 Year ended
31 December 2011 Year ended
31 December 2010
(BGN 000) (%) (BGN 000) (%) (BGN 000) (%)
Mortgages .................................................. 441,027 14.7 409,410 15.5 547,420 32.7 Cash and deposits ...................................... 56,266 1.9 58,968 2.2 15,645 0.9 Financial collateral agreements ................. 426,393 14.2 444,978 16.8 224,904 13.5 Pledges on assets and receivables and bills of exchange ........................................ 2,009,362 66.8 1,596,284 60.2 801,456 47.9 Unsecured .................................................. 74,206 2.4 141,926 5.4 83,987 5.0 Less allowances for impairment losses ..... (46,063) (22,504) (13,709)
Total .......................................................... 2,961,191 100.0 2,629,062 100.0 1,659,703 100.0
Usually, the value of the loan collateral is subject to review at least twice per year in the process of post-approval monitoring of the loan as described below. As at 30 June 2012, 2.4 per cent. of the Bank's loans are unsecured.
Post-Approval Process and Loan Portfolio Monitoring
Upon approval and drawing of the loan, loan officers in the Loan Department or in financial centres start the continuous monitoring of the credit exposures and the financial state of the borrowers. There is a separate division "Monitoring and administration of loans" established as a structural unit within the Loan Department. Officers at the division review the fulfilment of the contractual obligations in the loan and security agreements, keep track of changes in the legal status and financial state of the borrower, register changes in the market value of security and changes in the business environment. The credit officers perform the following tasks:
• Request from borrowers the current financial and accounting information required under the loan agreement;
• Collect data on the current state of the collateral and the changes in its market value. They perform reassessment of collateral, if necessary;
• Confirm or alter on a monthly basis the credit rating assigned to borrowers;
• Conduct a full analysis on a quarterly basis of the creditworthiness of borrowers, reassess credit risk and check with the central credit register of the BNB for borrowings of the customer from third parties. A summary of the information from the analysis is submitted to the Credit Committee.
Risk Exposures
According to the Internal Policy for Valuation of the Credit Risk of the Exposures and the BNB Ordinance No. 9, and by the internal rating system, the Credit Committee classifies risk exposures into the following four classification groups consistent with the degree of credit risk:
• Standard risk exposures on loans and other claims are those risk exposures which have been paid on time and information on the debtor's financial state gives no ground to assume that the debtor will not repay in full his debts.
• Watch exposures are the risk exposures on loans and other claims that show insignificant weaknesses with respect to their repayment or there is a possibility of deterioration in the debtor's financial state, which may question the full repayment of the obligation.
• Non-performing are the risk exposures on loans and other claims where significant weaknesses exist with respect to their repayment, or the available information points to the debtor's unstable financial state, current and anticipated proceeds are insufficient for the full repayment of his obligations to the Bank and to other creditors, as well as where weaknesses have been found with the distinct possibility that the Bank will sustain some loss.
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• Loss exposures are those risk exposures where grave weaknesses exist with respect to their repayment or as a result of the debtor's deteriorated financial state his obligations are deemed uncollectible, even though they have partial recovery value that may be realised in the future.
The classification of risk exposures is submitted for approval to the Management Board. Any Bank's business unit is required to implement credit policies and procedures and is responsible for the quality of its credit portfolio, for monitoring and controlling all credit risks in its portfolios, including those subject to central approval. Regular audits of business units and processes in the Loan Department are undertaken by the specialised Internal Audit. For more information on the specific criteria for classification of the exposures, please see "The Banking Sector and the Banking Regulation in Bulgaria – Legislative Framework of the Bulgarian Banking Sector - Loss Provisions".
The following table shows the current classification of the Bank's loan portfolio according to the BNB requirements as set out in BNB Ordinance No. 9, including the amount in BGN and as a percentage of the four classification groups as at dates indicated below:
Six months ended
30 June 2012 Year ended 31 December
2011 Year ended 31 December
2010
(BGN 000) (Per cent.) (BGN 000) (Per cent.) (BGN 000) (Per cent.)
Standard (up to 30 days) ............................ 2,862,218 95.18 2,554,702 96.35 1,616,016 96.57 Watch (over 30 days, up to 90 days) ......... 97,390 3.24 87,484 3.30 54,335 3.25 Non-performing (over 90 days, up to 180 days) ........................................................... 37,717 1.25 6,259 0.23 - - Loss (over 180 days) .................................. 9,929 0.33 3,121 0.12 3,061 0.18
Total .......................................................... 3,007,254 2,651,566 1,673,412
Less Loan loss reserves ...................................... (46,063) (1.53) (22,504) (0.85) (13,709) (0.82) Net loans ................................................... 2,961,191 2,629,062 1,659,703
As shown in the above table, the ratio of the loans past due over 90 days to total loans was 1.58 per cent. as at 30 June 2012, 0.35 per cent. as at 31 December 2011 and 0.18 per cent. as at 31 December 2010,
Pursuant to the requirements of the BNB Ordinance No. 9, the Bank maintains specific provisions for credit risk allocated against particular exposures classified as different from regular (standard) ones. Specific provisions for credit risk mean the excess of the balance sheet value calculated according to the applicable accounting standards over the exposure's risk value. For more information on the manner of calculation of the exposures' risk value and the specific provisions in general, please see "The Banking Sector and the Banking Regulation in Bulgaria – Legislative Framework of the Bulgarian Banking Sector - Loss Provisions". The specific provisions for credit risk, allocated pursuant to Ordinance No. 9 are deducted from the bank's own funds (capital base) pursuant to the BNB Ordinance No 8. Therefore, their respective values as at the following dates are shown as negative amounts:
Six months
ended 30 June Year ended 31 December
2012 2011 2010
(BGN 000, except percentages)
Total Tier 1 Capital ......................................................................... 354,980 324,254 255,881
Total Tier 2 Capital ......................................................................... 82,255 64,653 25,536
Additional (specific) deductions of Tier 1 and Tier 2 capital ........... (18,302) (13,663) (19,440) Investments in share equity and other participations ........................ (3,156) (165) (8, 984) Specific provisions for credit risk ..................................................... (15,146) (13,498) (10,456)
Total capital base ............................................................................. 418,933 375,244 261,977
In addition to the specific provisions in respect of non-standard exposures, the BNB requested from the Bank to allocate and maintain specific provisions in respect of some of the standard provisions. Their amounts are included in the total amounts of the specific provisions shown in the above table.
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Regarding the classification of the Bank's loan portfolio as presented according to the IFRS see "Selected Statistical Information – Non-Performing Loans" and "Presentation of Financial and Other Information - Bulgarian Banking System Data and Loans Classification Data".
Limits of loans in respect of customers grouped by economic sectors
The Bank has put limits in respect of granting loans to customers belonging to the same economic sector based on the Classification of Economic Activities 2008 issued by the Bulgarian National Statistical Institute. The biggest share is allocated to the most general sector of commerce and auto repair services (55 per cent.). The processing industry is on the second place with 30 per cent. limit. The limit in place in respect of each of the following economic sectors is 20 per cent.: extraction industry, operations in real estate, professional activities and scientific research, construction. 10 per cent. limit applies in respect of all other economic sectors.
Non-Standard Exposures
The Bank classifies problem loans and other assets to: (i) impaired loans and securities; (ii) past due but not impaired loans; (iii) loans with renegotiated terms; and (iv) loans and securities subject to write-off.
Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan /securities arrangements.
Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of collateral available and/or the stage of collection of amounts owed to the Bank.
Loans with renegotiated terms are the Bank's risk exposures that have been renegotiated or restructured. An exposure is considered restructured where, due to deterioration in the borrower's financial position resulting in an inability to repay its debt, the Bank has made concessions by changing the original terms and conditions of the arrangement that it would not otherwise consider. Once the loan of a legal entity is restructured, it remains in this classification group independent of satisfactory performance after restructuring, unless it persistently satisfies all the conditions for the corresponding lower-risk classification group for a period of not less than six months. An exposure is deemed renegotiated where it has not been identified as deteriorated, it is fully secured and there is a ground to believe that the Bank will collect the principal and interest.
The Bank writes-off a receivable on a loan or security classified as non-performing, fully covered by allowances for impairment losses by a decision of the Management Board on a motion by the Credit Committee for the account of allocated provisions for impairment losses. This determination is reached after considering the following information: occurrence of significant changes in the borrower/issuer financial position such that the borrower/issuer can no longer pay the obligation, or the proceeds from collateral will not be sufficient to pay back the entire exposure. The off-balance reporting of exposures is discontinued by a decision of the Management Board, provided the Bank's Credit Committee has determined the loans or securities uncollectible due to occurrence of any of the following circumstances: the debtor is a legal entity deleted from the trade or any other public register and has no legal successor; a deceased natural person who has not left heirs or the heirs have given up their rights of inheritance; the debtor has made a prescribed claim.
Restructuring and renegotiation of delinquent loans occurs on a case-by-case basis, as directed by the relevant Credit Committee and/or Credit Risk Division officers. Wherever debt restructuring is undertaken, the Bank attempts to re-work the debt in a way that keeps the loan in place and allows the borrower to continue its business. Because the Bank has considerable experience of lending to riskier, non-conforming borrowers and because the loan officer responsible for monitoring a loan gains a detailed understanding of the borrower's business and industry during the credit analysis process and the ongoing relationship with the borrower, the Bank's efforts to restructure to avoid foreclosure are often successful. As part of the restructuring process, the Bank may demand additional collateral, or require the borrower to sell non-core assets and repay part of the loan.
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Debt Recovery Procedures
If the decision is taken to terminate any exposure to a borrower, the Bank's actions are co-ordinated by the Directors of Loan Department and Legal Department, assisted by the appropriate legal or insolvency specialists.
The Bank evaluates all available methods for terminating its exposure to a borrower, including selling the debt to another creditor, enforcing security and selling the collateral or commencing bankruptcy proceedings. Of these options, selling the collateral is the most common. Where the collateral mainly consists of marketable property, the sale process is often completed within six to twelve months. More complicated loans involving less liquid assets generally take more time to resolve.
The Bank rarely institutes bankruptcy proceedings against a borrower. First, the Bank is generally a secured creditor and therefore is in a position to realise the collateral without commencing bankruptcy proceedings. Second, bankruptcies usually take at least three to four years to resolve. In addition, assets can often be sold for a higher price outside of a bankruptcy process, so it is in the interests of both borrowers and lenders to find buyers privately.
Liquidity Risk
Liquidity risk arises in the general funding of the Bank's activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations. Liquidity risk management seeks to ensure that the Bank has the ability, under varying scenarios, to fund increases in assets and meet maturing obligations as they arise.
The Bank's liquidity management system is based on the following principles:
• centralised control over Bank 's liquidity carried out by Liquidity Management Committee;
• persistent monitoring and evaluation of future cash flows and sufficiency of Bank's liquid assets;
• planning of operations in contingency situations.
The Treasury Department receives information from other business units regarding the liquidity profile of their financial assets and liabilities and the projected cash flows arising from projected future business. The Treasury Department maintains a portfolio comprised mostly of short-term and liquid securities, loans and advances to banks and other financial instruments to ensure that sufficient liquidity is maintained within the Group as a whole.
The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the Liquidity Management Committee. Daily reports cover the liquidity position of the Bank. A summary report, including any exceptions and remedial actions taken, is submitted regularly to the Liquidity Management Committee.
The Bank funds are raised using a broad range of instruments, including deposits, saving accounts, current accounts, subordinated debt, credit lines and other borrowed funds, as well as share capital. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets in terms of the overall Bank strategy.
The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks.
The Bank's liquidity ratio, specified as the ratio between the net liquid assets and the amount of the deposits from clients, was 17.4 per cent. at 30 June 2012, compared to 19.9 per cent. and 25.1 per cent. at 31 December 2011 and 2010, respectively. The share of cash in total attracted funds (Primary liquidity ratio) was 12.6 per cent. at 30 June 2012, compared to 14.4 per cent. and 14.4 per cent. at 31 December 2011 and 2010, respectively.
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In addition, the BNB Ordinance No. 11 requires the Bank to monitor its liquid assets ratio and liquidity ratios by maturity time bands (as described in detail in "The Banking Sector and the Banking Regulation in Bulgaria – Legislative Framework of the Bulgarian Banking Sector - Liquidity"). The Bank is in compliance with such requirements.
Market Risk
Market risk is the risk that changes in market prices, such as interest rates, equity prices or foreign exchange rates will affect the Bank's income or value of its holdings of financial instruments.
Market risk management policies are aimed at managing and controlling market risk exposures within the admissible limits concurrently improving the risk/earnings ratio. The Bank actively manages interest rate, foreign currency, price and other risks with a view to ensuring compliance with the adopted limits as to the acceptable level of risk. The Bank's risk limits are regularly reviewed with a view to assessing their adequacy given the goals and strategies of the Bank and current market conditions. The Bank separates its exposure to market risk between trading and non-trading portfolios, using a wide range of methods for assessing the inherent risk of its trade and banking positions, including in derivative and non-derivative instruments.
Market Risk Management
The market risk appetite of the Bank remains low. The trading portfolio accounted for approximately 8 per cent. of total assets as at 30 June 2012 and as at 31 December 2011, significant part of which comprised government securities.
Market risk management is vested in the Liquidity Management Committee. The Risk Management Department is responsible for the development of detailed risk management policies (subject to review and approval by the Management and Supervisory Boards) and for day-to-day review of their implementation.
The Bank has active market trade positions in a limited number of derivative financial instruments (largely short-term forwards), as well as in non-derivative instruments. Most of the Bank's trading operations were directed to customers. To satisfy customer requirements, the Bank maintains a package of capital market instruments, quoting bid/offer rates, and actively trades with other market participants.
These operations include trade in financial instruments and allow the Bank to provide to its customers capital market products at competitive prices. Since the trade strategy depends equally on the Bank's role in determining market and its positions in various financial instruments, the Bank aims to improve its net earnings from trade operations given the relationship between instruments and the market. The Bank manages its trade operations depending on the type of risk and on the basis of the variety of holdings of trade instruments.
The Bank manages its holdings of trade instruments in response to changing market conditions. The exposure regarding market risk is managed in accordance with risk limits determined by the management through purchase and sale of instruments or through hedging activities.
The principal tool used to measure and control market risk exposure within the trading portfolio is Value at Risk (VaR). VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used by the Bank is based upon a 99 per cent. confidence level and assumes a 10-day holding period. The VaR model is based mainly on historical values. Taking account of market data from the previous two years, the model generates a wide range of plausible future scenarios for market price movement.
Although VaR is an important tool for measuring market risk, the assumptions on which the model is based do give rise to some limitations, including the following:
• A 99 per cent. confidence level does not reflect losses that may occur beyond this level. Even within the model used there is 1 per cent. probability that losses could exceed VaR;
• VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day/trading session;
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• The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature;
• The VaR measure is dependent upon the Bank's position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa.
The Bank has applied the VaR methodology since early 2007 and uses the limits/range of VaR for measuring interest rate risk of its trading portfolio.
The limitations of the VaR methodology are monitored by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Bank uses a wide range of stress tests to model the financial impact of exceptional market scenarios on individual trading portfolios and the Bank's overall position.
The Bank has the following 10-day VaR limits:
• 7 per cent. limit in respect of the ratio VaR trade portfolio to the Bank's own funds (capital base), and
• 3 per cent. limit in respect of the ratio VaR open forex exposure to the Bank's own funds (capital base).
The market risks are measured with the following frequency: daily 10-day VaR on trade portfolio and opened currency position.
Interest Rate Risk
The Bank's operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-earning liabilities mature or redeem at different times or in different amounts. In the case of floating rate assets and liabilities the Bank is also exposed to risk of changes in base interest rates (e.g. Basic Interest Rate, the LIBOR and EURIBOR), which are the basis for determining interest rate terms. The risk management policy aims to improve net interest income and to reach market interest rate levels matching the Bank's strategy.
Interest rate management procedures regarding the balance between borrowings and placements apply in respect of the Bank's sensitivity to changes in interest rate levels. This depends on various factors, including the degree of compliance with the negotiated repayment terms, as well as on interest rate fluctuations.
The principal risk to which the Bank is exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The Liquidity Management Committee monitors the compliance with the set interest rate limits and is assisted by the Risk Management Department.
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank's financial assets and liabilities to various standard and non-standard interest rate scenarios.
Interest risk positions are managed by the Treasury Department, which uses securities, receivables from banks, deposits from banks and derivative instruments to manage the Bank's overall position.
Interest risk GAP analysis is performed on a monthly basis in the Bank. It represents the outcomes of parallel increase/decrease in all interest rates scenarios, grouped by maturity baskets. The calculations are made as follows:
• For each maturity interval the imbalance between interest-sensitive assets and liabilities by maturity intervals is calculated;
• The impact on Bank’s interest income is calculated as follows: the period imbalance for each maturity group/basket is multiplied by the scenario envisaged change in the interest rate. As at 30 June 2012 the GAP exposure of both BGN and EUR in case of interest rate changes ranging from minus to plus 300 base points is as follows:
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GAP exposure (BGN and EUR thousand)
bp BGN EUR
300 -10,131.78 -7,482.86 200 -6,754.52 -4,988.57 150 -5,065.89 -3,741.43 100 -3,377.26 -2,494.29 50 -1,688.63 -1,247.14 10 -337.73 -249.43 -10 337.73 249.43 -50 1,688.63 1,247.14 -100 3,377.26 2,494.29 -150 5,065.89 3,741.43 -200 6,754.52 4,988.57 -300 10,131.78 7,482.86
Interest risk stress tests results are part of the Bank ICAAP. They represent the interest rate sensitivity imbalance of assets and liabilities of the Bank for a one-year period and represent the results of stressing the Bank's portfolio with multiple scenarios envisaged multiple combinations of changes in both BGN and foreign currency interest rates.
Exchange Rate Risk
Whilst the Bank operates mainly in Euro, US dollars and Leva, the Bank has relatively limited foreign exchange exposure because the Lev is pegged to the Euro through a currency-board system which has been in operation since 1997 (when the Lev was pegged to the Deutsche mark).
The Bank transactional exposures result in foreign currency gains and losses that are recognised in the income statement. In respect of monetary assets and liabilities in foreign currency that are not hedged, the Bank maintains acceptable net exposure, buying and selling foreign currency when it deems appropriate. The sum of the bank's overall net open foreign exchange position is kept below 2 per cent. of its total own funds.
The Bank is obliged to comply with the following limits in respect of foreign exchange positions pursuant to the BNB Ordinance No. 8:
• for all foreign exchange positions, except positions denominated in Euro – 15 per cent., calculated as ratio between the open foreign exchange position in each currency and the amount of own funds;
• 30 per cent., calculated as a ratio between the total net open position and the amount of own funds.
Operational Risk
Operational risk is the risk of direct or indirect losses arising from a wide variety of causes associated with the Bank's processes, personnel, technology and infrastructure, and from external factors, other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour.
The Bank's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank's reputation with overall cost effectiveness.
The responsibility for development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of Bank rules and standards for the management of operational risk in the following areas:
• Requirements for appropriate segregation of duties, including the independent authorisation of documents;
• Requirements for the reconciliation and monitoring of transactions;
• Compliance with regulatory and other legal requirements;
• Documentation of controls and procedures;
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• Requirements for the regular assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;
• Requirements for the reporting of operational losses and proposed remedial action;
• Development of contingency plans;
• Training and professional development, and
• Risk mitigation, including insurance where this is effective.
Compliance with the Bank standards is supported by a programme of regular reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with reports submitted to Management and Supervisory Boards.
Anti-Money Laundering and Terrorist Financing Procedures
As required under Bulgarian law, the Bank has established procedures across its operations to combat money laundering. The Bank has a separate department within its structure - Anti-Money Laundering and Special Law Department, which performs the functions of the specialised anti-money laundering office within the meaning of the Bulgarian Act for Measures against Money Laundering. The Anti-Money Laundering and Special Law Department has the primary responsibility for overseeing the operation of the policy and monitoring the Bank's anti-money laundering procedures. No suspicious transactions have been identified to date.
The Bank employs know-your-customer policies and procedures to screen customers and transactions both at the time accounts are opened and customers accepted and when transactions are carried out. Under Bulgarian law, the Act for Measures against Money Laundering and the Measures against Financing Terrorism Act require banks to record and verify certain information in respect of customers and customers' transactions and to report suspicious transactions to the Financial Intelligence Department of the Bulgarian State Agency "National Security". Pursuant to the Bulgarian Act for Measures against Money Laundering, all customers are required to declare the origin of the funds for any transaction which exceeds the regulatory thresholds, which are currently BGN 30,000 for non-cash transactions or BGN 10,000 for cash transactions. All cash transactions in excess of BGN 30,000 must also be reported to the authorities. Any employee who encounters a suspicious transaction is required to report that transaction prior to its execution to the Bank's Anti-Money Laundering Committee. The transaction is then registered in the register of suspicious transactions and checked to determine whether it needs to be reported to the SANS.
The SANS is empowered to audit the banks to check their compliance with anti money laundering legislation. The Bank was last checked by SANS in September 2006 on the "secret client" principle. The BNB is also empowered to audit the banks in order to check the compliance with the anti-money laundering requirements. The Bank was last audited by the BNB in April-May 2011 and the audit covered the period of 2009 and 2010. Both the SANS's check and the BNB's audit found no suspicious circumstances or transactions and the audit report commented favourably upon the Bank's anti-money laundering procedures.
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SELECTED STATISTICAL INFORMATION OF THE BANK
Average Balance Sheets and Related Interest Rates
The following two tables show the average balances for interest-earning assets and interest-bearing liabilities of the Group together with the related interest income resulting in the presentation of the average yields and rates for the years ended 31 December 2011 and 2010 and for the six months ended 30 June 2012. The average balances are calculated on a daily basis.
Assets
As at 30 June As at 31 December
2012 2011 2010
Average Balance
Interest Income
Average Interest
Rate (%) Average Balance
Interest Income
Average Interest
Rate (%) Average Balance
Interest Income
Average Interest
Rate (%)
(Reviewed)
(BGN 000, except percentages)
Cash and due from banks .............. 296,091 587 0.40 331,613 1,749 0.53 191,890 839 0.44 Loans, gross ................................... 2,847,584 134,342 9.44 2,113,729 207,778 9.91 1,582,238 161,290 10.27 Trading portfolio ........................... 239,563 5,802 4.84 156,716 6,579 4.20 92,708 4,914 5.30 Investment securities, available-for-sale ........................................... 166,721 4,543 5.45 221,714 11,781 5.31 81,430 5,082 6.24 Receivables on repurchase agreements ..................................... 1,320 22 3.33 30,971 340 1.10 6,924 76 1.10
Total interest earning assets ....... 3,551,278 145,295 8.18 2,854,743 228,227 7.99 1,955,190 172,201 8.81
Non interest earning assets ............ 712,806 – – 474,570 – – 327,472 – –
Total assets ................................... 4,264,084 – – 3,329,314 – – 2,282,662 – –
Liabilities
As at 30 June As at 31 December
2012 2011 2010
Average Balance
Interest Expense
Average Interest
Rate (%) Average Balance
Interest Expense
Average Interest
Rate (%) Average Balance
Interest Expense
Average Interest
Rate (%)
(Reviewed)
(BGN 000, except percentages)
Deposits from banks ...................... 162,254 3,179 3.92 141,921 5,121 3.61 79,989 2,965 3.71 Deposits from customers ............... 3,453,708 92,747 5.37 2,701,891 140,516 5.20 1,830,406 91,700 5.01 Payables under repurchase agreements ..................................... 8,439 60 1.42 30,720 183 0.60 20,824 653 3.14 Subordinated term debt ................. 40,084 1,420 7.09 8,681 593 6.83 – – –
Depreciation on securities premiums ....................................... – 12 – – 946 – – 27
Total interest-bearing liabilities . 3,664,486 97,418 5.32 2,883,213 147,359 5.11 1,931,219 95,345 4.94
Non-interest-bearing liabilities ...... 197,957 – – 91,209 – – 56,784 – – Shareholders' equity ...................... 401,642 – – 354,892 – – 294,658 – –
Total liabilities and shareholders' equity .................... 4,264,084 – – 3,329,314 – – 2,282,662 – –
Average Interest-Earning Assets, Yields, Margins and Spreads
The following table shows a breakdown of the Group's average net income, yield, margin and spread as at each of the periods indicated. Average balances are based on the Group's balances as at the end of the relevant financial period. The yield represents interest income as a percentage of average interest-earning assets. The margin represents net interest income as a percentage of average assets. The spread represents the difference between the average rate of interest earned on interest-earning assets and the average rate of interest accrued on interest-bearing liabilities.
Six months ended
30 June Year ended
31 December
2012 2011 2010
(Reviewed)
(BGN 000, except percentages)
Average Interest Earning Assets, gross ......................................... 3,551,278 2,854,743 1,955,189
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Six months ended
30 June Year ended
31 December
2012 2011 2010
(Reviewed)
(BGN 000, except percentages)
Interest Income .............................................................................. 145,295 228,227 172,201 Net Interest Income ....................................................................... 47,877 80,868 76,856 Average Yield (%) ......................................................................... 8.18% 7.99% 8.81% Average Margin (%) ...................................................................... 2.66% 2.80% 3.92% Average Spread (%) ....................................................................... 2.87% 2.88% 3.87% Assets at Fair Value through Profit or Loss
The following table shows a breakdown of the Group's assets at fair value through profit or loss by category as at each of the periods indicated.
As at 30 June As at
31 December
2012 2011 2010
(Reviewed)
(BGN 000)
Bulgarian government bonds ......................................................... 247,836 193,808 57,780 Bulgarian corporate bonds and other debt securities .................... 116,175 127,546 – Foreign securities (European Investment Bank & World Bank) .. 8,263 – 3,985
Total financial assets held-for-trading ...................................... 372,274 321,354 61,765
The original maturity of the Group's financial assets held-for-sale is longer than one month. However, the financial assets, which are held-for-sale have high liquidity and can be released within one month. The financial assets held-for-sale had a weighted average yield of 6.20 per cent. as at 30 June 2012, 6.16 per cent. as at 31 December 2011 and a weighted average yield of 4.17 per cent. as at 31 December 2010.
Distribution of Loans by Currency
The following table shows a breakdown of the Group's loan portfolio by currency (loans in BGN and in foreign currency) and as a percentage of the Group's total loan portfolio as at each of the periods indicated.
As at 30 June As at 31 December
2012 % of total 2011 % of total 2010 % of total
(Reviewed)
(BGN 000) (%) (BGN 000) (%) (BGN 000) (%)
Loans in BGN ...................................... 574,434 19.40 523,878 19.93 474,439 28.59 Loans in EUR ...................................... 2,161,397 72.99 1,901,203 72.31 1,080,013 65.07 Loans in USD ...................................... 225,360 7.61 203,981 7.76 105,251 6.34 Other .................................................... – – – – – –
Total .................................................... 2,961,191 100.00 2,629,062 100.00 1,659,703 100.00
Maturity Composition of Loan Portfolio
The following table shows a breakdown of the maturity of the Group's loan portfolio as at each of the periods indicated.
One month or
less
One to three
months
Three months to one year
One to five years
More than five years Total
(Reviewed)
(BGN 000, except percentages)
As at 30 June 2012 (Unaudited) ............... 121,744 203,381 793,510 1,514,084 328,472 2,961,191 As at 31 December 2011 .......................... 149,134 161,453 583,798 1,406,205 328,472 2,629,062 As at 31 December 2010 .......................... 81,925 141,304 443,071 831,186 162,217 1,659,703
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Maturity Composition of Guarantees
The following table shows a breakdown of the maturity of the Group's guarantee portfolio as at each of the periods indicated.
One month or
less
One to three
months
Three months to one year
One to five years
More than five years Total
(Reviewed
(BGN 000, except percentages)
As at 30 June 2012 (Unaudited) ............... 23,986 22,755 63,627 29,587 5,012 144,967 As at 31 December 2011 .......................... 17,817 19,504 55,639 53,932 6,462 153,354 As at 31 December 2010 .......................... 18,977 22,750 63,166 64,372 2,386 171,651 Non-Performing Loans
The following table shows a breakdown of the Group's loans to non-financial institutions and other customers by credit quality classification as at each of the periods indicated prepared according to the IFRS.
As at
30 June 2012 As at
31 December 2011 As at
31 December 2010
(Reviewed)
(BGN 000) (%) (BGN 000) (%) (BGN 000) (%)
Standard (up to 30 days) .......................... 2,942,223 97.84 2,629,178 99.15 1,661,135 99.27 Watch (over 30 days, up to 90 days) ....... 17,385 0.58 13,008 0.49 9,216 0.55 Non-performing (over 90 days, up to 180 days) ......................................................... 37,717 1.25 6,259 0.24 – – Loss (over 180 days) ................................ 9,929 0.33 3,121 0.12 3,061 0.18
Total ........................................................ 3,007,254 2,651,566 1,673,412
Less Loan loss reserves .................................... (46,063) (1.53) (22,504) (0.85) (13,709) (0.82) Net loans ................................................. 2,961,191 2,629,062 1,659,703
For information regarding the Bank's loans by credit quality classification based on the BNB requirements, see "Asset, Liability and Risk Management – Credit Risk – Risk Exposures".
Allowance for Impairment Losses
The following table shows a breakdown of the Group's allowance for impairment losses as at each of the periods indicated.
As at 30 June As at
31 December
2012 2011 2012
(Reviewed)
(BGN 000) Impairment losses for individually impaired exposures As at the beginning of the period .......................................................... (5,195) (2,485) (1,370) Impairment losses (increases) ............................................................... (24,108) (3,560) (2,042) Reversals on impairment loans ............................................................. 698 850 878 Write-off ........................................................................................ 194 – 49
As at the end of the period .......................................................... (28,411) (5,195) (2,485)
Impairment losses for Exposures impaired on portfolio basis As at the beginning of the period .......................................................... (17,309) (11,224) (9,304) Impairment losses (increases) ............................................................... (5,535) (11,602) (6,315) Reversals on impairment loans ............................................................. 5,192 5,517 4,395 Write-off ........................................................................................ – – –
As at the end of the period ............................................................. (17,652) (17,309) (11,224)
Total impairment losses .............................................................. (46,063) (22,504) (13,709)
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Allocation of Allowance for Impairment Losses and Guarantees
The following table shows a breakdown of the Group's allocation of allowance for impairment losses and guarantees as at each of the periods indicated.
As at 30 June As at 31 December
2012 2011 2010
(Reviewed)
(BGN 000)
Loans to customers .............................................................................. 46,063 22,504 13,709 Guarantees and other liabilities ........................................................... - - - Maturity Composition of Interest-Bearing Liabilities
The following tables show a breakdown of maturities of the Group's interest-bearing liabilities as at each of the periods indicated.
As at 30 June 2012
One month or
less % of total
One to three
months % of total
Three months to one year % of total
One to five years % of total
More than five
years % of total Total
(Reviewed) (BGN 000)
Customer accounts ...................... 560,137 84.64 576,302 96.91 1,893,390 99.00 774,899 94.97 - - 3,804,728Deposits from banks .................... 95,921 14.50 7,006 1.18 30 - - - - - 102,957Debt securities issued .................. - - - - - - - - - - -Subordinated loan ........................ - - - - - - - - 58,732 56.11 58,732Other borrowed funds ................. 5,694 0.86 11,390 1.91 19,045 1.00 41,072 5.03 45,944 43.89 123,145
Total ............................................ 661,752 100.00 594,698 100.00 1,912,465 100.00 815,971 100.00 104,676 100.00 4,089,562
As at 31 December 2011
One month or
less % of total
One to three
months % of total
Three months to one year % of total
One to five years % of total
More than five
years % of total Total
(BGN 000)
Customer accounts ...................... 698,344 96.30 439,118 99.06 1,589,265 99.99 772,088 94.92 - - 3,498,815Deposits from banks .................... 26,834 3.70 4,022 0.91 - - - - - - 30,856Debt securities issued .................. - - - - - - - - - - -Subordinated loan ........................ - - - - - - - - 39,709 46.90 39,709Other borrowed funds ................. - - 144 0.03 211 0.01 41,311 5.08 44,964 53.10 86,630
Total ............................................ 725,178 100.00 443,284 100.00 1,589,476 100.00 813,399 100.00 84,673 100.00 3,656,010
As at 31 December 2010
One month or
less % of total
One to three
months % of total
Three months to one year % of total
One to five years % of total
More than five
years % of total Total
(BGN 000)
Customer accounts ...................... 860,778 97.11 380,620 92.73 625,614 98.55 394,008 99.95 - - 2,261,020Deposits from banks .................... 25,581 2.89 29,690 7.23 9,046 1.42 - - - - 64,317Debt securities issued .................. - - - - - - - - - - -Subordinated loan ........................ - - - - - - - - - - -Other borrowed funds ................. 3 - 152 0.04 169 0.03 215 0.05 40,000 100 40,539
Total ............................................ 886,362 100.00 410,462 100.00 634,829 100.00 394,223 100.00 40,000 100.00 2,365,876
Composition of Deposits by Type
The following table shows a breakdown of composition of the Group's deposits by type of deposit as at each of the periods indicated.
As at 30 June As at 31 December
2012 2011 2010
(Reviewed)
(BGN 000)
Demand deposits from customers ....................................................... 2,235,948 2,205,244 1,371,281 including Savings Accounts ................................................................. 1,383,701 1,167,263 775,409 Demand deposits from banks .............................................................. - - - Term deposits from customers ............................................................ 1,568,780 1,293,571 889,739
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As at 30 June As at 31 December
2012 2011 2010
(Reviewed)
(BGN 000)
Term deposits from banks ................................................................... 102,957 30,856 64,317
Total deposits ..................................................................................... 3,907,685 3,529,671 2,325,337
Distribution of Deposits by Currency
The following table shows a breakdown of the Group's deposits by currency and as a percentage of the Group's total deposits as at each of the periods indicated.
As at 30 June As at 31 December
2012 % of total 2011 Percentage
of total 2010 Percentage
of total
(Reviewed)
(BGN 000) (Per cent.) (BGN 000) (Per cent.) (BGN 000) (Per cent.)
Deposits in BGN .................................. 1,743,994 44.63 1,702,034 48.22 887,836 38.18 Deposits in EUR .................................. 1,648,758 42.19 1,393,754 39.49 1,051,959 45.24 Deposits in USD .................................. 504,635 12.92 433,709 12.29 385,494 16.58 Other .................................................... 10,298 0.26 174 - 48 -
Total .................................................... 3,907,685 100.00 3,529,671 100.00 2,325,337 100.00
Maturity Composition of Term Deposits
The following table shows a breakdown of the maturity of the Group's term deposits as at each of the periods indicated.
As at 30 June As at 31 December
2012 Percentage
of total 2011 Percentage
of total 2010 Percentage
of total
(Reviewed)
(BGN 000) (Per cent.) (BGN 000) (Per cent.) (BGN 000) (Per cent.)
One month or less ............................... 250,094 14.96 254,309 19.20 211,532 22.17 One to three months ............................ 158,412 9.48 124,914 9.43 282,688 29.63 Three months to one year ................... 1,120,685 67.04 803,140 60.64 419,181 43.94 One to five years ................................. 138,546 8.28 133,058 10.05 40,655 4.26 Over five years .................................... 4,000 0.24 9,006 0.68 - -
Total deposits .................................... 1,671,737 100.0 1,324,427 100.0 954,056 100.0
Return on Equity and Assets
The following table shows a breakdown of the return on the Group's equity and assets as at each of the periods indicated. Average balances are based on the Group's balances as at the end of each financial period divided by two.
Six months
ended 30 June Year ended 31 December
2012 2011 2010
(Reviewed)
(BGN 000, except percentages)
Net profit attributable to Bank's shareholders ..................................... 24,584 59,811 74,415 Average total assets ............................................................................. 4,264,084 3,329,314 2,282,663 Average equity ..................................................................................... 401,642 354,892 294,659 Net profit as a percentage of: Average total assets (%) ...................................................................... 1.15% 1.80% 3.26% Average equity (%) .............................................................................. 12.24% 16.85% 25.25% Dividends paid ..................................................................................... - - 31,492
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Six months
ended 30 June Year ended 31 December
2012 2011 2010
(Reviewed)
(BGN 000, except percentages)
Average equity as a percentage of average total assets....................... 9.42% 10.66% 12.91%
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RELATED PARTY TRANSACTIONS
The Bank has entered into and intends in the future to enter into transactions with related parties within the meaning of IAS 24 "Related Party Disclosures".
Unless stated otherwise, the entities indicated below have been considered to be related parties to the Bank (the "Related Parties"): (i) associated companies: the subsidiaries of the Bank (see "Business – Group Structure"); (ii) shareholders of the Bank (see "Principal Shareholders"); (iii) Directors and Management (see "Management"); (iv) relatives of Administrators of the Bank; and (v) employees of the Bank. Related party transactions include loans, deposit taking, subordinated loans, guarantees, securities, trade finance, letters of credit, foreign currency and other transactions. In Related Parties transactions, depending on the circumstances the Bank aims to obtain collateral and/or guarantees to reduce credit risk.
In the opinion of the Bank, all transactions with related parties are conducted on an arm's length basis.
Members of the management team of the Bank have connections to certain borrowers (though the percentage of total loan book is not more than 0.1 per cent.). These are not, however, related party transactions for the purpose of the BNB or IFRS accounting. Management have confirmed that such loans have been conducted at market rates, that they do not represent a conflict of interest, and are not of an amount that is material in the context of the issue of the Notes.
The following table presents summarized information on the transactions with related parties entered as at 31 December 2010, 31 December 2011 and 30 June 2012, respectively.
As at 30 June 2012 As at 31 December 2011 As at 31 December 2010
Related party
balances
Percentage in
aggregate of total
Related party
balances
Percentage in
aggregate of total
Related party
balances
Percentage in
aggregate of total
(Reviewed)
(BGN 000 except percentages)
Loans granted Transactions with associated companies ............................................ - - - - - - Transactions with Management and Directors of the Bank ........................... 1,353 0.05 1,331 0.05 1,007 0.06 Transactions with relatives of Administrators of the Bank ................. 6,934 0.23 19,275 0.73 5,845 0.35 Transactions with employees of the Bank ..................................................... 2,746 0.09 2,639 0.10 2,180 0.13
Total .................................................... 2,961,191 100.0 2,629,062 100.0 1,659,703 100.0
Deposits and current accounts Transactions with associated companies ............................................ 117 0.00 109 0.00 1,541 0.09 Transactions with Management and Directors of the Bank ........................... 61,689 1.62 42,818 1.22 40,945 2.47 Transactions with relatives of Administrators of the Bank ................. 49,589 1.30 26,319 0.75 22,698 1.37 Transactions with employees of the Bank ..................................................... 7,963 0.21 7,210 0.21 5,376 0.32
Total .................................................... 3,804,728 100.0 3 498,815 100.0 2,261,020 100.0
Contingent liabilities Transactions with associated companies ............................................ - - - - - - Transactions with Management and Directors of the Bank ........................... 279 0.14 283 0.13 163 0.06 Transactions with relatives of Administrators of the Bank ................. 3,494 1.78 3,331 1.48 3,284 1.20 Transactions with employees of the Bank ..................................................... 133 0.07 156 0.07 121 0.04
Total .................................................... 196,669 100.0 225,615 100.0 273,012 100.0
Subordinated loan Transactions with shareholders of the Bank ..................................................... 58,732 100 39,709 100 - -
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Remuneration to Directors
For the year ended 31 December 2011, the remuneration paid to the members of the Supervisory Board, to the members of the Management Board and to the procurators of the Bank ("Directors") for acting in such capacity totalled BGN 1,362 thousand (each member of the Supervisory Board received annual remuneration amounting to BGN 145 thousand and each member of the Management Board received annual remuneration amounting to BGN 169 thousand). The procurators received annual remuneration amounting to BGN 45 thousand. For the year ending 31 December 2010, the remuneration paid to the Directors for acting in such capacity was BGN 1,232 thousand (each member of the Supervisory Board received annual remuneration amounting to BGN 145 thousand and each member of the Management Board received annual remuneration amounting to BGN 169 thousand). The procurators received annual remuneration amounting to BGN 48 thousand.
For the first half of 2012, the remuneration paid to the Directors for acting in such capacity was BGN 606 thousand (each member of the Supervisory Board received annual remuneration amounting to BGN 145 thousand and each member of the Management Board received annual remuneration amounting to BGN 169 thousand). The procurators received annual remuneration amounting to BGN 24 thousand.
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PRINCIPAL SHAREHOLDERS
Share Capital
As at the date of this Prospectus, the share capital of the Bank amounts to BGN 60 million divided into 6 million shares with a nominal value of BGN 10 each. All issued shares are ordinary dematerialised (registered) shares each of which entitling its holder to one vote at the General Shareholders' Meeting as well as to a dividend and liquidation quota proportionate to the share's nominal value.
No preferred shares are issued as at the date of this Prospectus. Pursuant to the Public Offering of Securities Act 2000 and its Articles of Association, the Bank may issue preferred shares but may not issue shares entitling their holders to more than one vote at the General Shareholders' Meeting or to additional liquidation quota. In addition, pursuant to the Credit Institutions Act 2006, the banks may only issue dematerialised voting shares, i.e. the preferred shares issued by banks may not be non-voting in contrast to common joint-stock companies which are allowed to issue non-voting preferred shares.
Shareholding Structure
The table below presents the shareholding structure of the Bank as at 14 September 2012.
As at 14 September 2012
Number of Shares Percentage of votes at the General Meeting
Bromak EOOD .................................................................................................. 3,017,310 50.29 Bulgarian Acquisition Company II S.A.R.L. .................................................... 1,979,400 32.99 Other .................................................................................................................. 1,003,290 16.72
Total .................................................................................................................. 6,000,000 100.0
________ Source: The Bank
To the best of the knowledge of the Bank, in the past twelve months no major shareholder of the Bank has publicly announced its intention to sell a substantial number of the shares in the Bank in the near future. Nevertheless, the Bank cannot rule out the possibility that such intention will be announced in the near future and/or that the sale of a substantial number of the shares will be effected in the near future.
Principal Shareholders
Since the Bank is a publicly listed company the shares of which are publicly traded on the main market of the Bulgarian Stock Exchange, Standard Equities Segment (BSE Code: 6C9), the Bank does not have detailed information regarding the shareholding structure existing as at the date of this Prospectus.
Pursuant to the provisions of the Bulgarian Public Offering of Securities Act 2000, any shareholder in a public company who acquires or transfers directly or indirectly (as defined in Art. 146 of this act) voting rights in the general shareholders' meeting shall notify the public company and the Bulgarian Financial Supervision Commission, where as a result of the acquisition or transfer his voting rights reach, exceed or fall below 5 per cent. or a figure multiple of 5 per cent. from the total number of votes in the public company's general shareholders' meeting. The shareholders must submit such a notification also in case of a change of their voting rights resulting of changes in the total number of votes in the general shareholders' meeting (increase or reduction of the share capital). When the reaching or exceeding said thresholds is as a result of direct acquisition or transfer of shares, the obligation for submission of a notification shall also arise for the Bulgarian Central Depository. The public company must disclose to the general public the information provided with the notifications specified above within three business days after receiving this information.
The below information regarding the Bank's shareholding structure is based on the information provided to the Bank by its major shareholders in accordance with the respective Bulgarian regulations covering the reporting obligations of major shareholders, as well as public information from the Bulgarian Commercial Register as at 14 September.
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In accordance with the above, the major shareholders, i.e. the persons directly holding at least five percent of the total number of votes at the General Shareholders' Meeting are:
• Bromak EOOD, a limited liability company duly incorporated and existing under the laws of Bulgaria, having its registered office at 17 Debyr Street, Krasno Selo residential quarter, Krasno selo district, Sofia, Bulgaria, which holds 3,017,310 shares representing 50.29 per cent. of the Bank's share capital, which entitles it to 3,017,310 votes and which constitute 50.29 per cent. of the total number of votes at a General Shareholders' Meetings;
• Bulgarian Acquisition Company II S.A.R.L, a limited liability company (société à responsabilité limitée) is duly incorporated and existing under the laws of Luxembourg, having its registered office at 7 Val Sainte-Croix, L-1371 Luxembourg, which holds 1,979,400 shares representing 32.99 per cent. of the Bank's share capital, which entitles it to 1,979,400 votes and which constitute 32.99 per cent. of the total number of votes at a General Shareholders' Meetings.
Bromak EOOD is wholly owned by Tzvetan Radoev Vassilev, the chairman of the Supervisory Board. Therefore, according to Article 146 of the Bulgarian Public Offering of Securities Act, Mr. Vassilev should be regarded as an indirect owner, through Bromak EOOD, of 3,017,310 shares representing 50.29 per cent. of the share capital of the Bank.
Bulgarian Acquisition Company II S.A.R.L is a company controlled by the State General Reserve Fund of the Sultanate of Oman (SGRF). SGRF is a special vehicle to the Ministry of Finance of the Sultanate of Oman, entrusted with the responsibility to manage the Foreign Currency Reserve of the Sultanate of Oman as well as with the management of the state investments abroad.
All of the shares owned by the major shareholders mentioned above are ordinary shares and each share entitles its holder to one vote at the General Shareholders' Meetings. The major shareholders mentioned above do not hold any other voting rights at the General Shareholders' Meetings which are different from the voting rights of the other shareholders.
Save as disclosed in this section, the Bank is not aware of any shareholder who immediately following the listing is, or who will be, holding, whether directly or indirectly (including through the above direct shareholders), five percent or more of the Bank's issued share capital or total votes at the General Shareholders' Meetings.
Control Over the Bank
Mr. Tzvetan Vassilev's (the "Controlling Shareholder") participation exceeds 50 per cent. of the total number of votes at the General Shareholders' Meetings and therefore represents a controlling interest in the Bank.
There are no other natural or legal persons, or groups of such persons who have significant influence or control over the Bank. The Bank is not aware of any agreements which could result in a change of control of the Bank.
To the best of the Bank's knowledge, there are no conflicts of interests between the Controlling Shareholder and the Bank.
All of the Bank's shareholders, including the major shareholders, exercise the shareholders' rights set forth in the Commercial Act 1991, in the Articles of Association and in the other applicable regulations. The Articles of Association or other constitutional documents of the Bank do not contain provisions which specifically prevent the possible abuse of control by the Bank's major shareholders.
Pursuant to the provisions of the Bulgarian Public Offering of Securities Act 2000 each transaction of the Bank with the participation of an "interested" person (as defined in Art. 114, Para 5 of this act, including the major shareholders of a public company) above the specified thresholds is subject to preliminary shareholder approval at the General Shareholders' Meeting of the Bank. The preliminary shareholder approval is necessary for transactions between the Bank and its major shareholders (directly or through related persons) which relate to long-term assets or which give rise to obligations for the Bank if the value of the transaction exceeds 2 per cent. of the value of the Bank's assets in the last audited balance sheet or in the last prepared balance sheet (whichever is lower). The preliminary shareholder approval is also necessary when as a result of transactions between the Bank and major shareholders (directly or through
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related persons) the Bank shall acquire receivables amounting to more than 0.2 per cent. of the value of the Bank's assets in the last audited balance sheet or in the last prepared balance sheet (whichever is lower). The interested party in such a transaction may not exercise his voting rights at the general shareholders' meeting. When the transaction with the participation of interested parties is below the thresholds specified above, it is subject to the preliminary approval of the Management Board and the board members who are interested may not participate in the procedure for passing the resolution.
In 2007, the Bank has adopted a programme for application of the internationally recognised standards for good corporate governance. The Supervisory Board and the Management Boards made a decision in November 2007 that the Bank shall adopt and comply with the Bulgarian National Corporate Governance Code. For more information see "Management – Corporate Governance".
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THE BANKING SECTOR AND BANKING REGULATION IN BULGARIA
The following information relating to the Bulgarian banking sector and regulation in Bulgaria is for background purposes only. Some of this information has been extracted from publicly available sources and is sourced where it has been so provided. The Bank has not independently verified the information that has been extracted from publicly available sources. Although the Issuer and the Bank accept responsibility for extracting and reproducing such information accurately, the Issuer and the Bank do not accept responsibility for the accuracy of such information.
Introduction to the Bulgarian Banking System
History and Development of the Bulgarian Banking Sector
First Years Following the Collapse of Communism
Bulgaria began its transition to a market economy with a Soviet-type, state monopolised banking system. The BNB and its regional branches were under the direct control of the government. This centralised network had the dual responsibility of extending loans to enterprises in accordance with administrative planning and of holding and monitoring the accounts of the government. In addition to the BNB's network of branches, the State Savings Bank held private deposits and the Foreign Trade Bank carried out foreign economic operations.
In 1989, the banking system was transformed. The BNB's activities were restricted to those of a conventional central bank, and 59 small- and medium-sized commercial banks were created out of former branches of the BNB. Following the collapse of trade within the Council for Mutual Economic Assistance bloc and the initial shock of price liberalisation, many enterprises began to incur losses, and the volume of debt arrears to commercial banks increased. The problems in the banking sector were exacerbated by the fact that commercial banks inherited largely unserviceable loans from state owned companies, mainly denominated in foreign currencies, which became even more burdensome as a result of the rapid inflation experienced in the early 1990s.
The 1996 Banking Crisis
The state of the banking sector continued to deteriorate and by December 1995, with the exception of one of the large state-owned banks, Bulbank, the aggregate capital base of the banking sector had become negative. Over 70 per cent. of all commercial loans were classified as delinquent and losses were accumulated rapidly. Despite these trends, the extension of new credits continued. To overcome the escalating problems in the banking sector, the government and the BNB undertook various steps to relieve banks from non-performing loans and low capitalisation. However, the banking sector failed to recover, and an unrealistic expectation arose that the state would continue to bail out troubled state-owned banks. The rise of delinquent credits, however, was not just limited to the state sector. While commercial banks were accustomed to supporting many loss-making, state-owned enterprises, half of all new credits were channelled to the private sector, where a very small number of large loans was concentrated. These private sector borrowers proved no better at servicing their debt.
In the period from 1992 to 1997, the problems faced by banks included low capitalisation, bad debt, a shortage of qualified bank personnel, problems in the feasibility and credibility of policies and the BNB's inability to enforce regulations. The problems in the banking sector culminated in massive withdrawals of deposits from banks in 1996, resulting in a number of bank mergers, closures and privatisations and the introduction of additional regulation to stabilise the remaining institutions. During the banking crisis in 1996 and 1997, approximately one-third of all Bulgarian banks were found to be insolvent by the BNB and were subsequently closed. As a result of the banking crisis, the overall size of the banking sector decreased by more than 75 per cent. The Bulgarian government also took measures to stabilise its currency by instituting the currency board arrangement.
Stabilization of the Banking System and Bank Privatization
In 1997, the Bank Consolidation Company (the "BCC") was given a mandate to privatise the state-owned banks that emerged from the banking consolidation process. By May 2003, all six state-owned banks for which the BCC had been responsible were sold and the banking system was almost completely privatised and state ownership in the banking sector as a share of bank assets was reduced to below 3 per cent. In
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October 2004, the Ministry of Finance, as BCC's controlling shareholder, resolved to dissolve BCC following the successful completion of the bank privatisation process.
Since the banking crisis of 1996 and 1997, significant progress has been made in strengthening the banking system through recapitalisation, closure of weak and bankrupt banks and implementation of enhanced banking supervision. Stricter standards in granting banking licences have been implemented. Shareholders with stakes of 10 per cent. or more in a bank are required to obtain permission from the BNB, and shareholders with stakes over 3 per cent. are required to disclose the origin of the funds they have invested. New regulations have been developed to govern the closure of commercial banks. The procedure for closing banks has been simplified and the extent to which the BNB is entitled by law to exercise discretionary functions has been clarified.
Since 1997, the BNB has adopted new banking regulations imposing more stringent capital adequacy ratios on commercial banks, reflecting the BNB's conservative policy. The capital adequacy ratios imposed by the BNB are equal to or are higher than those set by the international framework adopted by the Basel Committee on Banking Regulations and Supervisory Practice for capital measurement and capital standards of banking institutions (see " - Capital Requirements" below). According to the BNB's statistics, banks, emerging cautiously from the financial crisis of 1996 and 1997, initially maintained excessively high capital adequacy levels of 41.3 per cent. in 1999. With the cautious restructuring of assets and gradual opening up to lending (initially to the corporate sector and subsequently to retail clients), capital adequacy fell substantially and stabilised at around 16.0 per cent. in 2005.
The Period of Economic Growth
In 2003 and 2004, activity in the banking sector intensified due to growing domestic demand for loans and increased risk appetite of banks. There was a trend of restructuring banking assets from low-yielding government bonds and deposits with foreign banks to loans. The growth in lending was financed by growth in domestic deposits and by increased funding from outside Bulgaria. According to the BNB's statistics, the overall assets in the banking system increased to approximately BGN 5.3 billion at 31 December 2004, and BGN 32.9 billion at 31 December 2005. The private loans to assets ratio for the system increased from 41.4 per cent. in 2002 to 52 per cent. in 2003, 53.6 per cent. in 2004 and 54 per cent. in 2005.
From 2005 to the end of 2008, during the period of rapid economic growth in Bulgaria, international markets were characterised by high liquidity and offered fast, easy and cheap access to money for businesses, capital and credit resources. The booming economies in Central and Eastern Europe, including Bulgaria led to the interest of foreign investors. Bulgarian banks considerably expanded their lending operations, financed mainly with external resources provided by parent banks. According to the BNB's statistics, by the end of 2008 the total banking system assets had more than doubled, reaching BGN 69.6 billion as at 31 December 2008, as compared with BGN 32.9 billion as at 31 December 2005. At the end of December 2008, the average level for the Bulgarian banking system net interest rate margin came to 4.9 per cent., higher than in a great number of EU countries' banking systems.
The Global Financial and Economic Crisis and Afterwards
The global financial and economic crisis had a direct adverse impact on the development of the Bulgarian banking system. The growth of the banking system's total assets was significantly constrained after 2008 and a sudden drop in funding and credit expansion occurred. In 2011, some slight signs of improvement occurred and as at 31 December 2011 banking system assets increased by 10.4 per cent. to BGN 76.8 billion as compared to the end of 2008; however, net interest spread declined from 5.1 per cent. at the end of 2008 to 4.4 per cent. at the end of 2011 (Source: BNB statistics).
As domestic demand remained weak, bank credit grew marginally. According to the BNB's statistics, credit to the private sector grew by 3.1 per cent. in 2011 mainly on account of the corporate sector while credit to households has been declining since 2009. At the same time, in part as a result of the competitive savings rates offered by banks in the uncertain environment, total deposits increased significantly during the last three years and since the beginning of 2011, have increased by more than 30 per cent. This has helped Bulgarian banks to finance their lending activity regardless of the reduction in cross-border funding from parent banks.
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During the last three years the quality of bank portfolios has deteriorated. According to the BNB's statistics, the share of non-performing loans increased steadily from 2.4 per cent. in December 2008 to 14.9 per cent. in December 2011 although the pace of the increase has slowed since the beginning of 2011. The ratio of loan loss provisions to total loans for the Bulgarian banking system increased three times from 2.4 per cent. at 31 December 2008 to 7.3 per cent. as at 31 December 2011.
The existing stringent prudential rules have kept banks well capitalised and liquid. During the last three financial years the Bulgarian banks set aside more capital and, consequently, the total capital adequacy of the banking sector increased to 17.5 per cent. as at 31 December 2011 as compared to 14.9 per cent. reported as at 31 December 2008 (Source: BNB statistics).
The BNB further strengthened the banking supervision, liquidity monitoring and stress testing of the banks, improved cooperation with parent bank supervisors and established a Financial Stability Unit. According to the BNB, the most robust protection of the Bulgarian banking system against external shocks is that most foreign banks operate in the country as subsidiaries. European Union bank subsidiaries manage approximately 70 per cent. of the total assets of the Bulgarian banking system, while the market share of the EU bank branches is only 4 per cent. of total assets. Although owned by foreign investors, the bank subsidiaries operate in the country under the BNB regulation and must meet the higher Bulgarian capital requirements (e.g. 12 per cent. capital adequacy ratio instead of the EU 8 per cent. minimum requirement).
According to the BNB statistics, as at 30 June 2012 the total assets of the Bulgarian banking sector were valued at BGN 79.4 billion, which represented a 3.4 per cent. growth compared to BGN 76.8 billion banking assets at 31 December 2011. As at 30 June 2012, the amount of deposits from non-financial institutions reached BGN 54.9 billion, an increase of 3.5 per cent. compared to BGN 53 billion non-financial institutions deposits as at 31 December 2011. The banking system's ratio of loan loss provisions to total loans (without exposures to banks) increased to 7.8 per cent. as at 30 June 2012 compared to 7.3 per cent. as at 31 December 2011. Net interest spread decreased from 4.4 per cent. at the end of 2011 to 3.9 per cent. as at 30 June 2012. As at 30 June 2012, the total capital adequacy of the banking sector was 16.7 per cent..
The high level of foreign ownership in the Bulgarian banking system makes it vulnerable to disruption as a result of internal or external factors. As at 30 June 2012, around three-quarters of the total assets of the banking system in Bulgaria were foreign owned, and about 25 per cent. of banks were domestically owned, according to supervisory data reported by the BNB. The Bulgarian banking system is exposed to the banking systems of other countries, including Italy, Greece, Austria and France. Foreign banks may rebalance their global loan portfolio in a manner adversely affecting Bulgaria as a result of events related or unrelated to Bulgaria, including as a result of the ongoing economic turbulence in the Eurozone and sovereign debt markets. In addition, foreign banks may decrease funding to their subsidiaries operating in Bulgaria due to actual or perceived deterioration in asset quality, particularly in the event of a weaker than expected economic performance and a rise in non-performing loans. As a result of these or other factors, or other potential shocks, foreign banks may revise their business strategies in, or relating to, Bulgaria and in particular their decision to fund their subsidiaries in Bulgaria.
Structure of the Bulgarian Banking Sector
The Bulgarian banking sector consists of the BNB and universal commercial banks. Non-bank financial institutions could provide certain limited banking services, such as maintaining accounts, making payments and extension of loans financed by privately raised funds.
The only state-owned bank is Encouragement Bank, established in 1999 for the purpose of providing loans to small and medium-sized businesses. The Municipal Bank is majority owned by Sofia Municipality.
Commercial Banks
According to the BNB, there are currently 31 banks in Bulgaria, of which 7 are branches of foreign banks and 18 are subsidiaries of foreign institutions. As at 30 June 2012, EU banks had a share of over 70 per cent. of the Bulgarian banking system, of which more than 90 per cent. were subsidiaries of EU banks and the rest were branches. UniCredit Bulbank, Société Générale Expressbank, Allianz Bank Bulgaria, Raiffeisenbank Bulgaria, Eurobank EFG Bulgaria and Piraeus Bank Bulgaria are subsidiaries of the
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respective foreign banks, specified in their names. The United Bulgarian Bank is a subsidiary of the National Bank of Greece, DSK Bank is owned by the Hungarian OTP and CIBank is owned by KBC Group. ING Bank, Citibank, BNP Paribas, and other large internationally active banks are also present in the Bulgarian banking market via branches.
The Bulgarian National Bank
The BNB was established pursuant to the first Bulgarian National Bank Act in 1879 and was originally charged with banking sector regulation and supervision but, especially after 1946, has participated in lending activities. Pursuant to the Bulgarian National Bank Act (1991), it was transformed into a conventional central bank. Currently, the BNB is regulated by the Bulgarian National Bank Act of 1997 (the "BNBA").
Bulgaria's monetary and exchange rate policies are shaped by the currency board arrangement established under the Bulgarian National Bank Act in July 1997. A major goal of the BNB is to maintain the stability of the Bulgraian national currency, the Lev. Under the Bulgarian National Bank Act, the BNB is required to maintain full foreign exchange coverage for its monetary liabilities and to effectively manage its foreign exchange reserves. In order to continue to effectively implement the currency board arrangement, the government needs to continue to pursue non-inflationary policies.
The tasks and responsibilities of the BNB also include:
• Maintaining full foreign exchange cover of the total amount of monetary liabilities of the BNB;
• Investing the gross international reserves in accordance with the principles and practices of prudent investment;
• Regulating and supervising commercial banks' activities for the purpose of ensuring the stability of the banking system and protecting the depositors' interests;
• Contributing to the establishment and functioning of efficient payment systems and supervising activities;
• Regulating and supervising the activities of payment system operators, payment institutions and electronic money institutions;
• Issuing banknotes and mint coins in Bulgaria, which is the exclusive right of the BNB, and
• Acting as the fiscal agent and depository of the Bulgarian state by virtue of contracts entered into in accordance with market conditions.
In July 1997, the Lev's exchange rate was pegged to the Deutsche mark by law at a ratio of DEM 1 = BGN 1,000. Under the BNBA, since the introduction of the Euro in January 1999, the Lev has been fixed to the euro according to the cross-rate at which the Deutsche mark was fixed to the Euro (€1 = BGL 1,955.83). In July 1999, the Lev was redenominated at the equivalent of parity for the new Lev (BGL new or BGN 1 = BGL 1,000) with the Deutsche mark (DEM 1 = BGN 1 and €1 = BGN 1.95583). The BNB sells and buys Euro in Bulgaria without any limitations at the fixed exchange rate.
In 1997, when Bulgaria adopted the currency board arrangement, it limited the BNB's discretionary functions. Pursuant to the BNBA, the BNB cannot extend credits or guarantees to the Government and governmental institutions, municipalities and municipal institutions. The BNB may act as a lender of last resort only upon the emergence of a liquidity risk that may affect the stability of the banking system, only for a period of up to three months and up to the amount of the excess of its foreign exchange reserves over its monetary liabilities. Such lending is restricted to commercial banks, and is permitted only if loans are fully backed up by prime rate highly liquid assets. At the date of this document, this option has never been used.
Since 1 January 2007, the BNB has been a full member of the European System of Central Banks and complies with the provisions of the EU Treaty and the Statute of the European System of Central Banks and the European Central Bank with respect to the institutional, personal and operational independence of the BNB and the members of its managing board. Under the BNBA, the BNB has a high degree of operational and financial independence. In performing its functions and responsibilities, the BNB is
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independent of the government and other state bodies. The BNB reports directly to the Parliament of Bulgaria.
The BNB is governed by a Governing Council, the governor and the three deputy governors. The Governing Council consists of seven members: the governor, the three deputy governors and three other members. The governor is elected by the parliament. The deputy governors are elected by the parliament on a proposal made by the governor, while the three other members are appointed by the president of the Republic of Bulgaria. The governor's and the other governing council members' personal independence is ensured by a six-year term of office. Members of the governing council may be dismissed prior to the end of their term only for failure to fulfil their functions or for serious violations of law.
The BNBA establishes three main departments at the BNB – an Issue Department, a Banking Department and a Banking Supervision Department. Each department is headed by a deputy governor of the BNB. The Issue Department is focused on maintaining full foreign exchange cover of the total amount of monetary liabilities of the BNB, by taking actions needed for the efficient management of the BNB's gross international reserves. The deputy governor heading the Banking Department is responsible for the supervision of payment system operators, payment institutions and electronic money institutions. Also, in case of any systemic risk for the stability of the banking system, the Banking Department shall perform the lender of last resort function pursuant to the provisions of the BNBA and the secondary legislation adopted by the governing council of the BNB. The deputy governor in charge of the Banking Supervision Department exercises the supervision over the banking system.
The BNBA implements EU provisions by prohibiting government budget deficit financing through borrowing from the BNB and by curtailing state institutions' privileged access to financing. As specified above, the BNBA explicitly stipulates that the BNB shall not extend loans in any form to the government or government institutions except against the purchase of special drawing rights from the IMF and under strict terms and conditions designed to avoid the creation of an inflationary environment. The BNB on-lends to the government the funds it receives from the IMF.
The BNB keeps accounts and records in compliance with the Accountancy Act and in accordance with the international accounting standards. The expenditure of the BNB is in accordance with annual budget approved by the Governing Council of the BNB and published in the State Gazette. The reports on the budget outlays are examined by the National Audit Office, which prepares a special report on the results of the examination. The report on the budget expenditure of the BNB is submitted to the parliament simultaneously with the BNB's annual report.
Legislative Framework of the Bulgarian Banking Sector
Following the 1996-1997 banking crisis, significant progress has been made in improving banking sector regulation and supervision as well as in enhancing the BNB's regulatory power. The BNB is responsible for the licensing, the regulation and the on-going supervision of the banking sector. Bulgarian banks are subject to the supervision of the BNB and, if they also provide investment services, of the Financial Supervision Commission.
The principal objectives of the banking laws and regulations in Bulgaria are the protection of depositors, the fulfilment of monetary policy objectives and the orderly distribution of credit. The following major Acts of Parliament, as amended, regulate the activities of Bulgarian banks:
• the Commercial Act 1991;
• the Special Pledges Act 1996;
• the Bulgarian National Bank Act 1997;
• the Bank Deposits Guarantee Act 1998;
• the Measures Against Money Laundering Act 1998;
• the Currency Act 1999;
• the Mortgage-Backed Bonds Act 2000;
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• the Public Offer of Securities Act 2000;
• the Banks Insolvency Act 2002;
• the Financial Supervision Commission Act 2003;
• the Measures Against Financing of Terrorism Act 2003;
• the Special Investment Purpose Companies Act 2003;
• the Credit Institutions Act 2006;
• the Financial Collateral Arrangements Act 2006;
• the Measures against Market Abuse with Financial Instruments Act 2006;
• the Supplementary Supervision over Financial Conglomerates Act 2006;
• the Markets in Financial Instruments Act 2007;
• the Payment Services and Payment Systems Act 2009;
• the Consumer Credit Act 2010;
• the Activities of Collective Investment Schemes and Other Collective Investment Undertakings Act 2011; and
• the Restrictions on Cash Payments Act 2011.
A comprehensive set of secondary legislation has been enacted by the BNB and other authorities pursuant to powers delegated under the above acts, in particular under the Credit Institutions Act. The regulatory framework for Bulgarian banks centres on prudential regulation. The Bulgarian authorities also closely follow and implement relevant EU directives. Certain material provisions of the Bulgarian banking legislative and regulatory framework are summarised below.
Licensing and Supervisory Measures
A credit organisation must hold a licence issued by the BNB to conduct "banking activities" as defined in the Credit Institutions Act. Licence applicants must submit to the BNB a business plan describing in detail the planned activities, client and product structure, the aims, policy and strategy of the bank, financial forecasts for a 3-year term; data of the members of the management and supervisory bodies, including data of their qualification and professional experience; data of the persons holding 3 per cent or more of the share capital of the bank together with documents certifying the origin of the funds and the taxes paid in the last 5 years, and data of their professional activities in the last 5 years.
In principle, the bank must be incorporated in the Republic of Bulgaria; however, a foreign bank may conduct activities in Bulgaria through a branch. Under the Credit Institutions Act, banks may be incorporated only as joint stock companies with dematerialized (registered) shares each of which entitles its holder to one vote at the general shareholders' meeting. The minimum required amount of the share capital as paid-in upon the establishment of the bank is BGN 10 million. Contributions against subscribed shares of up to the minimum required amount of the bank's share capital may only be in cash (in-kind contributions are not permitted). A bank may have one-tier management system (board of directors) or two-tier management system (management board and supervisory board). Both individuals and legal entities may be elected as members of the supervisory board. Only individuals may be elected as members of the management bodies of the bank (the board of directors or the management board, respectively). The day-to-day operation of the bank shall be managed and the bank shall be represented jointly by at least two persons, at least one of whom shall be proficient in Bulgarian. These persons shall manage the bank by being personally present at the bank's registered address.
The BNB may refuse to issue a licence if, among other things:
• Application materials do not comply with Bulgarian law;
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• The share capital of the bank and the paid-in amount are not sufficient;
• The members of the supervisory or management bodies do not comply with the legal requirements in respect of their education, qualification and professional experience, or are subject to a legal conjunction to hold this position;
• The financial standing of the bank's founders or their reputation is unsatisfactory, including in case:
• The shareholders who have subscribed for 3 per cent. or more of the share capital have not made contributions with own funds or the origin of these funds is not transparent or legitimate;
• In the BNB's judgment, shareholders controlling more than 3 per cent. of the share capital could, either by their activities or through their influence on decision making, injure the safety or soundness of the bank or its operations;
• In the BNB's judgment, the amount of the property owned or the activities conducted by the persons who have subscribed for 10 per cent. or more of the share capital of the bank do not correspond to the amount of their participation in the capital of the bank and raise suspicions about the reliability and suitability of these persons to support the bank's capital where needed.
A foreign bank licensed in another EU member state may carry out banking activities within the territory of Bulgaria through a branch after the competent authority in the respective member state that has granted the licence has notified the BNB thereof.
A foreign bank having its seat in a third state may conduct banking activities through a branch in Bulgaria after being issued a licence by the BNB.
The BNB is empowered to impose, at its discretion, a number of supervisory measures in case of a failure by a bank to comply with any legal requirement set forth in the Credit Institutions Act 2006 or the secondary legislation for its application, any recommendation from the BNB or any written commitment by a bank to the BNB. Depending on the specific case or violation, these measures may include, among the other things, placing a bank under special supervision in the case of potential insolvency or even revoking the banking licence of the bank. Pursuant to the Credit Institutions Act 2006, a risk of insolvency in a bank exists if: (a) the bank's total capital adequacy ratio is below the minimum level set; or (b) the bank's liquid assets will in the BNB's opinion be insufficient to enable the bank to fulfil its obligations in a timely manner; or (c) the bank has not fulfilled, on one or more occasions, its obligations to its creditors when they have become due.
In addition, the BNB may, at its discretion, withdraw a granted banking licence if, among other things:
• The bank fails to commence the permitted banking activities within 12 months after the licence has been granted, or
• The bank has ceased activities for more than 6 months, or
• The bank has insufficient own funds, or it cannot be considered that it will continue to meet its obligations towards its creditors, including where it does not ensure the security of the assets entrusted to it.
The above shall also apply to the withdrawal of the licence granted to a bank having its seat in a third country to conduct activities in Bulgaria through a branch. In addition, the BNB shall withdraw the banking licence of a third-country bank to conduct activities via a branch where the licence of the bank has been withdrawn by the competent authority of its home state.
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The BNB shall withdraw the banking licence granted to a locally established bank due to insolvency, where:
• a bank fails to pay its obligation due for more than 7 business days if it is directly related to the bank's financial status and at the BNB discretion, no repayment on obligations due may be expected in a reasonable period of time, or
• the amount of the bank's capital is negative.
Capital Requirements
After continued consultation, the Basel Committee on Banking Supervision released The International Convergence of Capital Measurement and Capital Standards − A Revised Framework ("Basel II", or the "New Basel Accord"). The Basel II rules came into effect in Bulgaria on 1 January 2007. The New Basel Accord regulates the capital requirements for financial institutions. Basel II envisages new, more risk sensitive rules for the calculation of the capital required to support the various risks based on internal models developed by banks and approved by the BNB, supervisory review and market discipline (through more extensive disclosures). Basel II makes the capital adequacy of banks more transparent for market participants and bank service users.
Basel II provides definitions for "Tier 1" capital and "Tier 2" capital, a system for weighting assets and off balance sheet items according to credit risk and a requirement that banks engaged in international operations maintain Tier 1 capital of at least 4 per cent. of risk-weighted assets and total capital (Tier 1 capital plus up to an equal amount of Tier 2 capital) of at least 8 per cent. of risk-weighted assets.
The capital adequacy of Bulgarian banks is subject to the capital adequacy requirements of the BNB Ordinance No. 8 of 2006. Ordinance No. 8 implements the recommendations of Basel II as laid out in EU Directive 2006/48/EC.
In Bulgaria, the required capital adequacy ratio set by the BNB for commercial banks is 12 per cent. whereas the Basel II and the European directives on capital adequacy require 8 per cent. The Tier 1 capital ratio set by the BNB is 6 per cent., whilst the Basel II requirement is 4 per cent. Capital adequacy ratios must be maintained for each commercial bank both on a stand-alone and on a consolidated basis. According to Ordinance No. 8 commercial banks are obliged to allocate capital not only for the credit and market risk (as previously regulated) but also for the operational risk, currency risk and settlement risk in their activities. Specific treatment of securitization schemes, collective investment schemes and credit derivatives is also envisaged. Capital adequacy is measured according to financial statements prepared in accordance with IFRS. Bulgarian banks calculate and report both primary and total capital ratios on a quarterly basis.
A bank's capital ratio is calculated by dividing the capital base by the risk weighted assets. The risk weighted assets and off-balance sheet items are determined in Ordinance No. 8 and have the same risk weights as in European Directives 2006/48/EC and are subject to certain national discretions.
Ordinance No. 8 requires the acceptance of the annual financial report by the general meeting of shareholders before including the retained earnings in Tier I capital. After the retained profits from previous years are included in Tier I capital, they can be used for dividends only with the approval of the BNB.
According to the BNB data, the total capital adequacy of the banking system was 16.74 per cent. as at 30 June 2012 as compared to 17.53 per cent. as at 31 December 2011 and 17.48 per cent. as at 31 December 2010.
Large Exposures
The Bulgarian Credit Institutions Act 2006 defines an exposure as a sum of certain balance-sheet assets and off-balance sheet items of a bank towards one person or economically related persons. An exposure which is equal or exceeds 10 per cent. of the capital of the bank or the bank group is considered a "large exposure". A large exposure may be established pursuant to a resolution adopted by the management body of the bank. When the exposure exceeds 15 per cent. the resolution has to be unanimous. The exposure towards one person or economically related persons may not exceed 25 per cent. of the own funds of the bank or the bank group, except for exposures to another credit institution or investment
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intermediary. Determining an exposure as a large exposure is carried out on the basis of a comparison between the exposure and the capital (capital base) of the bank.
Additional restrictions apply to exposures towards related parties. The bank may establish exposures only pursuant to a unanimous resolution of its collective managing body if the exposure is towards the following persons: (i) administrators of the bank (if the amount of the exposure exceeds his/her annual remuneration); (ii) shareholders holding more than 10 per cent. of the votes at the general shareholders' meeting of the bank (if the amount of the exposure exceeds 1 per cent. of the bank's own funds or BGN 300,000); (iii) a shareholder whose representative is a member of the managing or supervisory body of the bank (if the amount of the exposure exceeds 1 per cent. of the bank's own funds or BGN 300,000); (iv) spouses, brothers, sisters and relatives of direct lineage up to third degree including (which includes parents and children, grandparents and grandchildren, great-grandparents and great-grandchildren) of any of the persons specified above; and (v) other related persons. A bank may not give preferential conditions under the exposures to persons related to the bank.
A bank's total exposure to a related person which is not a credit institution or an investment intermediary may not exceed 10 per cent. of the bank's own funds. The total amount of all exposures of a bank to related persons may not exceed 25 per cent. of the bank's own funds.
The administrators of the bank (i.e. its directors and certain other senior management of the bank) who have authorized granting of credits in violation of the above rules shall be jointly and severally liable with the borrower for repayment of the granted sums.
The manner of specification of the exposure as a sum of certain balance-sheet assets and off-balance sheet items is further regulated in the BNB Ordinance No. 7 of 2006. According to Ordinance No. 7 a large exposure is established on a non-consolidated or consolidated basis as a sum of exposures towards an individual person or a group of economically related persons. Large exposure may also be a result of reduction of own funds (capital base), newly arising relatedness between individual persons, or an individual person and economically connected persons, which the bank is already exposed to or as a result of change in the market prices or other factors influencing the value of the bank's existing exposures. Therefore, where individual persons are found to be connected on a consolidated or non-consolidated basis, the exposures to them are summed up and reported as one exposure.
Ordinance No. 7 sets forth the exposure scope and reductions, and specific rules for exposures towards institutions, trading book exposures, syndicated loans, joint underwriting of issues. The banks are obliged to submit to the BNB notifications of any large exposure within 10 days after the resolution for establishment of a new large exposure or after the occurrence of another circumstance which results in the forming of a large exposure. In addition, the banks are obliged to prepare quarterly reports on the large exposures and submit the reports to the BNB within 15 days after the end of each reporting period.
Reserve Requirements
The minimum required reserves that banks maintain with the BNB are the main instrument used by the BNB to conduct its monetary policy conditions in Bulgaria. As the minimum required reserves are based on the funds attracted by the banks and are not remunerated, their amount implicitly affects the overall cost of funding banks and thus influences the banks' policies in setting their lending rates. For example, the reduction of the level of the minimum required reserves since the end of 2008 has boosted liquidity in the banking system and contributed to falling interest rates in the interbank money market.
The BNB Ordinance No. 21 of 1998 sets the level and the method for calculation of the minimum reserves required to be maintained by Bulgarian banks against their deposit base. With effect from 2008, Bulgarian banks are required to maintain reserves with the BNB equal to 10 per cent. of their attracted funds (except for attracted funds from other local banks licensed to operate as banks by the BNB, through the branches of a local bank abroad, funds in the form of debt/capital (hybrid) instruments or subordinated term debt approved by the BNB for inclusion in the bank's supplementary capital reserves). In addition to this requirement, banks shall maintain minimum required reserves amounting to 5 per cent. on funds attracted by banks from abroad. No reserves are required to be maintained on funds attracted from state and local government budgets. "Attracted funds" means generally all funding liabilities of a bank, including current and deposit accounts, liabilities in respect of bond issues, loans received (whether on a syndicated or bilateral basis) and discounted promissory notes, from whatever source and in whatever currency.
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The banks are required to submit to the BNB weekly reports on their deposit base (which is the base for calculation of the reserves), their cash in vaults and ATM terminals in Lev and foreign currency. The weekly report shall be submitted not later than on Tuesday of the week that follows the reporting week and information provided shall be for each day of the reporting week. In addition to the weekly reports, the banks shall also submit to the BNB, within two days after the end of each basis period (the period during which the deposit base is monitored in order to determine the amount of the minimum required reserves and which coincides with the calendar month), a report on the days between the latest weekly period and the end of the basis period.
Loss Provisions
Provisions against on and off-balance sheet credit exposures are regulated by the BNB Ordinance No. 9 of 2008 on valuation and classification of risk exposures of banks and setting of specific provisions for credit risk.
Ordinance No. 9 determines the criteria and manner of evaluating and classifying risk exposures of banks and for allocation of specific provisions for credit risk and provides a four-level exposure classification system based on the delinquency of obligation servicing as well as a range of qualitative criteria.
Specific provisions for credit risk shall be allocated against particular exposures classified as different from regular (standard) ones. Specific provisions for credit risk may be allocated also on an exposure group with similar risk characteristics to cover existing losses and risks which may not be specifically determined for each individual exposure. The specific provisions for credit risk are not an element of the accounting expenses.
The specific provisions for credit risk, allocated pursuant to Ordinance No. 9, shall be deducted from the bank's own funds (capital base) computed to Ordinance No 8.
The banks, in compliance with the regulation, are required to establish risk classification parameters for commercial loans. The following table summarises these parameters:
Classification Parameters Required provision
Standard • Meets all payment obligations or remains past due up to 30 days, provided that the delay is justified or accidental
Not required
• Proceeds used for purposes specified in the loan agreement
• Full and accurate information provided to the Bank, including on the financial standing of the debtor and the sources for repayment of his obligations
Watch • Principal or interest payment remains past due for 31 days to 90 days
Not less than 10 per cent.
• Proceeds used or being used for unauthorised purpose
• Final maturity of the loan with bullet repayment, granted to a newly-established company or a company with a poor credit history, has been renegotiated
• In general, insignificant weaknesses exist with respect to servicing the exposure or there is a possibility of deterioration in the borrower's financial state which may question the full repayment of the obligation
Non-performing • Principal or interest remains past due for 91 days to 180 days
Not less than 50 per cent.
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Classification Parameters Required provision
• Material deterioration in the borrower's financial standing, which may result in inability to repay its obligations
• In general, significant weaknesses exist with respect to the servicing of the obligations, or the available information points to the borrower's unstable financial state, current and anticipated proceeds are insufficient for the full repayment of his obligations to the bank and to other creditors, as well as weaknesses have been found with the distinct possibility that the bank will sustain some loss
Loss • Principal or interest remains past due over 180 days 100 per cent.
• Borrower suffers a permanent shortage of money
• Borrower has been declared bankrupt or is in a liquidation procedure, and there is a risk of leaving creditors unsatisfied
• The claim reported as balance-sheet item is subject to court proceedings or the court has awarded it to the bank but it has not been collected
• Other conditions providing grounds to consider that the risk exposure is jeopardized by non-repayment
• In general, as a result of the borrower's deteriorated financial state it is expected his obligations to become uncollectible, even though they have partial recovery value that may be realised in the future
Ordinance No. 9 requires that banks prepare reports on the classified risk exposures and allocated specific provisions for credit risk as of the last day of each quarter. The report is submitted to the BNB prior to the 15th day of the month that follows the reporting period. In addition, banks shall submit to the BNB an annual report on the classified risk exposures and allocated specific provisions for credit risk as an integral part of their annual reports prepared for supervisory purposes. Banks shall also prepare reports on a consolidated basis as provided for in the Ordinance No. 12 of 2007 of the BNB on the Supervision on a Consolidated Basis.
Liquidity
The banks shall manage their liquidity in a manner that ensures they can regularly and without delay meet their daily obligations, both in a normal banking environment and in a crisis situation.
Ordinance No. 11 of the BNB on Bank Liquidity Management and Supervision provides for the requirements for the liquidity management by the banks and the procedure for exercising liquidity supervision by the BNB. In order to watch their liquidity, the banks construct and maintain maturity ladders of assets, liabilities, off-balance sheet items and cash flows, which comprise the following maturity time bands:
• At sight up to 7 days;
• 8 days to 1 month;
• Over 1 month to 3 months;
• Over 3 months to 6 months;
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• Over 6 months to 1 year, and
• Over 1 year.
Ordinance No. 11 introduces the following ratios for monitoring liquidity:
• Liquid assets ratio – the ratio between the amount of available liquid assets (including cash and cash balances with the BNB; balances on current accounts with other banks and interbank deposits with a term of up to 7 days; gold in bullions or plates with weights accepted by gold markets; some categories of tradable debt securities, issued by central governments, central banks, institutions, international banks for development or international organisations as further specified in BNB Ordinance No. 8) and the amount of the deposits and other banks' liabilities;
• Liquidity ratios by maturity time bands – the ratio of the amount of assets (cash inflow) for the relevant maturity time intervals plus the excess of the net cash flow from the preceding time interval to deposits and other banks' liabilities (cash outflow) for the same maturity time interval; where a shortage of the net cash flow from the preceding time interval is established in calculating the ratio, the shortage shall be added to the cash outflow.
Pursuant to Ordinance No. 11 the liquidity of a bank shall be deemed acceptable if the liquidity ratios by maturity time bands are not below 1 for at least the first two maturity time intervals.
The banks are obliged to submit to the BNB monthly liquidity reports on a "going-concern basis" showing projected BGN cash flows and correspondingly the BGN equivalent of foreign currency-denominated assets and liabilities. If the BNB finds out that a bank has a material liquidity problem that requires prompt action, the Deputy Governor heading the Banking Supervision Department may require the bank to submit liquidity reports weekly or daily prepared on a ‘liquidity crisis' basis to reflect its plans for survival.
Reporting Requirements
Banks are required to prepare and submit to the BNB quarterly reports on their capital adequacy based on the balance sheet prepared as of the last date of the respective quarter.
In addition, and as specified above, the large exposures and exposures to related parties, as well as the classified risk exposures and allocated specific provisions for credit risk are also reported on a quarterly basis. The banks have to submit to the BNB weekly reports on their deposit base, which is the base for calculation of the minimum reserves required to be maintained with the BNB, as well as monthly reports covering the period between the end of the latest weekly period and the end of the calendar month considered as being the basis period for the purpose of calculating the minimum required reserves. The banks are also obliged to submit to the BNB information on a daily basis, including on their transactions in foreign currency.The banks must also submit additional information upon request from the BNB.
Pursuant to Ordinance No. 12 of the BNB on the Supervision on Consolidated Basis a bank, in case it is a parent company which is obliged to prepare consolidated reports, must submit to the BNB 6-monthly consolidated reports for supervisory purposes ("Supervisory Reports"). The consolidated supervisory report has to be submitted within 30 business days after the end of the reporting 6-month period and should contain: a consolidated report on the capital adequacy, a consolidated report on the large exposures and exposures towards related parties, a consolidated report on classified risk exposures and specific provisions for credit risk, a consolidated report on the individual and total amount of direct and/or indirect participations in some companies which are considered as being less liquid and non-profitable.
The annual financial statements (both on stand-alone and consolidated basis) of the Bank have to be certified by a certified auditor. In addition, the annual stand-alone and consolidated supervisory reports have to be certified by the auditor as well as the organization of the internal control system. Pursuant to Ordinance No. 14 of the BNB on the Content of the Audit Report for Supervisory Purposes, during the process of revision of the supervisory reports the auditor shall revise the major indicators of the bank's activities and prepare an opinion on the accuracy of the capital base ratio; the classification and valuation of the risk exposures and the allocated specific provisions; the accuracy of the ratios of the large exposures to own funds; the accuracy of the liquidity ratios; the accuracy of the bank investment ratio in some assets considered as being less liquid and non-profitable. The process of revising the internal
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control system shall include a review of the current state of the internal control system in all areas of bank activities, including risk control functions, compliance with the rules and internal audit. After reviewing the activity of internal auditors, the auditor shall report among the other things on the organisational and operational independence of the risk control function, the compliance with the internal rules and procedures, organization and operational independence of the internal audit function.
Pursuant to the Bulgarian Accountancy Act, all joint stock companies in Bulgaria are obliged to publish in the electronic Commercial Register their annual financial statements as certified by the auditor and approved of by the general shareholders' meeting. This obligation has to be fulfilled until 31 July after the end of the reporting year.
The banks are obliged to publish once per each 6-month period their balance sheet and income report in at least one central daily newspaper. Each bank shall also publicly disclose in Bulgarian language additional information such as: scope and methods of consolidation; risk management policies and rules; structure and elements of the capital base; capital requirements; exposure to counterparty credit risk, to credit risk and dilution risk, to operational risk; information on the nominated ECAIs and ECAs in applying the Standardised Approach for credit risk; internal models for market risk; equity instruments in the banking book; interest rate risk in the banking book; recognition for supervisory purposes of the internal models and credit risk mitigation techniques; remuneration policy and practices for the management and some other key employees.
In addition to the above mentioned reporting requirements applicable to banks, the Bank has some additional reporting obligations related to its status as a public company. Pursuant to the Bulgarian Public Offering of Securities Act, public companies in Bulgaria are obliged to submit to the Bulgarian Financial Services Commission and disclose to the public:
• quarterly reports, which include quarterly financial statements and additional data and information such as an interim report on the activities and other information and forms as specified by the vice-chairman of the Financial Services Commission in charge of the Investment Activities Department, and
• annual reports, which include the audited annual financial statement and additional information, including an annual report on the activities, a program for application of the internationally recognized good corporate governance practices, additional information and forms as specified by the vice-chairman of the Investment Activities Department.
In addition to the obligation to disclose information periodically public companies are also required to disclose within short time frames other regulated information, including price-sensitive information.
Accounting Practices
From 1 January 2003, IAS (now IFRS) issued by the International Accounting Standards Board (IASB) and adopted by the European Commission, has been compulsory for all banks operating in Bulgaria, superseding Bulgarian Accounting Standards.
Credit Reporting
The BNB has created a centralised information system for the obligations of clients towards banks and some other financial institutions. The Central Credit Register was created pursuant to the BNB Ordinance No 22 of 2009. After the respective registration, all the banks, including the branches of the foreign banks in Bulgaria, and some other financial institutions have access to the Central Credit Register and are obliged to submit information, respectively are entitled to receive information, of all the credits granted to clients irrespective of the amount except only for some categories of borrowers (the government and the BNB) or specific overdraft credits where the amount is insignificant.
The Central Credit Register provides the banks and other financial institutions on-line information on the credit indebtedness of their customers, including data on the current status of loans and arrears on outstanding and repaid loans for a 5-year historical period.
The information from the Central Credit Register is not public. The banks and the other financial institutions shall obtain and use the information on a confidential basis. These institutions shall obtain and use the information from the Central Credit Register only for the purpose of establishing the credit
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indebtedness of their customers. They shall not disclose and submit this information to third persons and use it for commercial purposes, including as consolidated data. Except for the banks and some other financial institutions as specified above, every person is entitled to receive information only on his/her own credit history.
Regulation of Mortgage Backed Securities
The Mortgage-Backed Bonds Act was enacted in 2000. By this act, the legislator attempted to make mortgage lending more attractive to banks and affordable to individuals. Another intention of this act was to introduce improved regulation of mortgage-backed securities in order to make them more attractive to investors. Many issues of mortgage-backed securities were placed after 2000. The mortgage-backed bonds may be issued either through a public offering or a private placement. According to Bulgarian law, only banks may issue mortgage-backed securities.
Developments in Regulation of Pledge and Pledge Enforcement
The Special Pledges Act that came into effect on 1 April 1997 amended significantly the regime of the pledges in Bulgaria. The act regulated for the first time in Bulgaria the non-possessory registered pledges over intangible rights such as dematerialized securities and commercial enterprises as a going concern, which may also include immovable property, and introduced better protection of the creditors' interests in relation to the enforcement against pledged property. A creditor whose receivables are secured by a special pledge created pursuant to this act does not have to file a claim with the court and obtain a court resolution against the debtor. The provisions of the act authorise the creditor upon the debtor's default to initiate enforcement directly against the pledged property, which occurs in two stages: (a) entry in the respective register of a notice of initiation of enforcement; and (b) private sale of the pledged property by the enforcing creditor. If the debtor disputes the creditor's rights, he shall have to file a claim with the court.
The Financial Collateral Arrangements Act was enacted on 22 August 2006 in order to implement in Bulgaria the provisions of Directive 2002/47/EC of the European Parliament and the Council of 6 June 2002 on financial collateral arrangements, as subsequently amended including in order to implement the provisions of Directive 2009/44/EC of the European Parliament and of the Council of 6 May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims. The aim of the act is to provide legal certainty and effective realisation of financial collateral. This type of arrangements may be made only between certain categories of persons such as public authorities, central banks, credit and other financial institutions, and their subject is limited to cash, financial instruments and credit receivables. The financial collateral arrangement may be in the form of a security agreement or a title transfer agreement, including a repurchase agreement (repo agreement). If the debtor fails to fulfil his obligations the collateral taker shall have the right to sell or acquire the financial collateral without court intervention, or a close-out netting provision shall come into effect. The Financial Collateral Arrangements Act 2006 introduces for the first time in Bulgaria and only in favour of the financial collateral takers the creditor's right to acquire the property which is subject of the security in order to satisfy the creditor's claims. In all other cases of security created pursuant to the Bulgarian law, including pledge and mortgage, any stipulation, made in advance, for acquisition by the creditor of the pledged or mortgaged property, shall be deemed null and void.
In addition to the rights of the banks arising from the security created for their receivables, according to the Credit Institutions Act 2006, when a credit or individual instalments thereon are not repaid on the agreed payment dates, and in the cases where the credit is declared due and payable prior to the end of its term because one or more instalments thereon have not been paid on time, the bank shall have the right to obtain directly from the court an order for immediate execution only on the basis of the bank's statement of account and without having to file a claim against the debtor.
Internal Control
The internal control in banks and banking groups is regulated by the BNB Ordinance No. 10 of 2003. Pursuant to Ordinance No. 10 the internal control in banks is a permanent process which comprises the implementation of several control functions, namely: management oversight, risk control, reporting and information, and internal audit.
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The internal audit in a bank is an independent appraisal function established to examine and evaluate the bank's transactions, operations and control systems. This function is fulfilled by an internal audit unit which consists of auditors holding the required professional qualification and expertise. The powers assigned to the internal auditors and the procedures for their exercise is regulated by internal rules and an annual plan adopted by the bank's management body. In carrying out their activities, the internal auditors are empowered to request and collect documents, undertake inquiries, recruit experts as well as to have unimpeded access to the bank's premises, assets, accountancy and information systems and management decisions. The internal audit unit is managed by a head which is in charge of the supervision over the unit's activities.
The results, findings and recommendations relating to each internal control activity performed within a bank are set out in a report drafted in compliance with specific requirements adopted by the head of the internal audit unit. The head in charge of the audited subject must prepare and submit to the internal auditors a written explanation or a claim as a response to the report. The internal audit unit, on the other hand, must consider the explanation and draw up a final conclusion to be presented together with the whole documentation to the executive directors of the bank. Consequently, the competent bodies and the administrators of the bank may impose remedial measures and notify the head of the internal audit unit thereby. The internal audit unit also submits to the management bodies an annual report, aimed to give information about the main results of internal auditors' control, measures taken and their execution as well as to give suggestions for future developments in this respect.
Banking supervision bodies regularly evaluate the systems, organization and efficiency of internal control in banks. Moreover, the head of the internal audit unit is obliged to immediately notify the Banking Supervision Department at the BNB of established violations or malpractices in the bank's management that have led or may lead to material damages.
Regulation of Insider Dealing
As defined in the Measures Against Market Abuse in Financial Instruments Act 2006, "inside information" is any information of a precise nature which has not been made public and which relates directly or indirectly to one or more issuers of financial instruments or to one or more financial instruments and which, if made public, would be likely to have a significant effect on the prices of those financial instruments or the price of related derivative financial instruments. Inside information could be any information which: (a) states facts or circumstances which have occurred or may reasonably be expected to occur in the future and is sufficiently precise so to enable one to draw a conclusion about their likely effect on the price of financial instruments or related derivative financial instruments; (b) is usually used by investors to take a decision on whether to invest in the respective financial instrument.
Any person who possesses inside information about an issuer or financial instrument by virtue of: (i) being a member of such issuer's governing body; (ii) holding shares (votes) in the general meeting of the shareholders of the issuer; (iii) having access to such information because of its employment, profession or duties; or (iv) acquiring such information via criminal activities or in another illegitimate way ("Insider"), shall be prohibited from using such information ("Insider Dealing Prohibition"). If the person referred to in the previous sentence is a legal entity, the Insider Dealing Prohibition shall also apply to any natural person who takes part in the decision making process related to the conclusion of a transaction on behalf of the legal entity concerned.
The Insider Dealing Prohibition comprises the following actions:
• acquiring or disposing of, or seeking to acquire or dispose of, for its own account or for the account of a third party (either directly or indirectly) financial instruments related to inside information;
• recommending or inducing other persons, on the basis of inside information, to purchase or sell any financial instruments affected by the inside information; and
• disclosing inside information to other persons, unless such disclosure is effected in the course of the ordinary course of one's job, occupation or obligations.
The Insider Dealing Prohibition applies also to any other person, aside from an Insider, if such person is aware or is required to be aware that certain information constitutes inside information.
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Bulgarian law provides for an exemption from the Insider Dealing Prohibition in respect of transactions concluded in the discharge of executable liabilities for the acquisition or disposal of financial instruments where such liabilities arose before the person came into possession of the inside information.
Deposit Insurance
The Deposit Insurance Fund is created pursuant to the Deposit Guarantee Act 1998. The fund shall guarantee the full payment of funds held on a depositor's accounts with a bank regardless of the number and size of the deposits up to BGN 196,000 except for the deposits of some categories of persons who are related to the bank or professional investors such as other banks, financial institutions, investment intermediaries, etc. The fund shall cover the liabilities of a particular bank to its depositors up to the amount guaranteed in the cases where the BNB has withdrawn the banking licence. From the date of the resolution of the BNB for withdrawal of the licence the fund shall subrogate the rights of the depositors to the bank within the amounts guaranteed, regardless of the amount and the date on which the fund effected payments on the guaranteed amount to any depositor.
The Insolvency Regime for Credit Organisations
The banks incorporated in the Republic of Bulgaria are subject to special insolvency rules set forth in the Banks Bankruptcy Act 2002.
A pre-requisite to initiation of bankruptcy proceedings in respect of the bank is the revocation of its licence by the BNB. As specified above in " – Licensing and Supervisory Measures" the BNB shall withdraw the banking licence due to insolvency, where:
• the bank fails to pay a matured obligation for a period longer than 7 business days (after maturity date) if such a failure is directly related to the bank's financial status and at the BNB discretion, no repayment on obligations due may be expected in a reasonable period of time, or
• the amount of the bank's capital is negative.
The administrative act for revocation of the licence is issued by the BNB Governing Council on a motion by the Governor and the Deputy Governor heading the Banking Supervision Department. The administrative act shall be reasoned and come immediately into effect. Although the administrative act may be challenged before the Supreme Administrative Court with regard to its legality, the court may not suspend the execution of the act until it comes up with an ultimate ruling on the appeal.
Only the BNB is authorised to apply for initiation of bankruptcy proceedings in respect of a bank. The bankruptcy court for the bank shall be the district court where the headquarters of the bank is located. In the bankruptcy proceedings for a bank no meeting of creditors shall be conducted, and no rehabilitation plan may be proposed.
If the application by the BNB is proper, the court shall institute a case on the date it is received and shall set a session not later than 15 days after the date of instituting the case.
If the BNB's act for revocation of the licence has entered into force, the court shall initiate bankruptcy proceedings against the bank. Where the act has not entered into force due to judicial appeal, the court shall suspend the proceedings until the end of the administrative case. The suspension of the proceedings shall not be an impediment to impose preliminary security measures such as imposing general foreclosure and distrain on the bank's property.
If the BNB application is proper and the administrative act for revocation of the licence has entered into force, the court shall open the bankruptcy proceedings by a resolution in which the court shall:
• declare the bank's insolvency and determine its initial date;
• open the bankruptcy proceedings in respect of the bank;
• declare the bank to be in bankruptcy and terminate its enterprise's activities;
• terminate the powers of the bank's corporate bodies;
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• impose a general foreclosure and distrain on the bank's property;
• deprive the bank of the right to manage and dispose of the property comprised in the bankruptcy estate;
• order the commencement of liquidation of property comprised in the bankruptcy estate and the distribution of liquidated property.
Although it may be challenged, the court resolution for opening the bankruptcy proceedings against a bank shall be brought into execution immediately from the date of issuance. The resolution shall have effect with respect to all persons, entities, organisations and other subjects to the law. The court shall send a copy of the resolution immediately or on the next business day at the latest to the BNB, the Deposit Insurance Fund and to the temporary administration of the bank. The court resolution shall also be announced in the commercial register. The Deposit Insurance Fund shall appoint at least two persons to act as trustees in bankruptcy of the bank on the date of receipt of the court resolution or on the following business day at the latest. The powers of a trustee in bankruptcy will be exercised jointly by the persons appointed as trustees in bankruptcy, decisions being made unanimously and any actions performed jointly.
The trustees in bankruptcy shall have the following powers:
• to represent the bank declared in bankruptcy;
• to manage the bank's current activities;
• to preserve, enhance, and manage the property included in the bankruptcy estate;
• to receive in accordance with an inventory, preserve, and maintain the bank's commercial books and commercial correspondence;
• to inquire about and identify the bank's property;
• to in the circumstances provided for by the law, demand termination, rescission, or annulment of transactions to which the bank is a party;
• to participate in proceedings to which the bank is a party and bring cases on behalf of the bank;
• to collect the bank's monetary claims;
• to prepare and implement, after approval by the Deposit Insurance Fund, a monthly budget concerning the expenses of the bank's bankruptcy proceedings;
• to subject to the permission of the Deposit Insurance Fund, dispose of the bank's cash funds, including amounts in bank accounts of which the bank is a holder, if this is necessary in connection with the management and preservation of the bank's property or in incurring other expenses related to the bankruptcy proceedings;
• to inquire about and identify the bank's creditors and prepare lists of claims against the bank;
• to take action to terminate and liquidate the bank's interests in commercial companies;
• to prepare a liquidation plan for the property in the bankruptcy estate and submit such plan to the Deposit Insurance Fund for approval;
• to liquidate the property in the bankruptcy estate in accordance with the approved liquidation plan;
• to distribute the cash proceeds;
• to deposit the cash funds obtained from the liquidation of the property of the bankruptcy estate or from the collection of claims of the bank in special BGN accounts or, for foreign currency amounts, in special accounts in the respective currency;
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• to perform other actions as provided for in the law.
The creditors of the bank shall file their claims with the trustees in bankruptcy within two months after the announcement of the court resolution for opening the bankruptcy proceedings in the commercial register. Within 14 days after the expiration of the term for filing the claims, the trustees shall prepare a list of the claims accepted by them and announce this list in the commercial register. The list may be disputed by any depositor or other creditor of the bank and by a shareholder or shareholders holding at least 25 per cent. of the voting shares of the bank.
The court shall examine and approve the list of accepted and undisputed claims in a closed session, issuing a judgment. In this case, the court judgment shall not be subject to appeal.
The bankruptcy court shall examine the objections made against the list in an open session, summoning the trustee in bankruptcy, the creditor with the disputed claim and the creditor making the objection, issuing a judgment on each of the objections made. The court judgment shall rule on supplementing the list, specifying the type, grounds for and amount of the claim, to be included in the list, the type and amount of collateral and the priority of claims provided that:
• an objection against a claim that was not accepted by the trustee in bankruptcy has been granted wholly or in part;
• an objection to a claim accepted by the trustee in bankruptcy has been rejected wholly or in part.
After the liquidation of the bank's property, it shall be distributed among the creditors. Distribution shall be effected where sufficient cash is raised into the property of the estate.
Pursuant to the Bank Bankruptcy Act, the creditor's claims of a bank rank in the following order of priority:
• claims secured by a pledge or mortgage – out of the proceeds from the sale of the collateral;
• claims on which the right of distraint are exercised – out of the value of the property under distraint;
• bankruptcy expenses;
• claims for which the Deposit Insurance Fund is subrogated and claims of depositors that are not covered by the deposit guarantee (see " - Deposit Insurance" above);
• claims of supplementary pension insurance funds;
• claims of banks;
• current payments owed to the social security scheme and having arisen within a year prior to the date of the court resolution opening the bankruptcy proceedings, as well as claims resulting from employment relations having arisen within a year before the date of the court resolution opening the bankruptcy proceedings;
• current public legal claims of the state and the municipalities, such as taxes;
• customs duties, fees and others, and claims having arisen within one year prior to the date of the court resolution opening the bankruptcy proceedings;
• all other claims;
• statutory or contractual interest on any unsecured claim, where such interest is owed after the date of the court resolution to open bankruptcy proceedings against the bank;
• any gratuitous transaction.
Where cash is insufficient to fully satisfy the claims that follow the first two categories above, it shall be distributed among the creditors of the class on a pro rata basis.
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Where some property remains after satisfaction of the creditors, it shall be distributed among the shareholders in accordance with the rights of the shares held by them.
The bankruptcy proceedings shall be terminated by a court resolution when:
• the debts have been repaid or
• the property of the bankruptcy estate has been depleted.
With the resolution the court shall also declare the deletion of the bank from the commercial register. The court resolution shall be entered in the commercial register.
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TAXATION
Republic of Bulgaria
The following is a general summary of certain Bulgarian tax considerations relevant to the purchase, ownership and disposition of the Notes as well as taxation of interest payments on the corresponding Loan. The summary is based on the laws of Bulgaria in effect on the date of this Prospectus. The summary is not comprehensive and is intended only as a general guide; therefore, it is not intended to be, nor should it be considered to be, legal or tax advice to any particular holder of Notes. In particular, the summary does not seek to address the availability of double tax treaty relief in respect of the Notes, or practical difficulties involved in claiming such double tax treaty relief.
Prospective investors should consult their own tax advisors regarding the tax consequences of investing in the Notes in their own particular circumstances. No representation with respect to the Bulgarian tax consequences to any particular Noteholder is made hereby. Neither the Bank not the Issuer assumes any obligation to update this summary after the date of issuance for any changes in law.
Taxation of the Notes
General
For the purposes of this summary, a "Resident Noteholder" means:
• An individual Noteholder whose permanent place of residence is in Bulgaria, or who spends inside the territory of Bulgaria more than 183 days in each period of 12 consecutive months, or who resides abroad on assignment of the Bulgarian State, its authorities and/or its organisations, or Bulgarian establishments, and the members of his/her family shall also be local natural persons, or who has his/her centre of vital interests in Bulgaria;
• A legal entity established under Bulgarian law; companies established under Regulation (ЕC) No. 2157/2001 of the Council, and cooperative societies established under Regulation (ЕC) No. 1435/2003 of the Council where they have their registered office within the country and are entered in a Bulgarian register.
Individuals and foreign entities (except for in the cases where they are acting through a location of business activity in Bulgaria) other than those listed above are "Non-Resident Noteholders".
Resident Noteholders shall be obliged to pay taxes on income from all sources within Bulgaria or abroad.
Non-Resident Noteholders shall be obliged to pay taxes on income from a source within Bulgaria. In addition, the non-resident legal entities shall be taxed under the laws of Bulgaria in respect of their profit realised through a place of business in Bulgaria, or from administration of property in such a place of business.
Prospective investors should note that certain substantive and procedural provisions of Bulgarian tax legislation are rather general and their interpretation and application by the Bulgarian tax authorities may be more inconsistent and subject to more unpredictable change than in more matured market economies or more developed taxation systems. Interpretation by different units of the tax administration may be inconsistent or contradictory and may constitute imposition of conditions, requirements or restrictions not expressly provided by the existing legislation. Similarly, court rulings on tax and related matters by different Bulgarian courts relating to the same or similar circumstances may also be inconsistent or contradictory.
Non-Resident Noteholders: Bulgarian tax treatment
A Non-Resident Noteholder should generally not be subject to Bulgarian taxes in respect of payment of principal or interest on the Notes received from the Issuer and also in respect of any gain realised on sale or other disposition of the Notes outside Bulgaria, provided that the proceeds of such disposition are not considered as being received from a source within Bulgaria.
According to Bulgarian law, income from bonds issued by local legal entities, as well as gain realised on disposition of such bonds, originate from a source within Bulgaria. Per argumentum a contrario, an
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income from the Notes or gain realised on the disposition of the Notes, should not be deemed to be received from a source within Bulgaria.
Regardless of the paragraph above, an interest income is regarded by Bulgarian law as originating from a source within Bulgaria, if such income is assessed by either local legal entities (other than through a place of business outside Bulgaria) or foreign legal entities through a place of business or an establishment within Bulgaria. The broad definition of "place of business" in Bulgarian law provides that it comprises: (i) a definite place (owned, rented or used on another ground), through which the foreign person implements fully or partially an economic activity in the country, e.g. place of management, branch, trade representative office registered in the country; office; chamber; studio; shop and others; (ii) activity in Bulgaria by persons (other than certain representatives with independent statute), authorised to conclude contracts on behalf of foreign persons; (iii) execution of commercial transactions with place of fulfilment in the Bulgaria in a lasting manner, even when the foreign person has no a permanent representative or a definite place in the country. With respect to interest paid on bonds from a source within Bulgaria to non-resident bondholders, if such interest is not realised through place of business or establishment in Bulgaria, a 10 per cent. withholding tax shall be levied upon the gross amount of the interest, subject to reduction or elimination pursuant to the terms of an applicable double tax treaty (see also " - Non-Resident Noteholders: Tax Treaty Relief" below). The Issuer believes that so long as any of the Notes remain outstanding, it will have no place of business or establishment in Bulgaria (see also "Description of the Issuer – Business of the Issuer").
In addition, individual Noteholders, residents for tax purposes in an EU Member State, shall benefit from the preferential treatment granted to resident individuals and their interest income on the Notes shall not be taxable (see below " - Resident Noteholders").
Non-Resident Noteholders: Tax Treaty Relief
A reduction in the rate of Bulgarian withholding tax or complete exemption from the applicable Bulgarian taxation may be provided under a double tax treaty between Bulgaria and the country which the Non-Resident Noteholder is a resident.
To obtain a benefit of such tax treaty a Noteholder must provide Bulgarian tax authorities (or the payer of the income, in case the respective income does not exceed BGN 500,000 per year) with a certificate of tax residence issued by the competent tax authority of the relevant treaty country, affidavit for being the beneficial owner of the income and that does not have place of business in Bulgaria, as well as any other documents and information as set out in tax laws and regulations or requested by the tax authorities in the course of the tax clearance procedure. If tax authorities are satisfied by the documentary evidence submitted they issue an opinion for application of the tax treaty (tax relief). This tax relief, in principle, is valid for all identical income received under the same relationship (e.g. for all interest payments on a bond), unless changes in relevant circumstances occur; however, according to certain court rulings the certificate of tax residence and affidavits must be renewed on an annual basis. Because of uncertainties related to the substantive and procedural requirements, including their interpretation by the concrete tax officials, Non-Resident Noteholders in practice may not be able to obtain advance treaty relief on receipt of proceeds from a source within Bulgaria. Whilst a procedure is provided for in the law to obtain a refund of taxes withheld, in practice this can be difficult and uncertain.
Taxation of Resident Noteholders
A Resident Noteholder will be subject to all applicable Bulgarian taxes in respect of gains from disposition of the Notes and interest income received on the Notes.
With respect to a Resident Noteholder, which is a legal entity, the gross amount of interest on the Notes, as well as any gain from sale or other disposition of Notes (specified as the positive difference between the sale price and the reporting price) shall be included in the entity's total taxable base, which is generally taxed at a rate of 10 per cent. However, some categories of institutional investors, including collective investment schemes and pension funds, are not liable for corporate tax, including in respect of their income originating from interest or disposition of financial instruments.
A Resident Noteholder, who is an individual, shall not be taxed for interest income received on the Notes, issued by other companies from Bulgaria, another EU member state or from an EEA state. However, a
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capital gain (determined as the positive difference between the disposition price and the acquisition price) shall be subject to tax at a rate of 10 per cent.
Taxation of Interest on the Loan
In general, payments of interest on borrowed funds by a Bulgarian entity to a non-resident, including payments of interest on the Loan by the Bank to the Issuer, are subject to Bulgarian withholding tax at the rate of 10 per cent., subject to reduction or elimination pursuant to the terms of an applicable double tax treaty.
The double tax treaty between the Republic of Bulgaria and The Netherlands provides that interest income of Dutch tax residents (i.e. the Issuer) shall not be taxed in Bulgaria, provided that the Dutch tax resident is the beneficial owner of such income. The application of tax benefits under any double tax treaty is subject to tax clearance and no assurance could be given that such relief will be granted. In particular, the Bulgarian tax authorities shall disallow application of the double tax treaty between Bulgaria and The Netherlands if they view the Issuer as a tax conduit and consider the Noteholders as beneficial owners of the interest income.
Pursuant to a Bulgarian tax provision in effect as of 1 January 2011, a foreign entity is a beneficial owner of an income, if the following two conditions are met: (a) the foreign entity has the right to dispose of such income and determine its utilization, and bears entirely, or a material part of the risk related with the activity, from which the income originates; and (b) the foreign entity does not act as a tax conduit, which means that the foreign entity: (i) is not controlled by persons who are not entitled to the same tax relief for the respective income; and (ii) pursues economic activity outside the possession or administration of the rights and assets from which the income originates; and (iii) has assets, capital and staff corresponding to its business activity and controls the use of the rights and assets, from which the income is derived. There have been recent instances of the Bulgarian tax authorities (even before the adoption of the tax provision described in the preceding sentence) rejecting in certain circumstances tax relief to foreign entities - recipients of interest income (including to Dutch tax residents), indicating that the recipients of interest income may not be the beneficial owner of the income, including, but not limited to situations, when such entities have no other business activity except limited financial operations, are managed by nominee directors, distribute substantial part of their income to other entities, e.g. to repay loans.
If payments under the Loan are subject to any withholding taxes, the Bank is obliged (subject to certain conditions) to increase payments as may be necessary so that the Issuer receives the net amount equal to the full amount it would have received in the absence of such withholding. In the event that the Bank fails to make the increased payments, such failure would constitute an Event of Default pursuant to the Facility Agreement.
No value added tax will be payable in Bulgaria in respect of interest and principal payments under the Loan.
Dutch Withholding Tax
All payments made by the Issuer of interest and principal under the Notes can be made free of withholding or deduction of any taxes of whatsoever nature imposed, levied, withheld or assessed by The Netherlands or any political subdivision or taxing authority thereof or therein.
US Withholding Tax
The United States has passed legislation (commonly referred to as "FATCA") which will impose new information reporting requirements and in some cases 30 per cent. withholding with respect to, among other things, payments made by entities such as the Issuer. Non-U.S. financial institutions (i.e. foreign financial institutions) may avoid being withheld upon under FATCA by entering into agreements with the U.S. Internal Revenue Service (the "IRS") to identify financial accounts held by U.S. persons or entities with substantial U.S. ownership, as well as accounts of other "financial institutions" that are not themselves participating in (or otherwise exempt from) the FATCA reporting regime. For these purposes, the term foreign financial institution includes, among others, banks, insurance companies and entities that are engaged primarily in the business of investing, reinvesting or trading in securities, commodities or partnership interests.
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If a participating financial institution makes a relevant payment to an accountholder that (i) has not provided information requested to establish whether the accountholder is exempt from reporting under the rules, (ii) does not consent, where necessary, to have information about U.S. ownership reported to the IRS or (iii) is a non-participating financial institution (that is not otherwise exempt), the payor will be required to withhold 30 per cent. on a portion of the payment.
In preliminary guidance, the IRS stated that it is considering promulgating regulations that generally would impose 30 per cent. withholding on a portion of each such payment based on the proportion of the relevant financial institution's direct and indirect U.S. assets as compared to its total assets. The IRS has indicated that this type of withholding that may be relevant to the Notes will not be imposed earlier than 1 January 2017.
An investor that is able to claim the benefits of an income tax treaty between its own jurisdiction and the United States may be entitled to a refund of amounts withheld pursuant to the FATCA rules, though the investor would have to file a U.S. tax return to claim this refund and would not be entitled to interest from the IRS for the period prior to the refund. It is not entirely clear how this rule applies to any withholding on payments of principal or disposition proceeds.
FATCA does not apply to Notes that are issued by 1 January 2013 unless they are treated as equity for U.S. equity for U.S. federal income tax purposes.
If withholding is required under FATCA, the Issuer will not be required to pay any additional amounts with respect to the withheld amounts.
Investors should consult their own advisors about the application of FATCA, in particular if they may be classified as financial institutions under the FATCA rules.
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SUBSCRIPTION AND SALE
On each Interest Payment Date the Issuer shall, pursuant to the Programme Dealer Agreement, pay to the Dealer a fee (the "Dealer Fee") in USD in an amount equal to the aggregate amount of interest due from the Borrower immediately prior to the Interest Payment Date less the aggregate amount of interest payable in respect of the Notes on such Interest Payment Date. To the extent that the Issuer has insufficient funds to pay the Dealer the Dealer Fee on any Interest Payment Date the Issuer shall pay to the Dealer whatever funds are available and any shortfall shall constitute Unpaid Dealer Fees that get deducted from amounts of principal payable to Noteholders on the date on which the Notes redeem.
The Dealer has entered into the Programme Dealer Agreement dated 9 September 2011 (as amended or supplemented from time to time, the "Programme Dealer Agreement") to which the Issuer acceded by virtue of the Accession Deed and agreed to subscribe for the Notes on the Issue Date.
United Kingdom
The Dealer has further represented, warranted and undertaken that:
(a) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell the Notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise constitute a contravention of Section 19 of the Financial Services and Markets Act 2000 ("FSMA") by the Issuer;
(b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not or, in the case of the Issuer would not, if it was not an authorised person, apply to the Issuer; and
(c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
United States of America
The Notes have not been and will not be registered under the Securities Act of 1933 (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S.
The Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the United States Internal Revenue Code and regulations thereunder.
The Dealer has agreed that, except as permitted by the Programme Dealer Agreement, it will not offer, sell or deliver the Notes, (a) as part of their distribution at any time or (b) otherwise, until 40 days after the later of the commencement of the offering and the issue date of the Notes, within the United States or to, or for the account or benefit of, U.S. persons, and that it will have sent to each dealer to which it sells Notes during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons.
Netherlands
Notes (including rights representing an interest in a Note in global form) issued by the Issuer may only be offered in the Netherlands to qualified investors within the meaning of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht).
- 139 -
Bulgaria
Any public offering of the Notes or engagement in trading in the Notes with persons in Bulgaria within the meaning of the Bulgarian Public Offering of Securities Act 1999 (as amended) will be illegal unless the Bulgarian Commission for Financial Supervision (the "Commission") has confirmed to the Issuer that the Commission has received (i) a certificate confirming that the Prospectus has been approved and has been prepared in accordance with the Prospectus Directive, as well information on whether Prospectus data has been excluded or replaced, data which has been so excluded or replaced, as well as the reasons for any such exclusion or replacement; and (ii) a copy of the approved Prospectus. Such Act defines a “public offering” to include the provision of information on a securities offering addressed to 100 or more persons or to an unlimited number of persons in whatever manner and by whatever means which contains sufficient data on the terms and conditions of the offering and the Notes being offered, such that investors could make a decision on the subscription or purchase of such Notes.
General
The Dealer has represented, warranted and agreed that it has complied and will comply with all applicable laws and regulations in each country or jurisdiction in which it purchases, offers, sells or delivers Notes or possesses, distributes or publishes this Prospectus or any other offering material relating to the Notes. Persons into whose hands this Prospectus comes are required by the Issuer and the Dealer to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, offer, sell or deliver Notes or possess, distribute or publish this Prospectus or any other offering material relating to the Notes, in all cases at their own expense.
In addition to the applications described in this Prospectus, the Issuer may, on or after the date of this Prospectus, make applications for one or more further certificates of approval under Article 18 of the Prospectus Directive as implemented in the Netherlands to be issued by the relevant competent authority to the competent authority in any Member State.
- 140 -
GENERAL INFORMATION
1. The issue of the Notes and the execution and performance by the Issuer of the Facility Agreement and the other documents to be entered into by the Issuer in relation to the Notes have been approved and authorised by written resolution of the Managing Director of the Issuer passed on or about 28 September 2012.
2. There are no governmental, legal or arbitration proceedings (including any proceedings which are pending or threatened of which the Issuer is aware) involving the Issuer which may have, or have had since its date of incorporation, a significant effect on the financial position or profitability of the Issuer.
3. There are no governmental, legal or arbitration proceedings (including any proceedings which are pending or threatened of which the Issuer is aware) involving the Bank which may have, or have had since 30 June 2012, a significant effect on the financial position or profitability of the Bank.
4. Application has been made to list the Notes on the Irish Stock Exchange by the Issuer, through the Listing Agent, A&L Goodbody located at IFSC, North Wall Quay, Dublin 1, Ireland (the "Irish Listing Agent"). The Irish Listing Agent is acting solely in its capacity as listing agent for the Issuer in connection with the Notes and is not itself seeking admission of the Notes to the Official List or trading on the Main Securities Market of the Irish Stock Exchange. It is expected that listing of the Notes will be granted on or before 3 October 2012. Transactions will normally be effected for delivery on the third working day after the day of the transaction.
5. There has been no significant change in the financial or trading position of the Issuer and no material adverse change in the financial position or prospects of the Issuer since 11 July 2012, being its date of incorporation.
6. There has been no significant change in the financial or trading position of the Bank or the Group since 30 June 2012 and no material adverse change in the prospects of the Bank or the Group since 31 December 2011.
7. The following documents will be available in physical form from the date hereof for as long as the Notes remain outstanding, during usual business hours on any weekday (public holidays excepted), for inspection by Noteholders at the London office of the Principal Paying Agent:
(i) the constitutional documents of the Issuer;
(ii) the constitutional documents of the Bank;
(iii) the Principal Trust Deed;
(iv) the Agency Agreement;
(v) the Master Schedule of Definitions;
(vi) the Proposals and Advice Agreement;
(vii) the Programme Dealer Agreement;
(viii) the Accession Deed;
(ix) the Supplemental Trust Deed;
(x) the Account Bank Agreement;
(xi) the Transfer Certificate;
(xii) the Consolidated Financial Statements; and
(xiii) the Facility Agreement.
- 141 -
8. The Issuer does not intend to provide any post-issuance transaction information regarding the Notes or the Loan.
9. The Notes are rated Ba3 by Moody's.
10. The expenses in connection with the admission of the Notes to the Irish Stock Exchange and to trading on the Main Securities Market of the Irish Stock Exchange are expected to amount to approximately EUR7,190.
11. The language of this Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.
- 142 -
ABBREVIATIONS AND DEFINITIONS
The following definitions apply throughout this Prospectus unless the context requires otherwise.
2011 Consolidated Financial Statements
Audited consolidated financial statements of the Group as at and for the year ended 31 December 2011
2010 Consolidated Financial Statements
Audited consolidated financial statements of the Company as at and for the year ended 31 December 2010
AD Bulgarian abbreviation for a joint stock company incorporated under the laws of Bulgaria
Administrators a) members of a supervisory or management board (board of directors) of a bank;
b) procurators of a bank and any person, whose position according to a bank's internal structure includes management and control of structural units directly related to the implementation of the principal subject of activity of the bank;
c) the management of the specialised internal control office.
AGM Annual general meeting of shareholders
Bank Corporate Commercial Bank AD
Bank ICAAP Bank's Internal Capital Adequacy Assessment Process
Basel II The International Convergence of Capital Measurement and Capital Standards − A Revised Framework
Basel III Basel III: A global regulatory framework for more resilient banks and banking systems
BCC Bank Consolidation Company AD
BCD, Bulgarian Central Depository
Central Depository AD (in Bulgarian: "Централен депозитар" АД)
BCRA Bulgarian Credit Rating Agency
BGN Bulgarian lev – the lawful currency of Bulgaria
BNB Bulgarian National Bank, address: 1, Knyaz Alexander І Sq., 1000 Sofia, Bulgaria, is the central bank of the Republic of Bulgaria responsible for maintenance of price stability through ensuring the stability of the national currency and implementing monetary policy as provided for in Bulgarian law
BNBA Bulgarian National Bank Act (State Gazette No 46 of 10 June 1997 as amended)
BNB Ordinance No. 7 Ordinance No. 7 of the BNB on the Large Exposures of Banks
BNB Ordinance No. 8 Ordinance No. 8 of the BNB on Capital Adequacy of Credit Institutions
- 143 -
BNB Ordinance No. 9 Ordinance No. 9 of the BNB on the Evaluation and Classification of Risk Exposures of Banks and the Allocation of Specific Provisions for Credit Risk
BNB Ordinance No. 10 Ordinance No. 10 of the BNB on the Internal Control in Banks
BNB Ordinance No. 11 Ordinance No. 11 of the BNB on Bank Liquidity Management and Supervision
BNB Ordinance No. 12 Ordinance No. 12 of the BNB on the Supervision on a Consolidated Basis
BNB Ordinance No. 14 Ordinance No. 14 of the BNB of 4 February 2010 on the Content of the Audit Report for Supervisory Purposes (effective as of 1 March 2010)
BNB Ordinance No. 21 Ordinance No. 21 of the BNB on the Minimum Required Reserves Maintained with the Bulgarian National Bank by Banks
BNB Ordinance No. 22 Ordinance No. 22 of the BNB of 16 July 2009 on the Central Credit Register
BORIKA Bulgarian bank organisation for card payments
BSE, Bulgarian Stock Exchange
Bulgarian Stock Exchange (in Bulgarian: Българска фондова борса – София АД)
CAGR Compound annual growth rate
CBA Currency board arrangement
Central Credit Register The Central credit register kept by the Bulgarian National Bank in accordance with BNB Ordinance No. 22
Commercial Act 1991 Bulgarian Commercial Act (State Gazette No 48 of 18 June 1991, as amended)
Consolidated Annual Financial Statements
Audited consolidated financial statements of the Group for the years ended 31 December 2011 and 2010
Consolidated Interim Financial Statements
Reviewed consolidated interim financial statements of the Group for the six-month period ended 30 June 2012, included in this Prospectus
Consolidated Financial Statements
Consolidated annual financial statements and consolidated interim financial statements
Controlling Shareholder Mr. Tzvetan Vassilev, who indirectly controls 50.29 per cent. of the share capital and of the votes at the general meeting of the shareholders of the Bank
Credit Institutions Act 2006 Bulgarian Credit Institutions Act (State Gazette No. 59 of 21 July 2006, as amended)
CRO Chief Risk Officer
CVM Cooperation and Verification Mechanism
Deposit Guarantee Fund Bulgarian Deposit Guarantee Fund, established under the adopted in 1998 Law on Bank Deposit Guarantee
EC European Community
- 144 -
EC Treaty Means the Treaty establishing the European Community (signed in Rome on 25 March 1957), as amended by the Treaty on European Union (signed in Maastricht on 7 February 1992), the Treaty of Amsterdam (signed in Amsterdam on October 2, 1997) and the Treaty of Nice (signed in Nice on 26 February 2001)
EGM Extraordinary General Meeting
EOOD Bulgarian abbreviation for a wholly-owned limited liability company incorporated under the laws of Bulgaria
EU The European Union
EU-27 The following 27 Member States of the European Union: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom
EUR The lawful currency of the member states of the European Union that adopt the single currency in accordance with the EC Treaty
European Central Bank The European Central Bank, address: Eurotower (Main building), Kaiserstrasse 29, 60311 Frankfurt am Main, Germany, is the central bank for Europe's single currency, the euro. The ECB's main task is to maintain the euro's purchasing power and thus price stability in the euro area. The euro area comprises the 17 European Union countries that have introduced the euro since 1999
Eurostat Eurostat, address: Joseph Bech building, 5 Rue Alphonse Weicker, L-2721 Luxembourg, is responsible for processing and publishing comparable statistical information at European level. Eurostat does not collect data; this is done by each EU member state's statistical authorities, which verify and analyse national data and send them to Eurostat. Eurostat's role is to consolidate the data and ensure they are comparable, using harmonized methodology. Eurostat is actually the only provider of statistics at European level
Eurozone Is an economic and monetary union of 17 EU member states that have adopted the euro as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain
Exposure Includes all balance sheet exposures arising from all loans taken by a given borrower of the Bank, on a gross consolidated basis
FDI Foreign direct investment
GDP Gross domestic product
Group Capital group involving Corporate Commercial Bank AD as the controlling entity with its subsidiaries subject to consolidation
IAS International Accounting Standards as adopted by the EU
IAS 24 International Accounting Standard 24 "Related Party Disclosures"
IAS 39 International Accounting Standard 39 "Financial Instruments: Recognition and Measurement"
- 145 -
IFRS International Financial Reporting Standards as adopted by the EU
IMF International Monetary Fund
Internal Audit The Internal Audit Department of the Bank
Lev Bulgarian lev – the lawful currency of Bulgaria
Liquidity Management Committee
The Liquidity Management Committee of the Bank
Member State A Member State of the European Economic Area
Ministry of Finance The Bulgarian Ministry of Finance, address: 102, G.S.Rakovski Str., 1040 Sofia, Bulgaria, is an institution responsible for the public finance and tax policies, state debt management, internal control and financial services and markets policy of the Republic of Bulgaria
MS SQL The database of the Bank which automates all banking operations
Moody's Moody's Investors Service Cyprus Ltd. (in relation to the Bank) or Moody's Investors Service Limited (in relation to the Notes)
NATO North Atlantic Treaty Organization
New Basel Accord Basel II
NSI, National Statistical Institute
The Bulgarian National Statistical Institute, address: 2, P. Volov Str., 1038 Sofia, Bulgaria, is created with the status of a state agency and performs independent statistical activities of the Bulgarian state
Operational Risk Management Council
The Operational Risk Management Council of the Bank
POS Point-of-sale
Prospectus Directive Directive 2003/71/EC of the European Parliament and of the Council of the European Union of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC
Public Offering of Securities Act 2000
Bulgarian Public Offering of Securities Act (State Gazette No. 114 of 30 December 1999, as amended), in effect as at 31 January 2000
Regulation 809/2004 Commission Regulation (EC) No. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and the dissemination of advertisements
Related Parties The following related to the Bank entities: (i) associated companies: the subsidiaries of the Bank; (ii) shareholders of the Bank; (iii) directors and management; (iv) relatives of administrators of the bank; and (v) employees of the bank.
RWS Remote working stations
SANS Bulgarian State Agency "National Security"
SGRF State General Reserve Fund of the Sultanate of Oman
SMEs Small and medium enterprises
- 146 -
UPS Uninterruptible power supply
USD The U.S. Dollar, the lawful currency of the United States
VaR Value at Risk
VPAY Type of debit card issued by Visa Europe
- 147 -
APPENDIX: FINANCIAL STATEMENTS
Commencing on the following page
INDEX TO FINANCIAL STATEMENTS
Consolidated Interim Financial Statements for the six months ended 30 June 2012 Independent Auditors' Report .............................................................................................................. F-4 Consolidated Income Statement .......................................................................................................... F-5 Consolidated Statement of Comprehensive Income ............................................................................ F-6 Consolidated Statement of Financial Position ..................................................................................... F-7 Consolidated Statement of Cash Flows ............................................................................................... F-8 Consolidated Statement of Changes in Equity .................................................................................... F-10 Notes to the Consolidated Financial Statements ..................................................................................
F-12
Consolidated Financial Statements for the year ended 31 December 2011 Independent Auditors' Report .............................................................................................................. F-61 Consolidated Income Statement .......................................................................................................... F-63 Consolidated Statement of Comprehensive Income ............................................................................ F-64 Consolidated Statement of Financial Position ..................................................................................... F-65 Consolidated Statement of Cash Flows ............................................................................................... F-66 Consolidated Statement of Changes in Equity ..................................................................................... F-68 Notes to the Consolidated Financial Statements .................................................................................
F-70
Consolidated Financial Statements for the year ended 31 December 2010 Independent Auditors' Report .............................................................................................................. F-117 Consolidated Income Statement .......................................................................................................... F-119 Consolidated Statement of Comprehensive Income ............................................................................ F-120 Consolidated Statement of Financial Position ..................................................................................... F-121 Consolidated Statement of Cash Flows ............................................................................................... F-122 Consolidated Statement of Changes in Equity ..................................................................................... F-124 Notes to the Consolidated Financial Statements .................................................................................. F-125
Corporate Commercial Bank AD
Consolidated financial statements
For the six months ended 30 June 2012
With independent auditors’ report
F-2
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
CONTENTS
1.
Auditors’ report
2.
Consolidated Income Statement
Page 1
3.
Consolidated Statement of Comprehensive Income
Page 2
4.
Consolidated Statement of Financial Position
Page 3
5.
Consolidated Statement of Cash Flows
Page 4
6.
Consolidated Statement of Changes in Equity
Page 6
7.
Notes to the Consolidated Financial Statements
Page 8
F-3
;
;
,
I;
)
)
)
)
)
I)
,
)
I)
IItII
INDEPENDENT AUDITORS' REPORT ON RBVIEWOF CONSOLIDATED INTERIM FINANCIAL STATEMENTSTO THE SHAREHOLDERS OF CORPORATE COMMERCIAL BANK AD
Introduction
We have reviewed the accompanying consolidated statement of financial position of CorporateCommercial Bank AD ("the Bank") as at 30 June 2012, the consolidated income statement,statement of comprehensive income, changes in equity and cash flows for the six-month periodthen ended, and notes, comprising a summary of significant accounting policies and otherexplanatory information ("the consolidated interim financial statements"). Management isresponsible for the preparation and fair presentation of these consolidated interim financialstatem'ents in accordance with IAS 34, 'Interim Financial Reporting'. Our responsibility is toexpress a conclusion on these consolidated interim financial statements based on our review.
Scope of Review
We conducted our review in accordance with the lnternational Standard on ReviewEngagements 2410,'Review of Interim Financial lnformation Performed by the IndependentAuditor of the Entity'. A review of consolidated interim financial statements consists of makinginquiries, primarily of persons responsible for financial and accounting matters, and applyinganalytical and other review procedures. A review is substantially less in scope than an auditconducted in accordance with International Standards on Auditing and consequently does notenable us to obtain assurance that we would become aware of all significant matters that mightbe identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that theaccompanying consolidated interim financial statements do not give a true and fair view of thefinancial position of the Bank as at 30 June 2012,and of its financial performance and its cashflows for the six-month period then ended in accordance with IAS 34, 'Interim FinancialReporting'.
KPMG Bulgaria OOD45/A, Bulgaria BoulevardSofia 1404Bulgaria
KPt/G Bulgaria OOD, a Bulgarian l imited l iabi l i ty companyand a m€mber l i rm oJ the KPI/G network of independontmember f i rms ai f i l iated with KPMG InternattonalCooporat ive { 'KPIVG Inl€rnat ional ' ) , a Swiss enl i ty.
Telephone +359 (2) 9697 300Telefax +359 (2) 9805 340E-mail [email protected] wvwv.kpmg.bg
Krassimir HadjidinevRegistered auditor
Begist€red with theCommercial R€gister at theBulgarian Registry Agoncyldenri ty Cod6 040595851
tderu ecoo RZBB 91bE r060 2664 188IC RZBBBGSFRai{teisenBank (Bu196ria) EAD
frTzvetelinka Koleva f\Authorized rrprurnmofif," I
l l lKPMG Bulgar ia OOD! '
Sofia, 14 August 2012
F-4
Corporate Commercial Bank ADC ons o lidate d F i nanc ial St ate me nts
For the six months ended 30 June 2012
Consolidated Income Statement
For the six months ended 30 lune 2012
In thousands of BGN
Interost income
Interest expense
Net interest income
Fees and commissions income
Fees and commissions expense
Net fee and commission income
Net trading income
Other operating income
Total operating income
General administrative expenses
Impairment losses
Profit before tax
Tax expenses
Profit after tax
Profit attributable to:Attr ibutable to owners of the parent
Attributable to minority interest
Net profit
income statement is to bef the financial statements..,,..
Director
KPMG Bulearia OOD
Tsvetelinka Koleva
Note
r t . t2
30 June 2012
145,295
(e7,4r8)
30 June 20l l
101,63'7
(63,3r7)
47,877
7,052
(1 , r43 )
38,320
6,457
(470)
5,909
I 8,830
4,063
5,987
11,743
1,231
9
l 0
76,679
(26,877)
(23,78e)
57,281
(20,33 5)
(4,409)
26,013
( r , 410 )
1 ? 5 1 7
(3,3 18)
24.603
24,584
t 9
----------U2re-
29,23',7
(18 )
__________2e2re_J;
JIrrrr
The con rolidat
Orlin RussevExecutive Director
$affiffiry
with the notes
il,{'}4}trts
t>Aut hori s e d r epr e s e nt at iv Registered auditor
F-5
)
,
;
)
,
)
IIIIttItIIIrIrI
Corporate Commercial Bank ADC ons o I idate d F inanc ial State me nts
For the six months ended 30 June 2012
Consolidated Statement of Comprehensive Income
For the six months ended 30 June2012
In thousands of BGN
Profit after tax
Revaluation of available for sale investments
Deferred tax on revaluation
Other comprehensive incomeTotal comprehensive income for the year
Total comprehensive income attr ibutable to:
Attributable to owners of the parent
Attributable to minority interest
Total comprehensive income
Basic earnings per share and diluted earningsper share with reduced value (BGN)
Orlin RussevExecutive Director
KPMG Bulgaria OOD
Tsvetelinka KolevaAut ho r is e d repre s e nt at iv e
Note 30 June 2012
24,603
(8ee)
90
30 June 20l l
29,219
3,303
(330)
) 417
32,192
32,210
( 18 )
(80e)
23,794
) 7 1 1 \
1 9
l 3
23,794 32,192
4 . 1 0 4.88
with the notesset out on pagesThe consolidated statement of comprehensive income is to be rea{i
s / \ { ,tr { ttr#tuIfi j,.
Zafirov
F-6
)I
;I
IIII)I
)
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I=
l|IIIIIIIIdI
It
Corporate Commercial Bank ADC o ns o I i date d F inanc ia I St ate ments
For the six months ended 30 June 201 2
Consolidated Statement of Financial Position
For the six months ended 30 June2012In thousands of BGN
ASSETS
Cash and cash equivalentsSecurit ies held lor tradingDerivatives held for trading
Held to maturity investments
Investment in associatesAvailable-for-sale investmentsReceivables from banks and other hnancialinstitutionsLoans to non-financial institutions and othercustomersProperty, plant and equipmentIntangible assetsOther assets
'Total assets
LIABILITIES
Derivatives held for trading
Deposits from banks and other financial institutionsDeposits from non-financial institutions and othercustomersOther borrowed fundsSubordinated term debtOther liabilities
Total l iabi l i t ies
EQUITY AND RESRVESShare CapitalReserves
Total equity and reserves
Total l iabi l i t ies and shareholder equity
Minority interest
Total groun l iabi l i t ies and shareholder equitv
The consolidated statement offinancial oosit
Orlin RussevExecutive
KPMG Bulgaria OOD
Tsvetelinka Koleva
Note
t 41 5
. 1 6
l 7
1 8
l 9202 l22
30 June 2012
798,381372,274
36377,0232,962
I 15 ,385
70,940
2,961,19186 ,017
33516,579
4,501,450
31 Dec 2011
'754,723
321,3542l l
76,84424
r48,704
43,894
2,629,062A) < )1
3726,667
_______tpy;t3_
214
146,51523
) 4
252926
- 242,214
3,665,471123,r45
5 R 7 1 ?
3,869
4,093,431
60,000347.8r4
_J918Jt_
3,3 83, I 5686,63039,709
2727
3.875
_____1,6!9,022_
60,000323,803
_________l!3,!93_
4,501,245
205
4,043,902
476
4,044,37845050r
the notes set out on
Krassimir Hadjidinev
ln conJunct
F*#'#Authorised Registered audito
F-7
Corporate Commercial Bank ADC ons olidate d Financial S tate ment s
For the six months ended 30 June 2012
Consolidated Statement of cash flows
For the six months ended 30 June 2012In thousands of BGN
Net cash flow from operating activitiesProfit after taxation
Impairment losses
Depreciation(Profit) from sale ofnon-current assets, net
Unrealised (gains) from dealing securitiesTax expense
Changes in operating assets
(Increase) in securities held for trading(lncrease) in receivables from banks and other financialinstitutions(lncrease) in loans to non-financial institutions(Increase)/Decrease in other assets
Changes in operating l iabi l i t ies
Increase in due to customersIncrease in other borrowed funds(Decrease) in other liabilities
Income taxes naid
Net cash flows from operating activities
Cash flows from investing activities
(Acquisition)/Disposal of properfy, plant andequipmentSale / (Purchase) of investmentsAcquisition of subsidiary, net of cash acquiredAcquisition of equity-accounted investeesNet cash flows from investing activities
Cash flows from financing activities(Payments) of finance lease liabilities
Dividends paid
Net cash flows from financing activities
Note 30 June 2012 30 June 201l
l 09,20,21
11 ,12
24,603
23,7892 ,114
(73)(2,7s3)
I , 410
29,2r9
4,4092,130
(e)(208)3 , 3 1 8
49,090
(52,7 t4)
(27,081)(356,035)
(5,383)
38,859
(70,878)
(4,96e)(300,788)
3,574(44t,213)
396,82336,55 I
(373,061)
46t,8234t,t37
(412) (e,228)432,962 493,732
(5,863) (4,68 r )
427,099 489,051
154,849
(2s,4e8)39,608(2,400)(2,938)
* , 1 1 )
( 1,1 02)(68,267)_
(69,36e)
(36) ( 1 8 )(54) (620)
__________p9L (638)
F-8
IIIrrIIrrrI)
IrrrrTITr
Corporate Commercial Bank ADC ons olidat e d F inanc ial St ateme nts
For the six months ended 30 June 2012
Consolidated Statement of Cash
For the six months ended 30 June 2012In thousands of BGN
Net increase in cash and cash equivalents
Cash and cash equivalents as at the beginning of theperiod
Cash and cash equivalents as at the end ofthe period
The consolidated statement of cash flows is to be
form an ofthe financial
OrlinDirector Executive
KPMG Bulgaria OOD
Tsvetelinka Koleva
Authoris e d repre s entati
798,3 8 l 653,898
notes set out on pages 8 to 55 that
HdstovDirector
Krassimir Hadjidi
Registered auditor
Flows, continued
Note 30 June 2012
43,658
754.723
30 June 201 I
84,842
569,056
t 4
F-9
t)
)Consolidated Statement of Changes in Shareholders' EquityFor the six months ended 30 June 2012
Share Share StatutorY
capital premium reserve
reserve
Retained Revaluation
earnings reserves
from
available
for sale
investments
Corporate Commercial Bank ADC o ns ol idate d Financ ial S tat e me nt s
For the six months ended 30 June 2012
Revaluatio Other
n reserves reserves
from non-current
assets
Minority Total
Interest
ln thousands of BGN
Balance as at I January 20l l
Total comprehensive income for the year
Net profit for the year
Other comprehensive income, net of
income taxes
Revaluation ofavailable for sale
lnvestments
Deferred tax on revaluation
Total other comprehensive income
Total comprehensive income
29,237 (18) 29,21e
3,303 3,303
(330) - (330)
2.973 - 2,9'.73
Transactions with owners recordedirectly in equity
t 1 , t ) l
2
(74,737)
74.73s 04J37) - (620) (618)
188.614 30,049 39r 355,020
Distribution of statutory reserves
Other movements
Dividends paid
Total transactions with ownersrecorded directly in equity
Balance as at 30 June 2011
Total comprehensive income
Net profit for the period
Other comprehensive income, net of
taxes
Revaluation of available for sale
lnvestments
Deferred tax on revaluation
Other movements
Total other comprehensive income
Total comprehensive income
Total transactions with ownersrecorded direct ly in equitY
Balance as at 31 Dec 20l l
30,574 85 30,659
( l ,554)
1 5 5
( l )
( 1 ,554)
1 5 5
(2)
60,000 48.500 188,612 60,624 338 25,594 r35 476 384 9
F-10
)
)Corporate Commercial Bank AD
C o ns o I i dat e d Financi al St ate me nt sFor the six months ended 30 June 20 I 2
Consolidated Statement of Changes in Equity, continuedFor the six months ended 30 lune2012
n thousands ofBGN
Balance as at I Januarv 2012
Share Share Statutory Retained Revaluation
capital premium reserve earnings reserv€s
reserve from
available for
sale
investments
60,000 48,500 188,612 60,624 338 25,594 r35 476 384.2:e
Revaluatio Other
n reserves reserves
from non-
current
assets
Minority Total
Interest
lTotal comprehensive income for thear
t profit for the periodOther comprehensive income, net of
taxes
evaluation ofavailable for salelnvestments
ferred tax on revaluation
24,584 t 9 24,603
(899 )
90
(8ee)
90
Total other comprehensive income (809 rotal comprehensive income
Transactions with owners recordeddirectly in equity
ribution of statutory reserves
uisition of subsidiaries
Div idends pa id
60,951 (60,951)
236 (236)
(s4) / \ , 1 r
otal of transactions with shareholdersdirect ly in equity - 6 r , 1 8 7 ( 6 0 , 9 5 I ) - (290) (51r
lance as at 30 June 2012 60,000 48,500 249,799 24,257 (471) 25,594 1 3 5 205 408,019
The dated statement of changes in equity statement is to be read in conjunction with the notes set out onpageso n 1 0
IliariDirector
KPMG Bulgaria OOD
Tsvetelinka KolevaAut hor is e d r epre s e ntat iv e
financial statements have been approved
Orlin RuLxecutive
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F-11
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
7
1. BASIS OF PREPARATION (a) Legal status
Corporate Commercial Bank AD (the Group) is a bank domiciled in the Republic of Bulgaria and has its registered office in Sofia, 10 “Graf Ignatiev” Str.
The Group has a banking license issued in accordance with the effective legislation. Major activities include all types of banking transactions on the domestic and foreign markets.
The consolidated financial statements for the six months ended 30 June 2012 include the assets, liabilities, share capital and the financial results of Corporate Commercial Bank AD together with its subsidiaries – Velder Consult OOD, CCB Asset Management AD and Dar 02 OOD and its associate entitiy – Fara Consult OOD, described in Note 30.
(b) Statement of compliance
These Consolidated financial statements have been prepared in accordance with IAS 34 Interim financial statements.
The present financial statements of the group are consolidated.
(c) Presentation of the financial statements
These Consolidated financial statements are presented in Bulgarian Leva (BGN) rounded to the nearest thousand and have been prepared on historical cost or amortized cost basis except for:
• derivative financial instruments measured at fair value;
• financial instruments held for trading and all other instruments designated at fair value through profit or loss measured at fair value, where such can be reliably determined;
• available-for-sale financial instruments measured at fair value, where such can be reliably determined;
• investments in properties measured at fair value, based on regular independent appraiser’s valuation.
(d) Functional and presentation currency
These Consolidated financial statements are prepared in Bulgarian Leva (BGN) rounded to the nearest thousand. The Bulgarian Lev is the functional and presentation currency of the Group.
F-12
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
8
1. BASIS OF PREPARATION, CONTINUED
(e) Basis of consolidation
These Consolidated financial statements are prepared in accordance with IAS 27 “Separate and Consolidated Financial Statements”, where all participations in entities, in which the Group exercises control by holding more than 50% of the voting rights are consolidated by applying the full consolidation method and all participations in entities, where the Group exercises significant influence by holding more than 20% of the voting rights, are consolidated by applying the equity method.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Income recognition
Interest income and expense are recognized as they accrue, taking into account the effective yield of the asset or an applicable floating rate. Interest income and expense include the amortization of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis.
Fee and commission income arises from financial services provided by the Group and is recognized when the corresponding service is provided.
Net trading income includes gains and losses arising from disposals and changes in the fair value of financial assets and liabilities held for trading.
(b) Foreign currency transactions
Transactions in foreign currencies are translated into the respective functional currencies of the operations at the spot exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. Foreign currency differences arising from translation are the differences between amortised cost in the functional currency in the beginning of the period, adjusted with effective interest and received payments during the period, and amortised cost in foreign currency at the spot exchange rate at the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined.
F-13
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
0/
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) Financial assets
The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
(i) Financial assets at fair value through profit or loss
This category includes two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by the management. Derivatives are also categorized as held for trading, unless they are designated as hedges.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable.
(iii) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale.
(iv) Available-for-sale
Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.
(v) Recognition and subsequent measurement of financial assets
Purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized on the date of the actual delivery of the assets. Loans are recognized when cash is advanced to the borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or when the Group has transferred substantially all risks and rewards of ownership.
F-14
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
00
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) Financial assets, continued
(v) Recognition and subsequent measurement of financial assets, continued
Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis optional price models and other valuation techniques often used by the market participants. All changes in fair value of the financial statements at fair value through profit or loss are recognised as part of net trading income in profit or loss. At subsequent measurement the changes in the fair value of available for sale financial assets are recognised directly in equity until the financial asset is sold or impaired, whereupon the cumulative gains and losses previously recognised in equity are recognised in profit or loss. Held to maturity financial assets and loans and advances are initially measured are subsequently measured at their amortised cost using the effective interest method.
(vi) Derecognition of financial assets
The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
The Group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the statement of financial position. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions.
In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if it does not retain control over the asset. The rights and obligations retained in the transfer are recognised separately as assets and liabilities as appropriate. In transfers in which control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
In certain transactions the Group retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised in its entirety if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, depending on whether the servicing fee is more than adequate (asset) or is less than adequate (liability) for performing the service.
(d) Cash and cash equivalents
Cash and cash equivalents comprise cash balances on hand, cash deposited with the central bank and short-term highly-liquid investments with maturity of three months or less when purchased.
F-15
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
01
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) Agreements for borrowing and lending of securities and repurchase agreements
(i) Borrowing and lending of securities
Investments lent under securities lending arrangements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for assets held for trading or available for-sale as appropriate. Cash collateral received in respect of securities lent is recognised as liabilities to either banks or customers. Investments borrowed under securities borrowing agreements are not recognised. Cash collateral placements in respect of securities borrowed are recognised under loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognised on an accrual basis over the period of the transactions and are included in interest income or expense.
(ii) Repurchase agreements
The Group enters into purchases (sales) of investments under agreements to resell (repurchase) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised in loans to either banks or customers. The receivables are shown as collateralised by the underlying security. Investments sold under repurchase agreements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for either assets held for trading or available-for-sale as appropriate. The proceeds from the sale of the investments are reported as liabilities to either banks or customers.
The difference between the sale and repurchase considerations is recognised on an accrual basis over the period of the transaction and is included in interest.
F-16
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
02
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(f) Borrowings
Borrowings are recognised initially at ‘cost’, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest rate method.
(g) Offsetting
Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when the Group has a legally enforceable right to set off the recognised amounts and the transactions are intended to be settled on a net basis.
(h) Impairment of financial assets
Sgd b`qqxhmf `lntmsr ne sgd Fqnto’r ehm`mbh`k `rrdsr `qd qduhdvdc `s d`bg qdonqshmf c`sd sn cdsdqlhmd vgdsgdq sgdqd hr `mx hmchb`shnm ne hlo`hqldms- He `mx rtbg hmchb`shnm dwhrsr+ sgd `rrds’r qdbnudq`akd `lntms hr drshl`sdc-
(i) Loans and advances, arising at Group level
The recoverable amount of originated loans and advances and purchased loans is calculated as the present value of the expected future cash flows, discounted at the instrument’s original effective interest rate. Short-term balances are not discounted.
Loans are presented net of specific and general allowances for impairment. Specific allowances are made against the carrying amount of loans that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans to their recoverable amounts. General allowances are maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the statement of financial position date. The expected cash flows for portfolios of similar assets are estimated based on previous experience and considering the credit rating of the underlying customers and late payments of interest or penalties. Increases in the allowance account are recognised in the income statement. When a loan is identified not to be recoverable, and after the completion of all the necessary legal procedures, and when the final loss has been determined, the loan is written off directly from the statement of financial position.
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down or allowance is reversed through the income statement.
F-17
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
03
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(h) Impairment of financial assets, continued
(ii) Financial assets remeasured to fair value directly through equity
When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. If, in a subsequent period, the fair value of a financial instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. Any subsequent increase in the fair value of impaired equity security, available for sale, is recognized directly in equity.
(i) Property, plant and equipment
The Group adopted a policy to carry its class of fixed assets, comprising the land and buildings, at revalued amount under the alternative approach of IAS 16, Property, plant and equipment.
The other classes of fixed assets are stated in the statement of financial position at their acquisition cost less accumulated depreciation.
Depreciation is calculated on a straight line basis at prescribed rates designed to decrease the cost or valuation of fixed assets over their expected useful lives. The following are approximations of the annual rates used:
Assets % • Buildings 4 • Plant and equipment 30 • Computer equipment 50 • Motor vehicles 25 • Other 15
Assets are not depreciated until they are brought into use and transferred from assets in the course of construction into the relevant asset category.
F-18
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
04
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) Intangible assets
Intangible assets, which are acquired by the Group, are stated at cost less accumulated amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over the expected useful life of the asset. The annual rates of amortisation are as follows: Assets %
• Computer software and licenses 50 • Other intangible assets 04
(k) Provisions
A provision is recognised in the statement of financial position when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
(l) Taxation
Tax on the profit for the year comprises current tax and the deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rates enacted by the reporting date, and any adjustment of tax payable for previous years.
Deferred tax is provided using the statement of financial position liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculated on the basis of the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. The effect on deferred tax of any changes in tax rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(m) Employee benefits
(i) Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and it has no legal or constructive obligation to pay further amounts. The Government of Bulgaria is responsible for providing pensions in Bulgaria under a defined contribution pension plan. The Group’s contributions to the defined contribution pension plan are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.
F-19
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
05
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(m) Employee benefits, continued
(ii) Defined benefit plans
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value.
The Group has an obligation to pay certain amounts to each employee who retires with the Bank in accordance with Art. 222, § 3 of the Labor Code. According to these regulations in the LC, when a labor contract of a Bank’s employee, who has acquired a pension right, is ended, the Group is obliged to pay him compensations amounted to two gross monthly salaries. In case the employee’s length of service in the Group equals to or is greater than 10 or more years, as at retirement date, then the compensation amounts to six gross monthly salaries. As at the reporting date, the Management of the Group estimates the approximate amount of the potential expenditures for every employee based on a calculation using the projected unit credit method.
(iii) Termination benefits
Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy and it is probable that the offer will be accepted, as well as the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.
(iv) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. The Group recognises as a liability the undiscounted amount of the estimated costs related to annual leave expected to be paid in exchange for the employee’s service for the period completed.
(n) Earnings per share
The Group presents data on basic earnings per share and diluted earnings per share for its ordinary shares. Basic earnings per share are calculated by dividing the profit or loss attributable to ordinary equity holders of the Group for a particular period by the average weighted number of ordinary shares during the period. Diluted earnings per share are calculated by adjusting the profit or loss attributable to ordinary equity holders of the Group for a particular period and the weighted average number of ordinary shares during the period for the effects of all dilutive potential ordinary shares comprised of convertible liabilities and options on shares.
F-20
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
06
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(о) Critical accounting estimates and judgments in applying accounting policies
The preparation of the financial statements requires the Management of the Group to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
(i) Impairment losses on loans and advances
Assets accounted for at amortised cost are reviewed for impairment on a basis described in accounting policy h) (i) above.
The specific allowances for impairment, applied to loans and receivables evaluated individually for impairment, are based upon the management’s best estimate of the present value of the cash flows that are expected to be received.
In estimating these cash flows, management makes judgments about counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the estimate of cash flows considered recoverable is independently approved by the Credit Committee of the Group.
Impairment losses determined on a portfolio basis cover credit losses inherent for exposures with similar economic characteristics where an objective evidence suggests that they include impaired exposures which cannot be individually identified yet.
In estimating the needs of impairment losses on a portfolio basis, the Management of the Group takes into account factors such as the type of the loan, impairment, collateral, the amount of the portfolio, concentrations and economic factors. Loans are grouped in portfolios by customers’ economic activity according to the National Classification of Economic Activities. This criterion is used for the purpose of grouping as it allows to analyze and review the general business environment for development of the respective economic activity. To calculate the amount of required impairment, assumptions were made as to how to model inherent losses and to determine the required input parameters based on the historical experience and current economic conditions. The accuracy of impairment depends on how precisely the probability of losses has been forecasted, as well as on the assumptions and parameters of the used model for determining portfolio provisions.
F-21
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
07
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(о) Critical accounting estimates and judgments in applying accounting policies, continued
(ii) Fair value measurement principles
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. Where transaction price is the best indicator of the fair value at initial recognition, the financial instrument is measured initially at transaction price and each difference between this price and the price as per valuation model is subsequently recognized in the statement of comprehensive income taking into consideration individual circumstances related to the transaction and not later than the moment when this fair value is supported by reliable market data or when the deal has been closed.
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction.
The Group measure fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
Level 1: Quoted market price (unadjusted) in an active market for and identical assets or liabilities;
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly
(i.e. derived from prices). This category includes quotes for instruments on markets considered as less then active or instruments valued using valuation techniques;
Level 3: Valuation techniques using significant unobservable inputs for financial assets and liabilities.
In addition, this category includes equity investments in subsidiaries and associates, as well as other financial institutions measured at cost that have no observable market data.
F-22
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
08
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(о) Critical accounting estimates and judgments in applying accounting policies, continued
(ii) Fair value measurement principles, continued
The following table analyzes the financial instruments measured at fair value according to the valuation models used:
Hm sgntr`mcr ne AFM
30 June 2012 Level 1 Level 2 Level 3 Total
Hmudrsldmsr gdkc enq sq`chmf 254+84/ 5+213 ‐ 261+163@u`hk`akd,enq,r`kd hmudrsldmsr 24+657 51+/21 06+474 004+274
Total 3/0+607 57+245 06+474 376+548
31 December 2011 Level 1 Level 2 Level 3 Total
Hmudrsldmsr gdkc enq sq`chmf 203+31/ 5+822 , 210+243@u`hk`akd,enq,r`kd hmudrsldmsr 13+888 0/5+004 06+48/ 037+6/3
Total 228+308 002+/37 06+48/ 36/+/47
(p) Segment reporting
The Group does not prepare segment reporting because the main source of risk and return is the corporate segment, there is no single external customer the income from which exceeds 10%, and the Group carries out its activities within the territory of the country. In case those fact change in the future and the Group presents its financial statements by segments, they will be determined and presented in accordance with the provisions of IFRS 8 Operating segments.
F-23
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
1/
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(q) International Financial Reporting Standards (IFRS) and interpretations (IFRIC) approved for implementation by the European Commission, but not yet in force as at the reporting date
A number of new standards, amendments to standards and interpretations are not yet effective for reporting periods ending on 30 June 2012, and have not been early applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Bank.
Standards, Interpretations and amendments to published Standards that are not yet effective and have not been early adopted – endorsed by the EC
• Amendments to IAS 1 Presentation of Items of Other Comprehensive Income – to be applied at latest, as from the commencement date of the first financial year starting on or after 1 July 2012.
• Revised IAS 19 Employee Benefits – to be applied at latest, as from the commencement date of the first financial year starting on or after 1 January 2013.
IASB/IFRIC documents not yet endorsed by EC:
Management believes that it is appropriate to disclose that the following new or revised standards, new interpretations and amendments to current standards, which are already issued by the International Accounting Standards Board (IASB), are not yet endorsed for adoption by the European commission, and therefore are not taken into account in preparing these financial statements. The actual effective dates for them will depend on the endorsement decision by the EC. • IFRS 9 Financial Instruments (issued November 2009 and Additions to IFRS 9 issued
October 2010) has an effective date 1 January 2015 and could change the classification and measurement of financial instruments.
• In May 2011 the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint arrangements, IFRS 12 Disclosures of Interests in Other Entities and IFRS 13 Fair Value Measurement, which all have an effective date of 1 January 2013. The IASB also issued IAS 27 Separate Financial Statements (2011) which supersedes IAS 27 (2008) and IAS 18 Investments in Associates and Joint Ventures (2011) which supersedes IAS 28(2008). All of these standards have an effective date of 1 January 2013.
• Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets (issued December 2010) has an effective date 1 January 2012.
• Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (issued December 2010) has an effective date 1 July 2012.
• In December 2011 the IASB issued amendments to IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities with an effective date of 1 January 2013.
• In December 2011 the IASB issued amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities with an effective date of 1 January 2014.
• Amendments to IFRS 1 Government Loans (Issued 13 March 2012) with an effective date of 1 January 2013.
• Improvements to IFRSs (2009–2011) (issued on 17 May 2012) with an effective date of 1 January 2013.
• Amendments to IFRS 10, IFRS 11 and IFRS 12 Transition Guidance (issued 28 June 2012) with an effective date of 1 January 2013.
• IFRIC Interpretation 20: Stripping Costs in the Production Phase of a Surface Mine with an effective date of 1 January 2013.
F-24
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
10
3. FINANCIAL RISK MANAGEMENT DISCLOSURES
(а) Introduction and general overview
The management of risks is among the main priorities of the Group’s management and is an inseparable part of the whole management system. The strategy for risk management is aimed at integration of best practices and compliance with regulatory requirements. In managing Group risks, such policies and procedures are applied that are adequate to the character and complexity of the Group’s activities.
In carrying out its transactions with financial instruments, the Group is exposed to the following types of risks:
• Credit risk
• Liquidity risk
• Market risk
• Operational risk
This note provides information about Group’s exposures to any of above mentioned risks, objectives policies implemented for risk measuring and management, as well as for capital management.
General overview of risk management
Management is responsible for the preparation and implementation of these general provisions of Group’s risk management. The Management Board selects and the Supervisory Board approves the members of the Liquidity Management Committee (LMC), Credit Committee and Operational Risk Management Council that are responsible for implementing the Group’s risk management policies in their specific areas. These bodies regularly report to the Management Board on their work.
The Group’s risk management policies are designed to identify and analyse risks faced by the Group, to determine appropriate risk limits and controls and to oversee the compliance with the set limits. Risk management policies and systems are regularly reviewed to reflect changes in market conditions, products and provided services. Through its training programmes, management standards and procedures, the Group aims to develop a strict and effective control environment in which all employees understand their role and responsibilities.
F-25
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
11
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(а) Introduction and general overview, continued
The Group’s internal audit oversees and assesses the efficiency of the risk management system, as well as risks and controls associated with the management, operations and information systems of the Group. The internal audit monitors the compliance of implemented risk management policies with the approved risk management policies and to what degree the risk faced by the Group complies with the adopted levels of bank risks. The results of the independent audits are reported to the Supervisory and Management Board.
(b) Credit risk
The Group is subject to credit risk through its lending, trading and investing activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees.
The risk that counterparties to both derivative and other instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Group deals with counterparties of good credit standing.
The Group ’s primary exposure to credit risk arises through its loans and advances to Customers. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the statement of financial position. In addition, the Group is additionally exposed to credit risk through commitments to extend credit and guarantees issued.
Bnmbdmsq`shnmr ne bqdchs qhrj 'vgdsgdq nm nq nee sgd rs`sdldms ne ehm`mbh`k onrhshnm( sg`s `qhrd eqnl ehm`mbh`k hmrsqtldmsr dwhrs enq Fqnto r ne bntmsdqo`qshdr vgdm sgdx g`ud rhlhk`q dbnmnlhb bg`q`bsdqhrshbr sg`s vntkc b`trd sgdhq `ahkhsx sn ldds bnmsq`bst`k nakhf`shnmr sn ad rhlhk`qkx `eedbsdc ax bg`mfdr hm dbnmnlhb nq nsgdq-
(i) Credit risk in the trading book Enq sgd otqonrdr ne lhshf`shmf sgd bntmsdqo`qsx qhrj `mc rdsskdldms qhrj vhsg qdf`qc sn sgd cd`kr hm sgd sq`chmf annj+ Fqnto bnmbktcdr cd`kr vhsg ghfg q`mjhmf bkhdmsr vhsg rsqhmf bqdchsvnqsghmdrr- Enq l`mx rtbg bkhdmsr Fqnto g`r `ooqnudc bqdchs khlhsr- Enq qdftk`snqx otqonrdr sgd sq`chmf annj hmbktcdr `kk ehm`mbh`k `rrdsr gdkc enq sq`chmf- Sgd `m`kxrhr a`rdc nm bkhdms bqdchs pt`khsx `mc q`shmf 'vgdqd `u`hk`akd( `r ne 2/ Itmd 1/01 `mc 20 Cdbdladq 1/00 hr rgnvm hm sgd mdws s`akd9
In thousands of BGN
30 June 2012
31 Dec 2011
Government bonds Rated ВВВ 247,836 200,741 Bonds of credit institutions Rated AAA 8,263 - Corporate bonds: Not rated 116,175 120,613 Total trading assets 372,274 321,354
F-26
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
12
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(ii) Credit risk in the banking book
Credit risk management is an element of the comprehensive model applied by the Group to manage Group risks. To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk the Group applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. The rating is determined in accordance with the Methods of Determining Credit Risk.
The Group ’s lending policy is oriented mostly to corporate customers, but it is not restricted to other borrowers with proved loan efficiency.
Credit risk management is an element of the comprehensive model applied by the Group to manage Group risks. To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk the Group applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. The rating is determined in accordance with the Methods of Determining Credit Risk.
By the system of internal rating customers are classified in different groups by conducting qualitative evaluation of credit risk degree. In determining the borrower’s credit rating, the Group evaluates the credit risk of the borrower in respect of potential changes in the economic environment and borrower’s financial stability. For this purpose the Group measures:
• Total business risk including systemic risk or risk of change in external factors for credit borrowers and specific or non-systemic reflecting the management quality and borrower’s financial stability;
• Risk ensuing from the Group ’s historical experience in regarding the respective customer.
The internal rating system is also used to determine whether it is necessary to accrue an impairment loss for particular credit exposures. This framework for grading risk includes 11 grades reflecting inherent risk and other factors related to credit risk.
The Group manages the credit risk level by establishing limits for any individual credit borrower and groups of economically related persons, as well as other limits in accordance with the nature, size and complexity of its lending operations and in accordance with BNB supervisory requirements.
In respect of the management of credit risk in the bank, stress tests are carried out regularly to assess credit risk and also to assess the concentration risk in the loan portfolio. For the assessment of credit risk are developed six scenarios with different assumptions about possible adverse changes in the microeconomic environment and / or other factors, by applying three different methods. Stress tests for assessment of concentration risk in the loan portfolio are made on the basis of branch concentration on the four largest size banks' exposures to sectors defined according to the Classification of Economic Activities (CEA 2008).
In addition to stress tests for credit risk assessment that have been performed, for all borrowers and credit transactions of the Bank with non-financial institutions (corporate and individuals) individual assessment is performed based on the two parameters as follows:
Probability of default (PD) is the probability that the counterparty fails to perform its obligations under current or future transaction within one year.
F-27
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
13
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(ii) Credit risk in the banking book, continued
Recovery rate (RR) is the amount of the Bank’s receivables that can be restored if the counterparty fails to perform its obligations under the current transaction.
• “Credit risk” Division exists in the Bank as a separate function. It carries out analyses over the financial position and the creditworthiness of the potential borrowers, the subject and the purpose of the loan, the collateral offered and the economic relatedness of the potential borrowers. Within the division comprehensive credit ratings of borrowers within the Bank are given and regularly updated. The division also evaluates the impact of newly offered loans to the application of the BNB Ordinance No. 8 requirements and the approved internal limits. In addition, an independent opinion for the appropriateness of the new loans as a risk generation factor in the context of the risks the Bank has already been exposed to.
• The Credit Committee is a specialized internal body for monitoring, evaluation, classification and provisioning of risk exposures, including those of concluded credit transactions. The Management board of the Group determines the number and the staff of the Credit Committee. The Credit Committee acts under the rules and procedures adopted by the by the Management Board and approved by the Supervisory Board.
The Group monitors the state of individual loans and the adequacy of allocated funds for covering credit risk on an ongoing basis.
All risk exposures of the Group , including credit exposures are evaluated on a monthly basis by the Group’s Credit Committee in accordance with the adopted Rules of Review, Evaluation and Classification of CCB Risk Exposures (the Rules).
According to the Rules and by the internal rating system, the Credit Committee classifies risk exposures into the following four classification groups consistent with the degree of credit risk:
• “Standard” risk exposures on loans and other claims are those risk exposures which are serviced and information on the debtor’s financial state gives no ground to assume that the debtor will not repay in full his debts.
• “Watch” exposures are the risk exposures on loans and other claims where insignificant weaknesses exist with respect to their servicing or there is a possibility of deterioration in the debtor’s financial state, which may question the full repayment of the obligation.
• “Substandard” exposures are the risk exposures on loans and other claims where significant weaknesses exist with respect to their servicing, or the available information points to the debtor’s unstable financial state, current and anticipated proceeds are insufficient for the full repayment of his obligations to the Group and to other creditors, as well as where weaknesses have been found with the distinct possibility that the Group will sustain some loss.
• “Loss” exposures are those risk exposures where grave weaknesses exist with respect to their servicing or as a result of the debtor’s deteriorated financial state his obligations are deemed uncollectible, even though they have partial recovery value that may be realized in the future.
The classification of risk exposures is submitted for approval to the Management Board.
Every business unit of the Group is required to implement credit policies and procedures and is responsible for the quality of its credit portfolio, for monitoring and controlling all credit risks in its portfolios, including those subject to central approval. Regular audits of business units and processes in the Lending Department are undertaken by the specialized Internal Audit.
F-28
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
14
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure
In thousands of BGN Note 30 June
2012 31 Dec
2011 Cash and cash equivalents 14 798,381 754,723 Securities held for trading 15 372,274 321,354 Derivatives held for trading 363 211 Held to maturity investments 16 77,023 76,844 Investments in associates 2,962 24 Available-for-sale investments 17 115,385 148,704 Receivables from banks and other financial institutions 18 70,940 43,894 Loans to non-financial institutions and other customers 19 2,961,191 2,629,062 Individually impaired Watch 5,513 8,748 Substandard 36,943 5,935 Loss 8,174 2,567 Gross carrying value 50,630 17,250 Impairment loss (28,411) (5,195) Book value 22,219 12,055 Impaired on a portfolio basis Loans to legal entities 2,685,741 2,423,726 Loans to individuals 9,484 10,119 Carrying value 2,695,225 2,433,845 Impairment loss (17,652) (17,309) Book value 2,677,573 2,416,536 Incl. renegotiated exposures 211,369 225,221 Past due, fully secured but not impaired Watch 11,872 4,260 Substandard 774 324 Loss 1,755 554 Gross carrying value 14,401 5,138 Neither past due nor impaired Loans to legal entities 238,321 187,581 Loans to individuals 8,677 7,752 Book value 246,998 195,333 Incl. renegotiated exposures 38,791 19,659
Total net book value of loans to non-financial institutions and other customers 2,961,191 2,629,062 Credit commitments and financial guarantees Unutilized overdrafts and credit lines 51,702 72,261 Guarantees and letters of credit 28 144,967 153,354 Total off balance amount 196,669 225,615
F-29
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
15
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
Impaired loans and securities
Impaired loans and securities are loans and securities for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities arrangements.
Past due but not impaired loans
Loans and securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of collateral available and/or the stage of collection of amounts owed to the Group.
Loans with renegotiated terms
Loans with renegotiated terms are Bank’s risk exposures that have been renegotiated or restructured. An exposure is considered restructured where due to deterioration in the borrower’s financial position resulting in inability to repay its debt, the Bank has made concessions by changing the original terms and conditions of the arrangement that it would not otherwise consider. Once the loan of a legal entity is restructured, it remains in this classification group independent of satisfactory performance after restructuring, unless all amounts that are past due have been fully repaid and three repayments of principal and interest have been made the exposure meets all other requirements for “regular” exposure An exposure to individual can be reclassified from restructured to regular when all amounts that are past due have been fully repaid. An exposure is deemed renegotiated where it has not been identified as deteriorated, it is fully secured and there is a ground to believe that the Bank will collect the principal and interest.
Impairment loss
The Group ’s policies as to impairment loss allowances on financial assets is described above in item 2 (h).
Write-off policy
The Group writes off a receivable on a loan or security classified as non-performing fully covered by allowances for impairment losses by a decision of the Management Board on a motion by the Credit Committee for the account of allocated provisions for impairment losses. This determination is reached after considering the following information: occurrence of significant changes in the borrower/issuer’ financial position such that the borrower/issuer can no longer pay the obligation, or the proceeds from collateral will not be sufficient to pay back the entire exposure. The off-balance reporting of exposures is discontinued by a decision of the Management Board, provided the Group ’s Credit Committee has determined the loans or securities uncollectible due to occurrence of any of the following circumstances: the debtor is a legal entity deleted from the trade or any other public register and has no legal successor; a deceased natural person who has not left heirs or the heirs have given up their rights of inheritance; the debtor has made a prescribed claim.
F-30
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
16
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
The table below represents analysis of the gross and net (of allowances for impairment) amounts of individually impaired and past due, fully secured but not impaired financial assets by classification group:
Loans to non-financial institutions and other customers
In thousands of BGN Gross Net 30 June 2012 Watch 17,385 16,044 Substandard 37,717 17,847 Loss 9,929 2,729 Total 65,031 36,620 31 December 2011 Watch 13,008 11,030 Substandard 6,259 5,305 Loss 3,121 858 Total 22,388 17,193
In compliance with the implemented Group ’s policy prior to extending the approved loans, customers are required to provide appropriate collateral. According to the Group ’s requirements the total amount of extended loans should be fully secured. Group guarantees and L/C are also subject to strict preliminary study.
Collateral on loans, guarantees and L/C most often include cash, property, plants and equipments, registered securities or any other property. The table below presents a breakdown of total loans extended to customers by the Group , by type of collateral:
Hm sgntr`mcr ne AFM 30 June 2012 31 Dec 2011
Lnqsf`fdr 441,027 409,410 Cash and deposits 56,266 58,968 Financial collateral agreements 426,393 444,978 Other collaterals 2,009,362 1,596,284 Tmrdbtqdc 74,206 141,926
Less impairment losses (46,063)
(22,504)
2,961,191 2,629,062 Other collaterals include pledge on movable property, other tangible and intangible assets, receivables and deferred income, and promissory notes.
F-31
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
17
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
Major concentration of credit risk occurs dependent on the sector of activity and the type of borrower in respect of Group investments, loans and advances, arrangements for extending loans and issuing guarantees.
The total amount of loans extended by the Group to non-financial institutions and other customers by economic sector is presented in the table below:
In thousands of BGN 30 June 2012 31 Dec 2011
Trade and services 1,194,594 1,026,552 Manufacturing 432,153 417,635 Construction 385,410 324,774 Agriculture 56,227 54,893 Transport and communication 226,691 220,424 Other industries 712,179 607,288 3,007,254 2,651,566 Less impairment losses (46,063) (22,504) 2,961,191 2,629,062
The tables below set out the government securities in bank portfolios split by maturity date and country of issue as of 30 June 2012 and 31 December 2011.
Less than 1 month
1 – 3 months
3 months to 1 year 1 – 5 years
Over 5 years Total
30 June 2012
Available-for-sale Financial assets
Government Bonds
Bulgaria - 86,258 140,504 17,686 3,388 247,836
Available-for-sale investments
Government Bonds
Bulgaria - - - - 1,279 1,279
Held to maturity investments
Government Bonds
Bulgaria - - - 57,308 08+604 66+/12
Total - 86,258 140,504 74,994 24,382 326,138
F-32
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
18
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
Less than 1 month
1 – 3 months
3 months to 1 year 1 – 5 years
Over 5 years Total
31 December 2011
Available-for-sale Financial assets
Government Bonds
Bulgaria 41,599 - 58,272 90,005 3,932 193,808
Available-for-sale investments
Government Bonds Bulgaria - - - - 1,270 1,270
Held to maturity investments
Government Bonds
Bulgaria - - - 11,943 64,901 76,844
Total 41,599 - 58,272 101,948 70,103 271,922
(c) Liquidity risk
Liquidity risk arises in the general funding of the Group’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations.
(i) Liquidity risk management
The Group ’s liquidity management system is based on the following principles:
- centralised control over Group ’s liquidity carried out by Liquidity Management Committee;
- persistent monitoring and evaluation of future cash flows and sufficiency of Group ’s liquid assets;
- planning of operations in contingency situations.
The Treasury Department receives information from other business units regarding the liquidity profile of their financial assets and liabilities and the projected cash flows arising from projected future business. The Treasury Department maintains a portfolio comprised mostly of short-term and liquid securities, loans and advances to banks and other financial instruments to ensure that sufficient liquidity is maintained within the Group as a whole.
F-33
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
2/
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(i) Liquidity risk management, continued
The centralized management of the liquidity of the Group is carried out by ongoing monitoring and assessment of the future cash flows and the sufficiency of liquid assets. In addition stress tests are performed for the assessment of liquidity risk in the Bank. The tests comprise preparation of maturity tables for “liquid crisis” scenario in accordance with the requirements of art. 6 para 4 of Regulation 11 of the Bulgarian National Bank for the management and supervision of the liquidity of the banks.
The maturity tables for “liquid crisis” scenario are presented in two variances
• in case of “liquid crisis” scenario of the Bank
• in case of “liquid crisis” scenario of the Banking system
In the first six months of 2012 the Group maintains optimal level of liquidity that enables the bank to fulfil its obligations effectively. The liquid assets ratio according to Regulation 11 of BNB is 21.70%.
All liquidity policies and procedures are subject to review and approval by the Liquidity Management Committee. The Bank prepares daily liquidity reports and periodically prepares a liquidity report on exceptions and corrective measures.
Sgd Fqnto ’r etmcr `qd q`hrdc trhmf ` aqn`c q`mfd ne ehm`mbhmf hmrsqtldmsr hmbktchmf cdonrhsr+ btqqdms `bbntmsr `mc nsgdq anqqnvdc etmcr+ `r vdkk `r rg`qd b`ohs`k- Sghr dmg`mbdr etmchmf ekdwhahkhsx+ khlhsr cdodmcdmbd nm `mx nmd rntqbd ne etmcr `mc knvdqr sgd bnrs ne anqqnvdc etmcr- Sgd Fqnto l`jdr hsr adrs deenqsr sn l`hms`hm ` a`k`mbd adsvddm sgd l`stqhsx ne anqqnvdc etmc `mc ekdwhahkhsx sgqntfg sgd trd ne etmcr vhsg ` q`mfd ne l`stqhsx- Sgd Fqnto bnmshmt`kkx `rrdrrdr khpthchsx qhrj ax hcdmshexhmf `mc lnmhsnqhmf bg`mfdr hm etmchmf qdpthqdc sn ldds atrhmdrr fn`kr `mc s`qfdsr rds hm sdqlr ne sgd nudq`kk Fqnto rsq`sdfx- Hm `cchshnm sgd Fqnto gnkcr ` onqsenkhn ne khpthc `rrdsr `r o`qs ne hsr khpthchsx qhrj l`m`fdldms rxrsdl-
(ii) Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks.
The ratios of net liquid assets to deposits from customers at the reporting date and during the reporting period are as follows:
30 June 2012 31 Dec 2011 As at 30 June 2012 17.39% 19.91% Average for the period 19.13% 23.40% Maximum for the period 21.52% 26.22% Minimum for the period 16.94% 18.70%
F-34
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
20
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iii) Residual contractual maturities of financial liabilities
The table below shows the undiscounted cash flows on the Group ’s financial liabilities on the basis of their earliest possible maturity.
The gross nominal inflow/(outflow) is the contractual, undiscounted cash flow on the financial liability or commitment.
Carrying Gross
nominal Less than 1 - 3 3 months 1 – 5 Over In thousands of BGN value
cash (outflow) 1 month months to 1 year years 5 years
30 June 2012
Deposits from banks
102,956 (103,021)
(95,947)
(7,044) (30) - - Deposits from other financial institutions 139,258
(143,066)
(30,397)
(26,181)
(72,488)
(14,000) -
Deposits from non-financial institutions and other customers
3,665,471
(3,717,095)
(531,058)
(580,819)
(1,840,935)
(764,283) -
Other borrowed funds 123,145
(127,877) (5,767)
(11,889)
(23,205)
(41,072)
(45,944)
4,030,720
(4,090,949) (663,169)
(625,823)
(1,936,658)
(819,355)
(45,944) Unutilized credit commitments - (51,702) (51,702) - - - -
4,030,720 (4,142,651) (714,871)
(625,823)
(1,936,658)
(819,355)
(45,944)
31 December 2011
Deposits from banks 30,856 (30,892) (26,853) (4,039) - - - Deposits from other financial institutions 115,659 (118,814) (33,810) (10,355) (67,222) (7,427) - Deposits from non-financial institutions and other customers 3,383,156 (3,445,408) (666,626) (467,518) (1,549,067) (762,197) - Other borrowed funds 86,630 (91,718) - (145) (438) (43,969) (47,166) 3,616,301 (3,686,832) (727,289) (482,057) (1,616,727) (813,593) (47,166) Unutilized credit commitments - (72,261) (72,261) - - - - 3,616,301 3,759,093 (799,550) (482,057) (1,616,727) (813,593) (47,166)
F-35
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
21
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iv) Expected maturities of assets and liabilities
The expected Group’s cash flows on financial liabilities significantly diverge from the maturity analysis shown above, with deposits at sight projected to sustain a stable or increasing balance and not all unrecognised loan commitments expected to be immediately utilized. The tables below disclose maturity analysis of assets and liabilities based on their remaining maturity. Projecting cash flows the Group takes into account historical data on cash flows adjusted to establish seasonal fluctuations and prevailing economic and market conditions.
Maturity table as at 30 June 2012
In thousands of BGN Less than
1 month1 - 3
months3 months to 1 year
1 - 5 years Over 5 years
Total
Assets Cash and cash equivalents 798,381 - - - - 798,381Securities held for trading 204,654 4,622 162,998 - - 372,274Derivatives held for trading 363 - - - - 363Available-for-sale investments 518 102 671 26,325 87,769 115,385Held to maturity investments 37,918 7,405 11,786 - 19,914 77,023Investments in associates 2,962 2,962Receivables from banks and other financial institutions 10,661 2,666 11,123 37,671 8,819 70,940Loans to customers 121,744 203,381 793,510 1,514,084 328,472 2,961,191Property, plant and equipment - - - 4,194 81,823 86,017Intangible assets - - - 335 - 335Other assets 8,279 - 8,300 - - 16,579 1,182,518 218,176 988,388 1,582,609 529,759 4,501,450Liabilities Deposits from banks and other financial institutions 126,260 32,947 69,401 13,606 - 242,214Deposits from non-financial institutions and other customers 529,799 550,361 1,824,018 761,293 - 3,665,471Derivatives held for trading - - - - - -Subordinated term debt - - - - 58,732 58,732Other borrowed funds 5,694 11,390 19,045 41,072 45,944 123,145Other liabilities 2,959 430 480 - - 3,869 664,712 595,128 1,912,944 815,971 104,676 4,093,431
Gap in maturity of assets and liabilities 517,806 (376,952) (924,556) 766,638 425,083 408,019
F-36
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
22
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iv) Expected maturities of assets and liabilities
Maturity table as at 31 December 2011 In thousands of BGN Less than
1 month1 - 3
months3 months to 1 year
1 - 5 years
Over 5 years
Total
Assets Cash and cash equivalents 643+612 - - - - 754,723Securities held for trading 0/0+045 602 219,596 - - 321,354Derivatives held for trading 100 , - - - 211Available-for-sale investments , 6+/24 1,438 121,320 18,911 148,704Held to maturity investments 41+8/8 , 4,058 - 19,877 76,844Investments in associates , , , , 13 13Receivables from banks and other financial institutions 0+676 3,165 11,285 17,853 9,804 43,894Receivables from customers 038+023 161,453 583,798 1,406,205 328,472 2,629,062Property, plant and equipment - - - 9,551 52,972 62,523Intangible assets - - - 372 - 372Other assets 5,381 - 1,286 - - 6,667
1,065,301 172,255 821,461 1,555,301 430,060 4,044,378Liabilities Deposits from banks and other financial institutions 59,965 14,362 57,731 14,457 - 146,515Deposits from non-financial institutions and other customers 665,213 428,778 1,531,534 757,631 - 3,383,156Derivatives held for trading 214 - - - - 214Subordinated term debt - - - - 39,709 39,709Other borrowed funds - 144 211 41,311 44,964 86,630Other liabilities 3,522 - 353 - - 3,875 728,914 443,284 1,589,829 813,399 84,673 3,660,099
Gap in maturity of assets and liabilities 336,387 (271,029) (768,368) 741,902 345,387 384,279
F-37
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
23
3. FINANCIAL RISK MANAGEMENT DISCLOSURES
(d) Market risk
Market risk is the risk that changes in market prices, such as interest rates, equity prices or foreign exchange rates will affect the Group ’s income or value of its holdings of financial instruments.
(i) Market risk management
Market risk management policies are aimed at managing and controlling market risk exposures within the admissible limits concurrently improving the risk/earnings ratio. The Group actively manages interest rate, foreign currency, price and other risks with a view to ensuring compliance with the adopted limits as to the acceptable level of risk. Group ’s risk limits are regularly reviewed with a view to assessing their adequacy given the goals and strategies of the Group and current market conditions. The Group separates its exposure to market risk between trading and non-trading portfolios, using a wide range of methods for assessing the inherent risk of its trade and banking positions, including in derivative and non-derivative instruments.
Market risk management is vested in the Liquidity Management committee. The Risk Management Department is responsible for the development of detailed risk management policies (subject to review and approval by the Management and Supervisory Boards) and for day-to-day review of their implementation.
(ii) Exposure to market risk – trading portfolio
The Group has active market trade positions in a limited number of derivative financial instruments (largely short-term forwards), as well as in non-derivative instruments. Most of Group ’s trading operations were directed to customers. To satisfy customer requirements the Group maintains a package of capital market instruments, quoting bid/offer rates, and actively trade with other market participants. These operations include trade in financial instruments and allow the Group to provide to its customers capital market products at competitive prices. Since the trade strategy depends equally on the Group ’s role in determining market and its positions in various financial instruments, the Group aims to improve its net earnings from trade operations given the relationship between instruments and the market. The Group manages its trade operations dependant on the type of risk and on the basis of the variety of holdings of trade instruments.
@kk sq`cd hmrsqtldmsr `qd rtaidbs sn l`qjds qhrj cdsdqlhmdc `r qhrj ne hlo`hqldms qdrtkshmf eqnl sgd nbbtqqdmbd ne etstqd bg`mfdr hm l`qjds bnmchshnmr- Sgd hmrsqtldmsr `qd du`kt`sdc `s e`hq u`ktd `mc `kk bg`mfdr hm l`qjds bnmchshnmr chqdbskx qdekdbs nm mds d`qmhmfr eqnl sq`cd nodq`shnmr-
The Group manages its holdings of trade instruments in response to changing market conditions. The exposure regarding market risk is managed in accordance with risk limits determined by the management through purchase and sale of instruments or through opening an offsetting position.
F-38
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
24
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(ii) Exposure to market risk – trading portfolio, continued
The principal tool used to measure and control market risk exposure within the trading portfolio is Value at Risk (VaR). VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used by the Group is based upon a 99% percent confidence level and assumes a 10-day holding period. The VaR model is based mainly on historical values. Taking account of market data from the previous two years, the model generates a wide range of plausible future scenarios for market price movement.
Although VaR is an important tool for measuring market risk, the assumptions on which the model is based do give rise to some limitations, including the following:
• A 99% percent confidence level does not reflect losses that may occur beyond this level. Even within the model used there is 1% probability that losses could exceed VaR;
• VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day/trading session;
• The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature;
• The VaR measure is dependent upon the Group ’s position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa.
The Group has applied the VaR methodology since early 2007 and uses the limits/range of VaR for measuring interest rate risk of its trading portfolio.
VaR positions of Group ’s trading portfolio at 30 June 2012 and 31 December 2011 are as follows:
In BGN As At Average Maximum Minimum 30 June 2012 Interest rate risk 2,507,578 3,682,619 5,463,054 2,507,578 31 December 2011 Interest rate risk 4,081,418 650,613 5,210,966 114,251
The limitations of the VaR methodology are monitored by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Group uses a wide range of stress tests to model the financial impact of exceptional market scenarios on individual trading portfolios and the Group ’s overall position.
F-39
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
25
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iii) Interest rate risk
Interest rate risk is the risk of losses resulting from uncertainty about future levels of interest rates. The Group ’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-earning liabilities mature or reprise at different times or in different amounts. In the case of floating rate assets and liabilities the Group is also exposed to risk of changes in base interest rates (e.g. Basic Interest Rate, the LIBOR and EURIBOR), which are the basis for determining interest rate terms. The risk management policy aims to improve net interest income and to reach market interest rate levels matching the Group ’s strategy.
Interest rate management procedures regarding the balance between borrowings and placements apply in respect of Group ’s sensitivity to changes in interest rate levels. This depends on various factors, including the degree of compliance with the negotiated repayment terms, as well as on interest rate fluctuations.
The principal risk to which the Group is exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The Liquidity Management Committee monitors the compliance with the set interest rate limits and is assisted by the Risk Management Department.
A summary of the Group ’s interest rate gap position on interest-bearing assets and liabilities is as follows:
In thousands of BGN Less than 1 month
1-3 months
3-6 months
6 months to 1 year
1-5 years
Over 5 years
30 June 2012 Sns`k hmsdqdrs,ad`qhmf `rrdsr 695,089 208,116 206,647 593,367 1,668,400 315,124Sns`k hmsdqdrs,ad`qhmf kh`ahkhshdr 774,425 872,352 942,062 1,145,383 45,558 96,722Sns`k f`o ne `rrdsr `mc kh`ahkhshdr (79,336) (664,236) (735,415) (552,016) 1,622,842 218,402Btltk`shud f`o ne `rrdsr `mc kh`ahkhshdr (79,336) (743,572) (1,478,987) (2,031,003) (408,161) (189,759)
31 December 2011 Sns`k hmsdqdrs,ad`qhmf `rrdsr 612+85/ 062+062 106+631
258+747
0+425+531 261+4/5
Sns`k hmsdqdrs,ad`qhmf kh`ahkhshdr 686+313 45/+2// 665+001
0+1/6+12/
57+13/ 68+006
Sns`k f`o ne `rrdsr `mc kh`ahkhshdr '62+353( '276+016( '447+26/(
'726+261(
0+357+3/1 182+278
Btltk`shud f`o ne `rrdsr `mc kh`ahkhshdr '62+353( '35/+480( '0+/07+850(
'0+745+222(
'276+820( '83+431(
F-40
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
26
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iii) Interest rate risk, continued
Analysis of sensitivity – interest rate risk
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of Group ’s financial assets and liabilities to various standard and non-standard interest rate changes scenarios.
Standard scenarios that are considered on a monthly basis include 200 basis points parallel rise and fall of yield curves in all currencies. An analysis of the Group ’s sensitivity to an increase or decrease in market interest rates (assuming a constant position and no asymmetrical movement in yield curves) is as follows:
Effect of change in the profit and
loss
In thousands of BGN 200 basis points
parallel rise 200 basis points
parallel decrease 30 June 2012 Change in net interest income (16,076) 16,076 31 December 2011
Change in net interest income
'07,0//( 07,0//
Interest risk positions are managed by the Treasury Department, which uses securities, receivables from banks, deposits from banks and derivative instruments to manage the Group ’s overall position.
(iv) Currency risk
Btqqdmbx qhrj hr sgd qhrj ne knrrdr ctd sn tmdwodbsdc bg`mfdr hm sgd dwbg`mfd q`sdr- Sgd Fqnto hr dwonrdc sn btqqdmbx qhrj sgqntfg sq`mr`bshnmr hm ehm`mbh`k hmrsqtldmsr sg`s `qd cdmnlhm`sdc hm ` enqdhfm btqqdmbx-
@r ` qdrtks ne sgd Btqqdmbx An`qc hm ok`bd hm sgd Qdotakhb ne Atkf`qh` sgd Atkf`qh`m btqqdmbx hr odffdc sn sgd dtqn- @r sgd btqqdmbx hm vghbg sgd Fqnto oqdrdmsr hs ehm`mbh`k rs`sdldmsr hr sgd Atkf`qh`m kdu+ sgd Fqnto ’r ehm`mbh`k rs`sdldmsr `qd `eedbsdc ax lnudldmsr hm sgd dwbg`mfd q`sdr adsvddm sgd Atkf`qh`m kdu `mc btqqdmbhdr nsgdq sg`m sgd dtqn-
Sgd Fqnto ’r sq`mr`bshnm`k dwonrtqdr fhud qhrd sn enqdhfm btqqdmbx f`hmr `mc knrrdr sg`s `qd qdbnfmhydc hm sgd hmbnld rs`sdldms- Sgdrd dwonrtqdr bnloqhrd sgd lnmds`qx `rrdsr `mc lnmds`qx kh`ahkhshdr ne sgd Fqnto sg`s `qd mns cdmnlhm`sdc hm btqqdmbx nsgdq sg`m sgd oqdrdms`shnm btqqdmbx hm sgd Fqnto ’r ehm`mbh`k rs`sdldmsr- Sgdrd dwonrtqdr vdqd `r enkknvr9
F-41
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
27
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iv) Currency risk, continued In thousands of BGN 30 June 2012 30 June 2012 30 June 2012
BGN Foreign
currency Total
Assets
Cash and cash equivalents 460,637 337,744 798,381 Securities held for trading 21,775 350,499 372,274 Derivatives held for trade 363 - 363 Available-for-sale investments 52,071 63,314 115,385 Held to maturity investments 73,870 3,153 77,023 Investments in associates 2,962 - 2,962 Receivables from banks and other financial institutions
43,327 27,613 70,940
Loans to customers 574,434 2,386,757 2,961,191 Property, plant and equipment 86,017 - 86,017 Intangible assets 335 - 335 Other assets 15,016 1,563 16,579 1,330,807 3,170,643 4,501,450 Liabilities
Derivatives held for trade - - - Deposits from banks and other financial institutions
112,506 129,708 242,214
Deposits from non-financial institutions and other customers
1,631,488 2,033,983 3,665,471
Subordinated term debt - 58,732 58,732 Other borrowings 41,150 81,995 123,145 Other liabilities 3,857 12 3,869
1,789,001 2,304,430 4,093,431
With respect to monetary assets and liabilities in foreign currency that are not hedged, the Group maintains acceptable net exposure, buying and selling foreign currency when it deems appropriate.
F-42
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
28
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iv) Currency risk, continued
In thousands of BGN 31 Dec 2011 31 Dec 2011 31 Dec 2011
BGN Foreign
currency Total
Assets
Cash and cash equivalents 464,569 290,154 754,723
Securities held for trading 61,575 259,779 321,354
Derivatives held for trade - 211 211 Available-for-sale investments 41,296 107,408 148,704 Held to maturity investments 73,677 3,167 76,844 Investments in associates 24 - 24 Receivables from banks and other financial institutions
21,735 22,159 43,894
Loans to customers 523,878 2,105,184 2,629,062 Property, plant and equipment 62,523 - 62,523 Intangible assets 372 - 372 Other assets 6089 578 6,667
1,255,738 2,788,640 4,044,378 Liabilities Derivatives held for trade - 214 214 Deposits from banks and other financial institutions
71,819 74,696 146,515
Deposits from non-financial institutions and other customers
1,630,215 1,752,941 3,383,156
Subordinated term debt - 39,709 39,709 Other borrowings 40,227 46,403 86,630 Other liabilities 3,750 125 3,875
1,746,011 1,914,088 3,660,099
Analysis of sensitivity – currency risk
A 10% increase in the Bulgarian lev exchange rate to major currencies other than the euro, as at 30 June 2012 would increase (decrease) gains and losses by the amounts specified below. The analysis assumes that all other variables, including also interest rates, are constant. The analysis is conducted on the same basis for 2011. Effect in thousands of BGN as at 30 June 2012 31 Dec 2011 US dollars 215 227 British pounds (31) (16) Swiss francs (26) (12)
A 10% depreciation of the Bulgarian lev to the above currencies, at 31 December would have the same effect as amounts but an opposite effect as a direction all other conditions being equal.
F-43
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
3/
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(e) Operational risk
Operational risk is the risk of direct or indirect losses arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors, other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Events caused by inadequate or dysfunctional internal processes, people, systems or external events are classified as operational events. For the purpose of recording and analysis of operational events, and developing adequate measures against subsequent event the Group has established and maintains a database of operational events. The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group ’s reputation with overall cost effectiveness.
The Group has developed Methodology for the identification and analysis of the key risk indicators (critical) for operational risk. Key risk indicators are developed for the main business processes to help an ongoing monitoring and identifying changes in the risk profile of the Bank. Another tool used in the Bank for measurement, evaluation and control of operational risk is the risk self-assessment and control. Self-assessment is a process by which significant risks inherent in any banking processes are identified, then their potential impact and likelihood of occurrence is assessed. In addition assessment of adequacy of control measures in place is made.
Based on data obtained from the three main tools for managing operational risk "Analysis and control of risk" Department in CCB AD prepares risk matrix, which is updated at least annually.
The responsibility for development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of Group rules and standards for the management of operational risk in the following areas:
• Requirements for appropriate segregation of duties, including the independent authorisation of documents
• Requirements for the reconciliation and monitoring of transactions
• Compliance with regulatory and other legal requirements
• Documentation of controls and procedures
• Requirements for the regular assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified
• Requirements for the reporting of operational losses and proposed remedial action
• Development of contingency plans
• Training and professional development
• Risk mitigation, including insurance where this is effective.
Compliance with the Group standards is supported by a programme of regular reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with reports submitted to Management and Supervisory Boards.
F-44
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
30
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(f) Compliance with capital adequacy requirements
Bulgarian banks apply the principles of Basel II in respect of measuring capital adequacy requirements. In accordance with the statutory framework the Group allocates capital for covering capital requirements for credit risk, market risk and operational risk. Over the period to 30 June 2012 Corporate Commercial Bank applied the standardized approach in respect of credit and market risks and the basis indicator approach in respect of operational risk.
The minimum requirements applicable to Bulgaria include total capital adequacy ratio of not less than 12% and tier 1 capital adequacy ratio of not less than 6%.
(i) Capital base (Own funds)
The capital base (own funds) includes primary and secondary capital as defined by the Bulgarian National Bank. As at 30 June 2012 the non-consolidated capital base of Corporate Commercial Bank is comprised of:
In thousands of BGN Share capital 60,000Premium reserves 48,500Reserve fund 248,531Current profit -Other reserves 135Total capital and reserves 357,166 Less Unrealized loss from available-for-sale financial instruments (1,852)Intangible assets (334)Total deductions (2,186) Total tier 1 capital 354,980 Revaluation reserves of the premises in which the Group is situated 25,536Subordinated term debt 56,719Total tier 2 capital 82,255 Additional deductions of tier 1 capital and tier 2 capital (18,302)Investments in shares and other equity securities (3,156)Specific provisions for credit risk (15,146)
Total capital base 418,933
Additional deductions of the capital base are associated with the Group’s participations in non-consolidated companies which accounts for 10 percent or more than 10 percent of their registered capital and specific allowance for credit risk in accordance with Regulation 9 on credit risk assessment of the Bulgarian National Bank. For regulatory purposes these participations are deducted equally from tier 1 capital and tier 2 capital.
F-45
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
31
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(f) Compliance with capital adequacy requirements, continued
(ii) Capital requirements
As at 30 June 2012 capital requirements for credit, market and operational risks are as follows: In thousands of BGN
Capital
requirementsCapital requirements for credit risk Exposures to: Local and regional government bodies 28 Institutions 3,346 Enterprises 212,730 Retail exposures 256 Exposures secured by property 24,537 Past-due exposures 656 Other exposures 12,817Total capital requirements for credit risk 254,370Capital requirements for market risk 1,211Capital requirements for operational risk 15,086
Total capital requirements for credit, market and operational risks 270,667 Additional capital requirements by virtue of BNB national discretion 135,334Total regulatory capital requirements 406,001 Capital base 418,933Of which tier 1 capital 345,829 Free capital 12,933Total capital adequacy ratio 12.38%Tier 1 capital adequacy ratio 10.22%
Capital requirements for credit risk cover both credit risk and dispersion risk in the banking and trading portfolio and counterparty risk of entire operations.
Capital requirements for market risk include market risk in the trading portfolio, currency risk of entire operations and commodity risk of entire operations. The Corporate Commercial Bank AD calculates capital requirements for interest risk of debt instruments in trading portfolio. As at 30 June 2012 the capital requirement for foreign currency risk is nil – the total net currency position is below 2% of the capital base. The operational risk is calculated by applying the method of Basis Indicator and represents 15% of the average annual gross income for the last three years (2011, 2010 and 2009).
Additional capital requirements are determined entirely at the discretion of BNB. They represent increase by 50% in the total requirements for credit, market and operational risk.
F-46
Corporate C
omm
ercial Bank A
D
Consolidated Financial Statem
ents For the six m
onths ended 30 June 2012
32
4. PR
ESE
NT
AT
ION
OF FA
IR V
AL
UE
OF FIN
AN
CIA
L IN
STR
UM
EN
TS
In accordance with IFR
S 7 the Group discloses inform
ation on the fair value of financial assets and liabilities for which m
arket information is available and w
hose fair value significantly diverges from
the carrying value. In thousands of BG
N
Held for trading
Held to
maturity
Loans and receivables
Available for
sale Investm
ents in associates
Other
amortized cost
Total carrying am
ount Fair value
30 June 2012
C
ash and cash equivalents -
- 798,381
- -
- 798,381
798,381 Financial assets held for trading
372,274 -
- -
- -
372,274 372,274
Investments
- 77,023
- 118,347
- ,
195,370 198,512
Receivables from
banks and other financial institutions -
- 70,940
- -
, 70,940
70,940 Loans to non-financial institutions and other custom
ers -
- 2,961,191
- -
- 2,961,191
2,961,191
261+163 66+/12
2+72/+401 007+236
, ,
3+287+045 3+3/0+187
Deposits from
banks and other financial institutions
242,214 242,214
242,214 D
eposits from non-financial institutions and other
customers
- -
- -
- 3,665,471
3,665,471 3,665,471
Other borrow
ings -
- -
- -
123,145 123,145
123,145 Subordinated term
debt -
- -
- -
58,732 58,732
58,732
- -
- -
, 3+/78+451
3+/78+451 3+/78+451
31 Decem
ber 2011
C
ash and cash equivalents -
- 754,723
- -
- 754,723
754,723 Financial assets held for trading
321,354 -
- -
- -
321.354 321.354
Investments
- 76,844
- 148,728
- ,
225,572 227,864
Receivables from
banks and other financial institutions -
- 43,894
- -
, 32+783
32+783 Loans to non-financial institutions and other custom
ers -
- 2,629,062
- -
- 2,629,062
2,629,062
210+243 65+733
2+316+568 037+617
, ,
2+863+5/4 2+865+786
Deposits from
banks and other financial institutions
146,515 146,515
146,515 D
eposits from non-financial institutions and other
customers
- -
- -
- 3,383,156
3,383,156 3,383,156
Other borrow
ings -
- -
- -
86,630 86,630
86,630
- -
- -
- 39,709
39,709 39,709
-
- -
- ,
2+545+/0/ 2+545+/0/
2+545+/0/
F-47
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
33
4. PRESENTATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED The fair value of cash, cash equivalents, deposits, as well as all other loans and advances extended to banks and other financial institutions is approximately equal to their carrying value because of their short-term maturity. The market value of loans and advances to customers is approximately equal to their carrying value due to fact that the main part of the loan portfolio carries floating interest rates which reflect the changes in the market conditions.
5. NET INTEREST INCOME In thousands of BGN 30 June 2012 30 June 2011
Interest income Interest income arise from: Receivables from banks 598 813 Loans to non-financial institutions and other
customers 134,352
93,027
Financial instruments held for trading and available-for-sale investments
10,345
7,797
145,295 101,637 Interest expense: Interest expense arise from: Deposits from banks (3,179) (1,895) Deposits from other customers and subordinated
term debt (94,227)
(61,375)
Depreciation of securities premiums (12) (47) (97,418) (63,317) Net interest income
47,877 38,320
Interest income on loans to non-financial institutions and other customers includes BGN 98 thousand accrued on individually impaired financial assets.
6. NET FEES AND COMMISSIONS INCOME Hm sgntr`mcr ne AFM 30 June 2012 30 June 2011
Net fees and commissions income In Bulgarian leva 3,996 3,571 In foreign currency 3,056 2,886 7,052 6,457 Fees and commissions expense In Bulgarian leva (465) (393) In foreign currency (678) (77) (1,143) (470)
Net fee and commission income
5,909 5,987
F-48
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
34
7. NET TRADING INCOME Hm sgntr`mcr ne AFM 30 June 2012 30 June 2011
Net trading income arises from: Trade in debt instruments and similar
derivatives
7,388 4,346 Revaluation of debt instruments and similar
derivatives
2,753 208 10,141 4,554 Net trading income arises from: Gains from foreign currency transactions 1,603 (4,506) Gains from foreign currency revaluation 7,086 11,695 8,689 7,189 Net trading income 18,830 11,743
8. OTHER OPERATING INCOME Hm sgntr`mcr ne AFM 30 June 2012 30 June 2011
Gains from sale/exchange of fixed assets, net 73 9 Other non-financial services sold 1,372 982 Other net income 2,618 240
Other operating income 4,063 1,231
9. GENERAL ADMINISTRATIVE EXPENSES In thousands of BGN 30 June 2012 30 June 2011
General administrative expenses: Personnel cost (10,108) (8,497) Materials, rents and hired services (5,032) (4,065) Cdoqdbh`shnm (2,114) (2,130) Administrative, marketing and other expenses (9,623) (5,643)
General administrative expenses (26,877) (20,335)
Personnel costs include wage and salaries, social and health security accrued in compliance with the provisions of local legislation. As at 30 June 2012 the number of Group’s employees is 839 (31 December 2011: 731).
F-49
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
35
10. IMPAIRMENT LOSSES Hm sgntr`mcr ne AFM 30 June 2012 30 June 2011
Increases Impairment losses on loans extended (29,680) (8,376) Reversals on loan impairment 5,891 3,967
Net impairment losses (23,789) (4,409)
11. INCOME TAX Hm sgntr`mcr ne AFM 30 June 2012 30 June 2011
Btqqdms s`w (1,338) (3,664) Cdedqqdc s`w (72) 346 Total income taxes recognized in Income statement
(1,410) (3,318)
In compliance with Bulgaria’s tax legislation commercial company profit in 2012 is subject to income tax amounting to 10%.
Reconciliation between the accounting profit before taxation and tax expenses is as follows:
Hm sgntr`mcr ne AFM 30 June 2012 30 June 2011
Accounting profit 15+/02 21+426 Corporate tax at applicable tax rate (10% - 2012 and 2011)
1+500 2+143
Tax effect of non-deductible expenses in determining the taxable profit
228 573
Effect of tax exempt income '0+501( '163(
Current tax expenses 0+227 2+553
Deferred taxes 61 '235(
Tax expense 0+30/ 2+207
Effective tax rate 4-31$ 0/-08$
F-50
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
36
12. DEFERRED TAXES
Recognized deferred tax assets and liabilities
Deferred income tax is calculated for all temporary tax differences under the liability method using the base tax rate of 10% for 2012 (2011: 10%), when differences may arise at earliest.
Deferred tax balances are attributable to the following: In thousands of BGN
Assets Liabilities Net (Assets) / Liabilities
30.06.2012 31.12.2011 30.06.2012 31.12.2011 30.06.2012 31.12.2011 Available-for-sale financial assets (185) (212) 133 250 (52) 38
Other liabilities (47) (29) - (47) (29)Available-for-sale financial assets – recognised in tax declaration
(133) (250) 236 263 103 13
Revaluation of fixed assets (21) (21) 2,844 2,844 2,823 2,823
Net tax assets (386) (512) 3,213 3,357 2,827 2,845
Movements in temporary differences during the period:
In thousands of BGN Balance Recognised during the year Balance
31 Dec 2011In Income Statement
Comprehensive income
30 June 2012
Available-for-sale financial assets 51 90 (90) 51 Other liabilities (29) (18) (47) Revaluation of non-current assets 2,823 2,823 Net (assets)/ liabilities 2,845 72 (90) 2,827
13. EARNINGS PER SHARE
30 June 2012 30 June 2011
Mds oqnehs `ssqhats`akd sn A`mj’r nqchm`qx rg`qdgnkcdqr 'AFM ‘///( 13+473 18+126Vdhfgsdc `udq`fd mtladq ne nqchm`qx rg`qdr 'AFM ‘///( 5+/// 5+///
Basic earnings per share (in levs) 3-0/ 3-77 No new shares were issued during 2012.
Basic earnings per share in accordance with IAS 33 are calculated on the basis of the profit attributable to ordinary shareholders. Since the Group did not issue potential diluted ordinary shares in 2012 and 2011 diluted earnings per share correspond to the basic earnings per share.
F-51
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
37
14. CASH AND CASH EQUIVALENTS In thousands of BGN 30 June 2012 31 Dec 2011
Cash on hand In Bulgarian leva 20,666 24,681 In foreign currency 154,724 46,197 Current account with the BNB 448,647 436,849 Current accounts and balances with local banks with a maturity of up to 3 months
62,843 80,918
Current accounts and amounts with foreign banks with a maturity of up to 3 months
111,501 166,078
798,381 754,723
The current account with the central bank is used for direct participation in money and securities markets, as well as for settlement. The balances on current accounts with the BNB also include the Group ’s minimum required reserves. For the purpose of cash flow reporting, cash and cash equivalents include cash on hand, balances on current accounts with the central bank, and deposits with maturity of up to 3 months.
15. SECURITIES HELD FOR TRADING
Hm sgntr`mcr ne AFM 30 June 2012 31 Dec 2011
Government bonds issued by the government of the Republic of Bulgaria
Bonds in leva , 285 Medium-term government securities denominated in leva
8+014
34+674
Medium-term government securities denominated in foreign currency
8/+13/ 48+168
Long-term government securities denominated in leva
3+276 04+4/4
Long-term government securities denominated in foreign currency
033+/73 62+128
Bonds denominated in foreign currencies 005+064 016+150 Foreign securities denominated in leva 7+152 , 261+163 210+243
16. HELD TO MATURITY INVESTMENTS In thousands of BGN 30 June 2012 31 Dec 2011
Government securities issued by the government of the Republic of Bulgaria
Long-term government securities denominated in leva
62+76/ 62+566
Long-term government securities denominated in foreign currency
2+042 2+056
66+/12 65+733
F-52
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
38
17. AVAILABLE-FOR-SALE INVESTMENTS
Hm sgntr`mcr ne AFM 30 June 2012 31 Dec 2011
Government securities issued by the government of the Republic of Bulgaria
Long-term government securities denominated in foreign currency
0+168 0+16/
Medium-term government securities denominated in leva
, ,
Long-term government securities denominated in leva
, ,
Corporate bonds in leva , , Short-term foreign government securities denominated in foreign currency
, ,
Medium-term foreign government securities denominated in foreign currency
, ,
Bonds denominated in foreign currency 51+/21 0/5+024 Equity investments 41+/63 30+188 004+274 037+6/3
Equity investments are shares owned in local companies and settlement institutions related to the Group ’s membership in them. Investments classified as equity and other non-fixed income instruments for sale are stated at cost price as their fair value cannot be duly identified.
18. RECEIVABLES FROM BANKS AND OTHER FINANCIAL INSTITUTIONS
Hm sgntr`mcr ne AFM 30 June 2012 31 Dec 2011
Receivables from local banks and other financial institutions
51+080 23+014
Receivables from foreign banks and other financial institutions
7+707 8+7/2
Less impairment losses
'58( '23(
6/+83/ 32+783
19. LOANS TO NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS
Analysis by borrower Hm sgntr`mcr ne AFM 30 June 2012 31 Dec 2011
Retail Customers In leva 3,966 3,872 In foreign currency 16,727 15,455 Non-financial institutions and other Customers In leva 592,445 524,722 In foreign currency 2,394,116 2,107,517 Total receivables from customers 3,007,254 2,651,566
Impairment losses (46,063) (22,504) 2,961,191 2,629,062
F-53
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
4/
19. LOANS TO NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS, CONTINUED
Impairment losses on individual basis: In thousands of BGN 30 June 2012 31 Dec 2011
As at beginning of period (5,195) (2,485) Charge for impairment losses (24,108) (3,560) Reversed impairment losses 698 850 Disposals 194 -
As at period end
(28,411) (5,195)
Impairment losses on a portfolio basis: In thousands of BGN 30 June 2012 31 Dec 2011
As at beginning of period (17,309) (11,224) Charge for impairment losses (5,535) (11,602) Reversed impairment losses 5,192 5,517
As at period end
(17,652) (17,309)
Total impairment losses
(46,063) (22,504)
20. PROPERTY, PLANT AND EQUIPMENT
In thousands of BGN Land and buildings
Plant and equipment
Motor vehicles
Fixtures and fittings
Other assets
Assets in progress
Total
Cost As at 1 January 2012 60,263 6,837 2,235 4,059 123 6,355 79,872Additions - 2 52 - - 25,520 25,574Transfers from assets in progress 372 369 625 167 17 (1,550) -Disposals - (151) (576) (10) - - (737)As at 30 June 2012 60,635 7,057 2,336 4,216 140 30,325 104,709 Depreciation
As at 1 January 2012 7,291 5,649 1,767 2,572 70 - 17,349Charge for the period 1,193 406 189 229 19 - 2,036On disposals - (151) (538) (4) - - (693)
As at 30 June 2012 8,484 5,904 1,418 2,797 89 - 18,692
Book value As at 1 January 2012 52,972 1,188 468 1,487 53 6,355 62,523
As at 30 June 2012 52,151 1,153 918 1,419 51 30,325 86,017
F-54
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
40
21. INTANGIBLE ASSETS
In thousands of BGN Cost As at 1 January 2012 2,039Additions 41Disposals (exchanges) -As at 30 June 2012 2,080 Amortization As at 1 January 2012 1,667Charge for the period 78
On disposals -
As at 30 June 2012 1,745
Book value As at 1 January 2012 372 As at 30 June 2012 335
22. OTHER ASSETS In thousands of BGN 30 June 2012 31 Dec 2011
Advance payments 2,500 1,122 Prepaid expenses 8,976 1,854 Tax receivables 2,442 2,213 Assets for resale 80 84 Other assets 2,581 1,394
16,579
6,667
23. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS In thousands of BGN 30 June 2012 31 Dec 2011
In leva 001+4/5 60+708 In foreign currency 018+6/7 63+585
131+103 035+404
F-55
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
41
24. DEPOSITS FROM NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS In thousands of BGN 30 June 2012 31 Dec 2011
Individuals In leva 8/2+564 505+178 In foreign currency 0+//7+200 750+677 Non-financial institutions and other customers In leva 616+702 0+/03+/46 In foreign currency 0+/14+561 780+/11
2+554+360 2+272+045
25. OTHER BORROWED FUNDS In thousands of BGN 30 June 2012 31 Dec 2011
Due to customers 49 130 Due to banks 122,984 86,403 Finance lease liabilities 001 86
012+034 75+52/
Deposits in banks include funding from the Bulgarian Development Bank at the amount of BGN 40,000 thousand (2011 – BGN 40,000 thousand). This funding has been obtained under the Program for target financing of commercial banks to provide for medium-term, long-term and project financing of Small and Medium-Sized Enterprises. In addition, the Group has received funding from Societe Generale and Citibank International plc. at the amount of EUR 21,000 thousand and EUR 18,300 thousand under loan contract dated 19 May 2011 and 19 January 2012 respectively. The purpose is financing Small and Medium-Sized Enterprises.
26. OTHER LIABILITIES In thousands of BGN 30 June 2012 31 Dec 2011
Deferred tax liabilities (note 12) 1+716 1+882 Deferred fees and commissions 0// 0/8 Other creditors 446 383 Other liabilities 274 168 2+758 2+764
F-56
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
42
27. CAPITAL AND RESERVES
(a) Subscribed share capital In thousands of BGN
Number of shares
Nominal value
Subscribed share capital
5+///+/// 5/+///
5+///+/// 5/+///
On 30 June 2012 the subscribed share capital of the Group amounted to BGN 60,000 thousands and was fully paid. The Group’s capital comprised 6,000 thousands ordinary voting shares, each of them with a par value of BGN 10. The procedure of transformation of CCB into a public company was finalized in the second quarter of 2007 and in May as a result of successful public offering an issue of 1,000 thousands new registered shares was sold on the Bulgarian Stock Exchange – Sofia.
(b) Statutory reserves
Statutory reserves comprise the amounts set aside for purposes stipulated in local legislation. According to Bulgarian legislation, the Group is obliged to allocate at least 1/10 of its annual profits as statutory reserve until the cumulative amount reaches 1/10 of the share capital of the Group.
(c) Premium reserve
The premium reserve includes the difference between nominal and issue price of shares sold on the Bulgarian Stock Exchange – Sofia.
(d) Revaluation reserve from investments available for sale
The Revaluation reserve of available for sale investments includes the revaluation reserves from the change in fair value of financial instruments available for sale or derivatives, hedging cash flows in accordance with IAS 39 Financial instruments: Recognition and Measurement.
(e) Revaluation reserve of fixed assets
The revaluation reserve of fixed assets includes the reserve for revaluation of buildings at the revalued amount in accordance with the requirements of IAS 16 Property, Plant and Equipment.
(f) Other reserves
Other reserves include reserves made in accordance with decisions taken by the Management Board of the Bank.
F-57
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
43
28. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Credit commitments
The Group provides bank guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year.
The contractual amounts of commitments and contingent liabilities are set out in the following table below. The values reflected in the table for commitments are considered entirely transferred. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the reporting date if counterparts failed completely to perform as contracted.
In thousands of BGN 30 June 2012 31 Dec 2011
Ehm`mbh`k ft`q`msddr `mc kdssdqr ne bqdchs Hm kdu` 0/3+387 001+6/8 Hm enqdhfm btqqdmbx 3/+358 3/+534
033+856 042+243
Issued guarantees are secured by fixed assets, deposits or other assets pledged in favour of the Group . These commitments and contingent liabilities have off-balance credit risk. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows.
29. RELATED PARTY TRANSACTIONS
Transactions with
associated companies
Transactions with
Management and Directors
of the Bank
Transactions with relatives of
administrators of the Bank
Transactions with
employees of the Bank
Hm sgntr`mcr ne AFM Loans granted
Exposure as at 1 January 2012 , 1,331 19,275 2,639 Changes during period - 22 (12,341) 107 Exposure as at 30 June 2012 - 1,353 6,934 2,746
Deposits and current accounts Exposure as at 1 January 2012 109 42,818 26,319 7,210 Changes during period 8 18,871 23,270 753 Exposure as at 30 June 2012 117 61,689 49,589 7,963
Contingent liabilities Exposure as at 1 January 2012 , 283 3,331 156 Changes during period - (4) 163 (23) Exposure as at 30 June 2012 - 279 3,494 133
Remuneration of Directors , 630 - -
F-58
Corporate Commercial Bank AD Consolidated Financial Statements
For the six months ended 30 June 2012
44
Transactions with Management and Directors of the Bank as of 30 June 2012 include subordinated term debt at the amount of EUR 29,000 thousand received from Bromak EOOD. Repayment of the debt is possible only after the written approval of BNB.
30. SUBSIDIARIES AND ASSOCIATES
Control and significant influence of the entities in the Group
CCB’s Group parent company is Corporate Commercial Bank.
Onwnership % Onwnership %
30 June 2012 31 Dec 2011
„Dar 02” OOD 90% 90% „Velder Konsult” OOD 99.9% 67% „CCB Asset Management” AD 51% 51% „Fara Konsult” OOD 25% 25%
31. EVENTS AFTER THE REPORTING DATE
No events arising after the reporting date requiring additional disclosures or adjustments to the Group’s financial statements.
F-59
Corporate Commercial Bank AD
Consolidated financial statements
For the year ended 31 December 2011
With independent auditors’ report
F-60
I
iiIIiitIitIIIIIIIIIt
KPMG Bulgar ia OOD45/A, Bulgar ia BoulevardSof ia 1404Bulgar ia
Telephone +359 (2) 9697 300Telefax +359 (2) 9805 340E-mail bg-otf [email protected] wwrru.kpmg.bg
INDEPENDENT AT]DITORS' REPORT
To the shareholdersCorporate Commercial Bank AD
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Corporate CommercialBank and its subsidiaries ("the Bank") which comprise the consolidated statement of financialposition as at 31 December 2011, the consolidated statements of comprehensive income,changes in equity and cash flows for the year then ended, and notes, comprising a summary ofsignificant accounting policies and other explanatory information.
Management's Respons i b il ity for the C ons olidated Financ ial St atements
Management is responsible for the preparation and fair presentation of these consolidatedfinancial statements in accordance with International Financial Reporting Standards as adoptedby the European Union, and for such internal control as management determines is necessary toenable the preparation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.
Auditor's Re sponsibility
Our responsibility is to express an opinion on these consolidated financial statements based onour audit. We conducted our audit in accordance with International Standards on Auditing.Those standards require that we comply with ethical requirements and plan and perform theaudit to obtain reasonable assurance about whether the consolidated financial statements are freefrom material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the consolidated financial statements. The procedures selected depend on ourjudgment, including the assessment of the risks of material misstatement of the consolidatedfinancial statements, whether due to fraud or error. In making those risk assessments, weconsider internal control relevant to the entity's preparation and fair presentation of theconsolidated financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity's internal control. An audit also includes evaluating the appropriateness of accountingprinciples used and the reasonableness of accounting estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinion.
KPMG Bulgana OOD, a Bulgarian l imit€d l iabi laty company Fl€gistered wrth rh€and a m€mb€.lrrm ol th6 KPMG n€twork ol indep6nd6nt Comre.cral R6grster at thererb€r l rrms aftr l iated with KPMG Internat ional Bulgarian Regrstry AgencyCoop€rativ€ ('KPMG International'), a Swiss entity. ld€ntirv Code 040595851
lEAN BG06 RZBB 9155 1060 2664 18BIC RZEBBGSFRaiif6is6nBank (Bulgarial EADF-61
tIIIIIIIIIIIII
Opinion
In our opinion, the consolidated financial statements give a true and fair view of theconsolidated financial position of the Bank as at 3l December 2011, and of its consolidatedfinancial performance and its consolidated cash flows for the year then ended in accordancewith International Financial Reporting Standards as adopted by the European union.
Report on Other Legal and Regulatory Requirements
Annual report of the activities of the Bank prepared in accordance with the requirements ofarticle 33 of the Accountancy Act
As required under the Accountancy Act, we report that the historical financial informationdisclosed in the consolidated annual report of the activities of the nu*, p."pu."J uyManagement as required under article 33 of the Accountancy Act, is consistent, in all materialaspects, with the consolidated financial information disclosed in the audited consolidatedfinancial statements of the Bank as of and for the year ended 3l Decembe r 2lll.Managementis.responsible for the preparation of the consolidated annual report ;f the activities of the Bankwhich was approved by the Management Board of the Bank on )0 F"b-u, v zor2.
/tKrassimir Hadjidinev\Registered 4adro<J\
Gilbert McCaulAut ho rised rep res entative
KPMG Bulgaria OOD
22February 2012
II
II
ffiffi
F-62
IIIIIIIItIItIItIIItII
Corporate Commercial Bank ADCo nso lidated F inanc ial S tate me nts
For the year ended 3 I December 201 I
Consolidated Income Statement
For the year ended 3l December 201 I
In thousands of BGN
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net trading income
Other operating income
Total operating income
General administrative expenses
Impairment losses
Profit before tax
Tax expenses
Profit after tax
Profit attributable to:Shareholders ofBank
Minority interest holders
Net profit
Gilbeft McCaulAuthorised representative
KPMG Bulgaria OOD
59,878 73.610
Note 20tL
228,227
(14't,3s9)
20t0
172,201
(9s,34s)
E0,868
13,677
(1,048)
76,856
15,654
(93 1)
12,629
20,743
4,870
14,723
28,343
4,17 7
9
1 0
1 19,1 10
(43,87 t)
(8,8 l9)
ru,o93
(39, l l9)
(3,0s2)
t t , 12
66420
(6,542)
81,922
(8,3 l2)
59 ,81 I
67
59,878
74,4r5
(805)
73,610
unction with the notes set out on pages 8 to 53 that form
//'---'-,iRur."u
-----r
Executive
I
Krassimir HadiidiRegistered
The consolid is to be read i
<"1"4CoQnnPer. Ne045
ffi
F-63
ItIIIiitIitIIIIIIIIII
Consolidated Statement of Comprehensive Income
For the year ended 3 I December 201 I
In thousands of BGN
Profit after tax
Revaluation of available for sale investments
Defened tax on revaluation
Other comprehensive incomeTotal comprehensive income for the year
Total comprehensive income attributable to:
Shareholders of Bank
Minodty interest holders
Total comprehensive income
Basic eamings per share and diluted earnings t?per share with reduced value (BGN)
Gilbeft McCaulAut ho ri s e d re p r e s e n tat iv e
KPMG Bulgaria OOD
Corporate Commercial Bank ADC onsol idate d F inanc ial S tatement s
For the year ended 3 I December 20 I I
20tr
59,E7E
t,749
( l7s) (19)
20LO
73,610
1,574
61,452
172
73,7E2
61,385 74,587
67 (805)
6rAs2 73,782
9.91 12.40
The consolidated statement of comprehensive income is to be read in conjunction with the notes set out on pages
Georgi Flristovve Director Executive DL
Krassimir Hadjidinev iRegistered auditor , \
/ \:
F-64
IIIIItfiIrIIIIIIIIIIII
Corporate Commercial Bank ADConsol idate d F i n anc i al S tate ment s
For the year ended 3l December 201 I
Consolidated Statement of Financial PositionFor the yezu ended 3 I December 20 I IIn thousands of BGN
ASSETS
Cash and cash equivalentsSecurities held for tradingDerivatives held for tradingHeld to maturity investmentsInvestment in associatesAvailable-for-sale investmentsReceivables from banks and
Note
l +
l 5
l 6
t 7other financial
2727
20tl
714 '7) 7
321,3542l l
76,84424
r48,704
43,894
2,629,06262,523
3726,667
20IO
569,0566t ,765
876,4258,823
176,796
r,659,70364,307
369
institutionsLoans to non-financial institutions and othercustomersProperty, plant and equipmentIntangible assetsOther assets
Total assets
LIABILITIES
Derivatives held for tradingDeposits fi'om banks and other financial institutionsDeposits from non-financial institutions and othercustomercOther bonowed fundsSubordinated term debtOther liabilities
Total liabilities
EQUITY AI\D RESRVESShare CapitalReserves
Total equity and reserves
Total liabilities and shareholder equity
Minority interest
Total group liabilities
The
53 rhat
Gilbert McCaulAutho ri sed represen tat iveKPMG Bulgaria OOD
4.044.378 2,702,755-
l 8
l 9202 l22
23
a t
25
26
l 1 , 9 1 0
2 1 4146,515
3,383,15686,63039,7093.875
3.660.099
60,000323,803
383,803
4,043,902
476
324160,882
2,164,45540,539
l 3 ,109
2,379,309
60,000
322,4t7
2,701;726
,/ ':
u Krassimir H.dj idi"."{ \ . .Registeredaud*,
/\
F-65
IIIIIIiItIIttItIItttI
Corporate Commercial Bank ADConso I idate d F i nanc ial S tat ements
For the year ended 3 I December 201 I
Consolidated Statement of cash flows
For the year ended 3 1 December 201 IIn thousands of BGN
Net cash flow from operating activitiesProfit after taxation
Impairment lossesDepreciationLosV(profit) from sale of non-current assets, netUnrealised (gains)/losses from dealing securitiesTax expense
Changes in operating assets
(Increase) in securities held for trading(lncrease)/Decrease in receivables from banks andother fi nancial institutions(Increase) in loans to non-financial institutionsDecrease in other assets
Changes in operating liabilities
Increase in due to customersIncrease/ (Decrease) in other borrowed funds(Decrease) in other liabilitiesIncome taxes paid
Net cash flows from operating activities
Cash flows from investing activities(Acquisition) of property, plant and equipmentSale / (Purchase) of investmentsNet cash flows from investing activities
Cash flows from financing activities(Payments) of finance lease liabilitiesDividends paid
Net cash flows from financing activities
l 09,20,21
l t , t 2
20ll
59,878
8,8194,2'12
(7)72
6.54279,576
(259,385)
29,485(978,167)
7,64r(t,200,426)
t,204,04386,160(e,s37)(8,92r)
1,27 t,74s
150,895
(2,484)37,94535.461
(6e)(620)
_______(6q2_
2010
73,6t0
3,0524,362
223(2)
8,31289,557
(49,204)
( 14,5 l3)(274,998)
8,089(330,626)
618,598(303)
(8'006)(7,842)
602,447
361,378
(6,800)(105,321)(n2, t2t )
(38)(31,492)
(3 r,530)
F-66
IIIIIIlIIIttItIIIIttt
Corporate Commercial Bank ADConso I idate d F i nanc ial S tatements
For the year ended 3 I December 201 I
Consolidated Statement of Cash Flows, continued
For the year ended 3 I December 201 IIn thousands of BCN
Net increase in cash and cash equivalents
Cash and cash equivalents as at the beginning of theperiod
Cash and cash equivalents as at the end of the period
Note 2010
a 1 1 a l l
351329569,056
t4 7 54,723 569,056
flows is to be lead in conjunction with the notes set out on pages 8 to 53 that
20tl
185,667
statemeY/
/fuOrlin Russev GeorgiExecutive Director Executive
Gilbet McCaul
Autho rised representativeKPMG Bulgaria OOD
The consolidated statement of
form an integral pt' of the
ffi
Krassimir Hadjidi
F-67
Cotporate Commercial Bank ADC o nso lidated F i nanc i al S tatement s
For the year ended 3 I December 201 1
Consolidated Statement of Changes in EquityFor the period ended 3 I December 20 I I
Share Share Statu-
capitalpremrum rory
reserYe reserve
Retained Revaluation
earnings reserves from
available for
sale
investments
Revaluatio Other Minority
n reserves reserves Interest
from non-
current
assets
Total
In thousands of BGN
60,000 48,s00 82,693 63,81s (l,408) 25,s94 135 1,834 28t,t63
74,4t5 (80s) '73,610
- t g l
- ( l 9 )
l 9 l
(19)
1 4 A , l 5 t 72 (805) 73.782
IIIIIaIItIIIIIIIIIItI
Balance as at 1 January 2010
Total comprehensive income for the year
Net profit for the year
Other comprehensive income, net of
income taxes
Revaluation of available for sale
investments
Deferred tax on revaluation
Total comprehensive income
Transactions with owners recordeddirectly in equity
Distlibution of statutory r€serves
Other movements
Dividends paid
Total of transactions with shareholdersreflected directly in capital
Balance as at 31 December 2010
Total comprehensive income for the!-ear\et profit for the yearOther comprehensive income, net ofincome taxes
Revaluation of available for salelnvestments
Defened tax on revaluation
Total comprehensive income
3 1 , 1 8 9 ( 3 1 , 1 8 9 )
(1)
- (3t,492)
(7)
(3t,492)
31,182 (62,68t) (3t,499)
60.000 48,500 I13,875 75,549 (1,236) 25,594 135 r.029 323.446
59,81 I 67 59,878
I ; 749
( l7s)
|,749
( 175)
59,81 I 1 ,57 4 67 61,452
F-68
Corporate Commerci-al Bank ADConsolidate d F i nanc ial S tate ments
For the year ended 3 I December 20 I I
Consolidated Statement of Changes in Equity, continuedFor the period ended 3l December 20ll
In thousands of BGN
Transactions with owners recordeddirectly in equityDistribution of statutory rcserves
Other movements
Dividends paid
Total of transactions with shareholdersreflected directly in capital
Balance as at 3l December 2011
Share Share
capitalpremr|.m
reserve
Statu- Retained
. earningstory
reserve
74;736 (74,736)
l -
Revaluation
reserves from
available for
sale
investments
Revaluatio Other Minority Total
n reserves reserves Interest
from non-
current
assets
- t
(620't (620\
74,737 (74,736) (620) (619)
60,000 48,500 188,612 60,624 338 25.594 135 476 384,279
in equity statement is to be read in conjunction with the notes set out onpart of the statements. The financial statements have been approved
Director
The consolidated statement
IIIII)
IItIIItIttItItt
Executivet
//
IliyanExecutive
Cilbert McCaulAuthorised representativeKPMC Bulearia OOD
pages 8 to 53
Krassimir Hadiidinev
F-69
1. BASIS OF PREPARATION (a) Legal status
Corporate Commercial Bank AD (the Group) is a bank domiciled in the Republic of Bulgaria and has its registered office in Sofia, 10 “Graf Ignatiev” Str.
The Group has a banking license issued in accordance with the effective legislation. Major activities include all types of banking transactions on the domestic and foreign markets.
The consolidated financial statements for the year ended 31 December 2010 include the assets, liabilities, share capital and the financial results of Corporate Commercial Bank AD together with its subsidiaries – Velder Consult OOD, CCB Asset Management AD and Dar 02 OOD and its associate entitiy – Fara Consult OOD, described in Note 30.
(b) Statement of compliance
These Consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Commission.
(c) Presentation of the financial statements
These Consolidated financial statements are presented in Bulgarian Leva (BGN) rounded to the nearest thousand and have been prepared on historical cost basis except for:
• derivative financial instruments measured at fair value;
• financial instruments held for trading and all other instruments designated at fair value through profit or loss measured at fair value, where such can be reliably determined;
• available-for-sale financial instruments measured at fair value, where such can be reliably determined;
• investments in properties measured at fair value, based on regular independent appraiser’s valuation.
(d) Functional and presentation currency
These Consolidated financial statements are prepared in Bulgarian Leva (BGN) rounded to the nearest thousand. The Bulgarian Lev is the functional and presentation currency of the Group.
7
F-70
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
1. BASIS OF PREPARATION, CONTINUED
(e) Basis of consolidation
These Consolidated financial statements are prepared in accordance with IAS 27 “Separate and Consolidated Financial Statements”, where all participations in entities where the Group exercises control by holding more than 50% of the voting rights are consolidated applying full consolidation method and all participations in entities, where the Group exercises significant influence by holding more than 20% of the voting rights are consolidated applying equity method.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Income recognition
Interest income and expense is recognized as it accrues, taking into account the effective yield of the asset or an applicable floating rate. Interest income and expense include the amortization of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis.
Fee and commission income arises on financial services provided by the Group and is recognized when the corresponding service is provided.
Net trading income includes gains and losses arising from disposals and changes in the fair value of financial assets and liabilities held for trading..
(b) Foreign currency transactions
Transactions in foreign currencies are translated into the respective functional currencies of the operations at the spot exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. Foreign currency differences arising on translation are difference between amortised cost in functional currency in the beginning of period, adjusted with effective interest and received payments during the period, and amortised cost in foreign currency at the spot exchange rate at the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined.
8
F-71
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) Financial assets
The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
(i) Financial assets at fair value through profit or loss
This category includes two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless they are designated as hedges.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable.
(iii) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale.
(iv) Available-for-sale
Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.
(v) Recognition and subsequent measurement of financial assets
Purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized on the date of the actual delivery of the assets. Loans are recognized when cash is advanced to the borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or when the Group has transferred substantially all risks and rewards of ownership.
0/
F-72
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. ОСНОВНИ ЕЛЕМЕНТИ НА СЧЕТОВОДНАТА ПОЛИТИКА, ПРОДЪЛЖЕНИЕ
(c) Financial assets, continued Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis optional price models and other valuation techniques often used by the market participants. All changes in fair value of the financial statements at fair value through profit or loss are recognised as part of net trading income in profit or loss. At subsequent measurement the changes in the fair value of available for sale financial assets are recognised directly in equity until the financial asset is sold or impaired, whereupon the cumulative gains and losses previously recognised in equity are recognised in profit or loss. Held to maturity financial assets and loans and advances a are initially measured are subsequently measured at their amortised cost using the effective interest method.
(vi) Derecognition
The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the statement of financial position..
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
The Group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions.
In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. Risks and awards retained after transfer are correspondingly recognized as liabilities or assets.
In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
(d) Cash and cash equivalents
Cash and cash equivalents comprise cash balances on hand, cash deposited with the central bank and short-term highly-liquid investments with maturity of three months or less when purchased.
00
F-73
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) Securities borrowing and lending business and repurchase agreements
(i) Securities borrowing and lending
Investments lent under securities lending arrangements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for assets held for trading or available for-sale as appropriate. Cash collateral received in respect of securities lent is recognised as liabilities to either banks or customers. Investments borrowed under securities borrowing agreements are not recognised. Cash collateral placements in respect of securities borrowed are recognised under loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognised on an accrual basis over the period of the transactions and are included in interest income or expense.
(ii) Repurchase agreements
The Group enters into purchases (sales) of investments under agreements to resell (repurchase) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised in loans to either banks or customers. The receivables are shown as collateralised by the underlying security. Investments sold under repurchase agreements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for either assets held for trading or available-for-sale as appropriate. The proceeds from the sale of the investments are reported as liabilities to either banks or customers.
The difference between the sale and repurchase considerations is recognised on an accrual basis over the period of the transaction and is included in interest.
(f) Borrowings Borrowings are recognised initially at ‘cost’, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest rate method.
(g) Offsetting
Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when the Group has a legally enforceable right to set off the recognised amounts and the transactions are intended to be settled on a net basis.
(h) Impairment of financial assets
Sgd b`qqxhmf `lntmsr ne sgd Fqnto’r ehm`mbh`k `rrdsr `qd qduhdvdc `s d`bg qdonqshmf c`sd sn cdsdqlhmd vgdsgdq sgdqd hr `mx hmchb`shnm ne hlo`hqldms- He `mx rtbg hmchb`shnm dwhrsr+ sgd `rrds’r qdbnudq`akd `lntms hr drshl`sdc-
01
F-74
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(h) Impairment of financial assets, continued
(i) Loans and advances
The recoverable amount of originated loans and advances and purchased loans is calculated as the present value of the expected future cash flows, discounted at the instrument’s original effective interest rate. Short-term balances are not discounted.
Loans are presented net of specific and general allowances for impairment. Specific allowances are made against the carrying amount of loans that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans to their recoverable amounts. General allowances are maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the statement of financial position date. The expected cash flows for portfolios of similar assets are estimated based on previous experience and considering the credit rating of the underlying customers and late payments of interest or penalties. Increases in the allowance account are recognised in the income statement. When a loan is identified to be not recoverable, all the necessary legal procedures have been completed, and the final loss has been determined, the loan is written off directly.
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the write down, the write-down or allowance is reversed through the income statement.
(ii) Financial assets remeasured to fair value directly through equity
When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. If, in a subsequent period, the fair value of a financial instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. Any subsequent increase in the fair value of impaired equity security, available for sale, is recognized directly in equity.
02
F-75
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(i) Property, plant and equipment
The Group adopted a policy to carry its class of fixed assets, comprising the land and buildings, at revalued amount under the alternative approach of IAS 16, Property, plant and equipment.
The other classes of fixed assets are stated in the statement of financial position at their acquisition cost less accumulated depreciation.
Depreciation is calculated on a straight line basis at prescribed rates designed to decrease the cost or valuation of fixed assets over their expected useful lives. The following are approximations of the annual rates used:
Assets % • Buildings 4 • Plant and equipment 30 • Computer equipment 50 • Motor vehicles 25 • Other 15
Assets are not depreciated until they are brought into use and transferred from assets in the course of construction into the relevant asset category.
(j) Intangible assets
Intangible assets, which are acquired by the Group, are stated at cost less accumulated amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over the expected useful life of the asset. The annual rates of amortisation are as follows: Assets %
• Computer software and licenses 50 • Other intangible assets 04
(k) Provisions
A provision is recognised in the statement of financial position when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
03
F-76
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(l) Taxation
Tax on the profit for the year comprises current tax and the deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rates enacted by the reporting date, and any adjustment of tax payable for previous years.
Deferred tax is provided using the statement of financial position liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculated on the basis of the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. The effect on deferred tax of any changes in tax rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(m) Employee benefits
(i) Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The Government of Bulgaria is responsible for providing pensions in Bulgaria under a defined contribution pension plan. The Group’s contributions to the defined contribution pension plan are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.
(ii) Defined benefit plans
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value.
The Group has obligation to pay certain amounts to each employee who retires with the Bank in accordance with Art. 222, § 3 of the Labor Code. According to these regulations in the LC, when a labor contract of a company’s employee, who has acquired a pension right, is ended, the Group is obliged to pay him compensations amounted to two gross monthly salaries. In case the employee’s length of service in the Group equals to or is greater than 10 or more years, as at retirement date, then the compensation amounts to six gross monthly salaries. As at the reporting date, the Management of the Group estimates the approximate amount of the potential expenditures for every employee based on a calculation using the projected unit credit method.
04
F-77
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(m) Employee benefits, continued (iii) Termination benefits
Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.
(iv) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. The Group recognises as a liability the undiscounted amount of the estimated costs related to annual leave expected to be paid in exchange for the employee’s service for the period completed.
(n) Earnings per share
The Group presents data on basic earnings per share and diluted earnings per share for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary equity holders of the Group for a particular period by the average weighted number of ordinary shares during the period. Diluted earnings per share is calculated by adjusting the profit or loss attributable to ordinary equity holders of the Group for a particular period and the weighted average number of ordinary shares during the period for the effects of all dilutive potential ordinary shares comprised of convertible liabilities and options on shares.
(о) Critical accounting estimates and judgments in applying accounting policies
The preparation of the financial statements requires Management of the Group to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
(i) Impairment losses on loans and advances
Assets accounted for at amortised cost are reviewed for impairment on a basis described in accounting policy h) (i) above.
05
F-78
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(о) Critical accounting estimates and judgments in applying accounting policies, continued
(i) Impairment losses on loans and advances, continued
The specific allowances for impairment, applied to loans and receivables evaluated individually for impairment, are based upon management’s best estimate of the present value of the cash flows that are expected to be received.
In estimating these cash flows, management makes judgments about counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the estimate of cash flows considered recoverable is independently approved by the Credit Committee of the Group.
Impairment losses determined on a portfolio basis cover credit losses inherent for exposures with similar economic characteristics where an objective evidence suggests that they include impaired exposures which cannot be individually identified yet.
In estimating the needs of impairment losses on a portfolio basis, the Management of the Group takes into account factors such as the type of the loan, impairment, collateral, the amount of the portfolio, concentrations and economic factors. Loans are grouped in portfolios by customer’s economic activity according to the National Classification of Economic Activities. This criterion is used for the purpose of grouping as it allows to analyze and review the general business environment for development of the respective economic activity. To calculate the amount of required impairment, assumptions were made as to how to model inherent losses and to determine the required input parameters based on the historical experience and current economic conditions. The accuracy of impairment depends on how precisely the probability of losses has been forecasted, as well as on the assumptions and parameters of the used model for determining portfolio provisions.
(ii) Fair value measurement principles
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.
06
F-79
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(о) Critical accounting estimates and judgments in applying accounting policies, continued
(ii) Fair value measurement principles, continued
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. Where transaction price is the best indicator of the fair value at initial recognition, the financial instrument is measured initially at transaction price and each difference between this price and the price as per valuation model is subsequently recognized in the statement of comprehensive income taking into consideration individual circumstances related to the transaction and not later than the moment when this fair value is supported by reliable market data or when the deal has been closed.
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction.
The Group measure fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
Level 1: Quoted market price (unadjusted) in an active market for and identical assets or liabilities;
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly
(i.e. derived from prices). This category includes quotes for instruments on markets considered as less then active or instruments valued using valuation techniques;
Level 3: Valuation techniques using significant unobservable inputs for financial assets and liabilities.
In addition, this category includes equity investments in subsidiaries and associates, as well as other financial institutions measured at cost that have no observable market data;
The following table analyzes the financial instruments measured at fair value according to the valuation models used:
Hm sgntr`mcr ne AFM
31 December 2011 Level 1 Level 2 Level 3 Total
Hmudrsldmsr gdkc enq sq`chmf 203+31/ 5+822 , 210+243@u`hk`akd,enq,r`kd hmudrsldmsr 13+888 0/5+004 06+48/ 037+6/3
Total 228+308 002+/37 06+48/ 36/+/47
07
F-80
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(о) Critical accounting estimates and judgments in applying accounting policies, continued
(ii) Fair value measurement principles, continued
31 December 2010 Level 1 Level 2 Level 3 Total
Hmudrsldmsr gdkc enq sq`chmf 50+654 , , 61,765
@u`hk`akd,enq,r`kd hmudrsldmsr 74+26/ , 80+315 176,796
Total 147,135 - 91,426 238,561
(p) Segment reporting
The Group does not prepare segment reporting because the main source of risk and return is corporate segment, there is not a single external customer the income from which exceeds 10%, and the Group carries out its activities on the territory of the country. In case those fact change in the future and the Group presents its financial statements by segments, they will be determined and presented in accordance with the provisions of IFRS 8 Operating segments, as disclosed in note 1(e).
08
F-81
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(q) International Financial Reporting Standards (IFRS) and interpretations adopted from European Commission not yet effective as of the date of the Statement.
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2011, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Group.
Standards, Interpretations and amendments to published Standards that are not yet effective and have not been early adopted – endorsed by the EC
• Amendments to IFRS 7 Disclosures – Transfers of Financial Assets (issued October 2010) – effective from the first financial year that starts after 1 July 2011.
• Improvements to IFRSs 2010 (issued May 2010), various effective dates, generally 1 January 2011.
IASB/IFRIC documents not yet endorsed by EC:
Management believes that it is appropriate to disclose that the following new or revised standards, new interpretations and amendments to current standards, which are already issued by the International Accounting Standards Board (IASB), are not yet endorsed for adoption by the European commission, and therefore are not taken into account in preparing these consolidated financial statements. The actual effective dates for them will depend on the endorsement decision by the EC.
IFRS 9 Financial Instruments (issued November 2009 and Additions to IFRS 9 issued October 2010) has an effective date 1 January 2015 and could change the classification and measurement of financial instruments.
In May 2011 the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint arrangements, IFRS 12 Disclosures of Interests in Other Entities and IFRS 13 Fair Value Measurement, which all have an effective date of 1 January 2013. The IASB also issued IAS 27 Separate Financial Statements (2011) which supersedes IAS 27 (2008) and IAS 28 Investments in Associates and Joint Ventures (2011) which supersedes IAS 28 (2008). All of these standards have an effective date of 1 January 2013.
Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets (issued December 2010) has an effective date 1 January 2012.
Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (issued December 2010) has an effective date 1 July 2012.
In June 2011 the IASB issued Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) with an effective date of 1 July 2012.
In June 2011 the IASB issued an amended IAS 19 Employee Benefits with an effective date of 1 January 2013.
In December 2011 the IASB issued amendments to IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities with an effective date of 1 January 2013.
In December 2011 the IASB issued amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities with an effective date of 1 January 2014.
IFRIC Interpretation 20: Stripping Costs in the Production Phase of a Surface Mine with an effective date of 1 January 2013.
1/
F-82
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES
(а) Introduction and general overview
In carrying out its transactions with financial instruments, the Group is exposed to the following types of risks:
• Credit risk
• Liquidity risk
• Market risk
• Operational risk
This note provides information about Group’s exposures to any of above mentioned risks, objectives policies implemented for risk measuring and management, as well as for capital management.
General overview of risk management The Group operates in the condition of a dynamically developing global financial and economic crisis. Its further development might result in negative implications on the financial and liquidity position of the Group.
Management is responsible for the preparation and implementation of these general provisions of Group’s risk management. The Supervisory Board on the proposal by the Management Board establishes Liquidity Management Committee (LMC), Credit Committee and Operational Risk Management Council that are responsible for implementing the Group’s risk management policies in their specific areas. These bodies regularly report to the Management Board on their work. The Group’s risk management policies are designed to identify and analyse risks faced by the Group, to determine appropriate risk limits and controls and to oversee the compliance with the set limits. Risk management policies and systems are regularly reviewed to reflect changes in market conditions, products and provided services. Through its training programmes, management standards and procedures, the Group aims to develop a strict and effective control environment in which all employees understand their role and responsibilities.
The Group’s internal audit oversees and assesses the efficiency of risk management system, as well as risks and controls associated with management, operations and information systems of the Group. The internal audit monitors the compliance of implemented risk management policies with the approved risk management policies and to what degree the risk faced by the Group complies with the adopted levels of bank risks. The results of the independent audits are reported to the Supervisory and Management Board.
(b) Credit risk
The Group is subject to credit risk through its lending, trading and investing activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees.
The risk that counterparties to both derivative and other instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Group deals with counterparties of good credit standing.
The Group ’s primary exposure to credit risk arises through its loans and advances. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the statement of financial position. In addition, the Group is additionally exposed to credit risk through commitments to extend credit and guarantees issued.
10
F-83
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES
(b) Credit risk, continued
Bnmbdmsq`shnmr ne bqdchs qhrj 'vgdsgdq nm nq nee sgd rs`sdldms ne ehm`mbh`k onrhshnm( sg`s `qhrd eqnl ehm`mbh`k hmrsqtldmsr dwhrs enq Fqnto r ne bntmsdqo`qshdr vgdm sgdx g`ud rhlhk`q dbnmnlhb bg`q`bsdqhrshbr sg`s vntkc b`trd sgdhq `ahkhsx sn ldds bnmsq`bst`k nakhf`shnmr sn ad rhlhk`qkx `eedbsdc ax bg`mfdr hm dbnmnlhb nq nsgdq-
(i) Credit risk in the trading book Enq sgd otqonrdr ne lhshf`shmf sgd bntmsdqo`qsx qhrj `mc rdsskdldms qhrj vhsg qdf`qc sn sgd cd`kr hm sgd sq`chmf annj+ Fqnto bnmbktcdr cd`kr vhsg ghfg q`mjhmf bkhdmsr vhsg rsqhmf bqdchsvnqsghmdrr- Enq l`mx rtbg bkhdmsr Fqnto g`r `ooqnudc bqdchs khlhsr- Qdftk`snqx sq`chmf annj hmbktcdr ehm`mbh`k `rrdsr gdkc enq sq`chmf otqonrdr- Sgd `m`kxrhr a`rdc nm bkhdms bqdchs pt`khsx `mc q`shmf 'vgdqd `u`hk`akd( `r ne 20 Cdbdladq 1/00 `mc 20 Cdbdladq 1/0/ hr rgnvm hm sgd mdws s`akd9
In thousands of BGN 2011 2010
Government bonds Rated ВВВ 200,742 57,780 Bonds of credit institutions Rated AAA - 3,985 Corporate bonds: Not rated 120,612 - Total trading assets 321,354 61,765
(ii) Credit risk in the banking book
Credit risk management is an element of the comprehensive model applied by the Group to manage Group risks. To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk the Group applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. The rating is determined in accordance with the Methods of Determining Credit Risk.
The Group ’s lending policy is oriented mostly to corporate customers but it is not a limit in respect of other borrowers with proved loan efficiency.
Credit risk management is an element of the comprehensive model applied by the Group to manage Group risks. To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk the Group applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. The rating is determined in accordance with the Methods of Determining Credit Risk.
By the system in internal rating customers are classified in different groups by conducting qualitative evaluation of credit risk degree. In determining the borrower’s credit rating regarding the potential changes in the economic environment and its financial stability. For this purpose the Group measures:
11
F-84
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(ii) Credit risk in the banking book, continued
• Total business risk including systemic risk or risk of change in external factors for credit borrowers and specific or non-systemic reflecting the management quality and borrower’s financial stability;
• Risk ensuing from the Group ’s historical experience in regarding the respective customer.
The internal rating system is also used to determine whether it is necessary to accrue impairment loss for particular credit exposures. This framework for grading risk includes 11 grades reflecting inherent risk and other factors related to credit risk.
The Group manages the credit risk level by establishing limits for any individual credit borrower and groups of economically related persons, as well as other limits in accordance with the nature, size and complexity of its lending operations and in accordance with BNB supervisory requirements.
The major credit risk management bodies include:
• Credit Council. The Credit Council is a permanent specialized consultative body. The Credit Council considers the proposals of the Lending Department and the heads of subsidiaries for concluding credit transactions and submits to the executive directors, or where this is beyond their competence to the Management Board an unbiased evaluation of the parameters of proposed credit transaction. The renewal and review of credit exposures are subject to the same review. The Group ’s Management Board determines the number and the staff of the Credit Council. The Credit Council acts under the rules and procedures adopted by the Management Board and approved by the Supervisory Board.
• On 01.11.2009 within the “Analysis and control of risk” Department in the Group, “Credit risk” Division starts functioning. It carries out analyses over the financial position and the creditworthiness of the potential borrowers, the subject and the purpose of the loan, the collateral offered and the economic relatedness of the potential borrowers. Within the division comprehensive credit ratings of borrowers within the Group are given and regularly updated. The division also evaluates the impact of newly offered loans to the application of the BNB Ordinance No. 8 requirements and the approved internal limits. In addition, an independent opinion for the appropriateness of the new loans as a risk generation factor in the context of the risks the Group has already been exposed to.
Effective from the same date, The Credit Council ceases its activities.
• Credit Committee. The Credit Committee is a specialized internal body for monitoring, evaluation, classification and provisioning of risk exposures, including those of concluded credit transactions. The Management board of the Group determines the number and the staff of the Credit Committee. The Credit Committee acts under the rules and procedures adopted by the by the Management Board and approved by the Supervisory Board.
The Group monitors the state of individual loans and the adequacy of allocated funds for covering credit risk on an ongoing basis.
All risk exposures of the Group , including credit exposures are evaluated on a monthly basis by the Group ’s Credit Committee in accordance with the adopted Rules of Review, Evaluation and Classification of CCB Risk Exposures (the Rules).
.
12
F-85
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(ii) Credit risk in the banking book, continued
According to the Rules and by the internal rating system, the Credit Committee classifies risk exposures into the following four classification groups consistent with the degree of credit risk:
• “Standard risk exposures on loans and other claims are those risk exposures which are serviced and information on the debtor’s financial state gives no ground to assume that the debtor will not repay in full his debts.
• Watch exposures are the risk exposures on loans and other claims where insignificant weaknesses exist with respect to their servicing or there is a possibility of deterioration in the debtor’s financial state, which may question the full repayment of the obligation.
• “Substandard exposures are the risk exposures on loans and other claims where significant weaknesses exist with respect to their servicing, or the available information points to the debtor’s unstable financial state, current and anticipated proceeds are insufficient for the full repayment of his obligations to the Group and to other creditors, as well as where weaknesses have been found with the distinct possibility that the Group will sustain some loss.
• Loss exposures are those risk exposures where grave weaknesses exist with respect to their servicing or as a result of the debtor’s deteriorated financial state his obligations are deemed uncollectible, even though they have partial recovery value that may be realized in the future.
The classification of risk exposures is submitted for approval to the Management Board.
Any Group ’s business unit is required to implement credit policies and procedures and is responsible for the quality of its credit portfolio, for monitoring and controlling all credit risks in its portfolios, including those subject to central approval. Regular audits of business units and processes in the Lending Department are undertaken by the specialized Internal Audit.
13
F-86
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure In thousands of BGN Note 2011 2010 Cash and cash equivalents 14 754,723 569,056 Securities held for trading 15 321,354 61,765 Derivatives held for trading 211 8 Held to maturity investments 16 76,844 76,425 Investments in associates 24 8,823 Available-for-sale investments 17 148,704 176,796 Receivables from banks and other financial institutions 18 43,894 73,593 Loans to non-financial institutions and other customers 19 2,629,062 1,659,703 Individually impaired Watch 8,748 3,112 Substandard 5,935 - Loss 2,567 3,061 Gross carrying value 17,250 6,173 Impairment loss (5,195) (2,311) Book value 12,055 3,862 Impaired on a portfolio basis Loans to legal entities 2,423,726 1,497,940 Loans to individuals 10,119 8,594 Carrying value 2,433,845 1,506,534 Impairment loss (17,309) (11,398) Book value 2,416,536 1,495,136 Incl. renegotiated exposures 225,221 228,358 Past due, fully secured but not impaired Watch 4,260 6,104 Substandard 324 - Loss 554 - Gross carrying value 5,138 6,104 Neither past due nor impaired Loans to legal entities 187,581 147,570 Loans to individuals 7,752 7,031 Book value 195,333 154,601 Incl. renegotiated exposures 19,659 22,601
Total net book value of loans to non-financial institutions and other customers 2,629,062 1,659,703 Credit commitments and financial guarantees Unutilized overdrafts and credit lines 72,261 101,361 Guarantees and letters of credit 28 153,354 171,651 Total 225,615 273,012
14
F-87
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
Impaired loans and securities
Impaired loans and securities are loans and securities for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities arrangements.
Past due but not impaired loans
Loans and securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of collateral available and/or the stage of collection of amounts owed to the Group.
Loans with renegotiated terms
Loans with renegotiated terms are Group ’s risk exposures that have been renegotiated or restructured. An exposure is considered restructured where due to deterioration in the borrower’s financial position resulting in inability to repay its debt, the Group has made concessions by changing the original terms and conditions of the arrangement that it would not otherwise consider. Once the loan of a legal entity is restructured, it remains in this classification group independent of satisfactory performance after restructuring, unless it persistently satisfies all the conditions for the corresponding lower-risk classification group for a period of not less than six months. An exposure is deemed renegotiated where it has not been identified as deteriorated, it is fully secured and there is a ground to believe that the Group will collect the principal and interest.
Impairment loss
The Group ’s policies as to impairment loss allowances on financial assets is described above in item 2 (h)..
Write-off policy
The Group writes off a receivable on a loan or security classified as non-performing fully covered by allowances for impairment losses by a decision of the Management Board on a motion by the Credit Committee for the account of allocated provisions for impairment losses. This determination is reached after considering the following information: occurrence of significant changes in the borrower/issuer’ financial position such that the borrower/issuer can no longer pay the obligation, or the proceeds from collateral will not be sufficient to pay back the entire exposure. The off-balance reporting of exposures is discontinued by a decision of the Management Board, provided the Group ’s Credit Committee has determined the loans or securities uncollectible due to occurrence of any of the following circumstances: the debtor is a legal entity deleted from the trade or any other public register and has no legal successor; a deceased natural person who has not left heirs or the heirs have given up their rights of inheritance; the debtor has made a prescribed claim
.
15
F-88
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
The table below represents an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by classification group:
Loans to non-financial institutions and other customers
In thousands of BGN Gross Net 31 December 2011 Watch 13,008 11,030 Substandard 6,259 5,305 Loss 3,121 858 Total 22,388 17,193 31 December 2010 Watch 9,216 8,719 Substandard - - Non-performing 3,061 1,247 Total 12,277 9,966
In compliance with the implemented Group ’s policy prior to extending the approved loans, customers are required to provide appropriate collateral. According to the Group ’s requirements the total amount of extended loans should be fully secured. Group guarantees and L/C are also subject to strict preliminary study. .
Collateral on loans, guarantees and L/C most often include cash, property, plants and equipments, registered securities or any other property. The table below presents a breakdown of total loans extended to customers by the Group , by type of collateral:
Hm sgntr`mcr ne AFM 2011 2010
Lnqsf`fdr 409,410 547,420 Cash and deposits 58,968 15,645 Other collaterals 444,978 224,904 Tmrdbtqdc 1,596,284 801,456 Lnqsf`fdr 141,926 83,987
Less impairment losses (22,504)
(13,709) 2,629,062 1,659,703 Other collaterals include pledge on non-current assets and promissory notes.
16
F-89
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
Major concentration of credit risk occurs dependent on the sector of activity and the type of borrower in respect of Group investments, loans and advances, arrangements for extending loans and issuing guarantees..
The total amount of loans extended by the Group to non-financial institutions and other customers by economic sector is presented in the table below:
In thousands of BGN 2011 2010
Trade and services 1,026,552 672,070 Manufacturing 417,635 274,745 Construction 324,774 269,304 Agriculture 54,893 47,814 Transport and communication 220,424 86,610 Other industries 607,288 322,869 2,651,566 1,673,412 Less impairment losses (22,504) (13,709) 2,629,062 1,659,703
(c) Liquidity risk
Liquidity risk arises in the general funding of the Group’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations.
(i) Liquidity risk management
The Group ’s liquidity management system is based on the following principles:
- centralised control over Group ’s liquidity carried out by Liquidity Management Committee;
- persistent monitoring and evaluation of future cash flows and sufficiency of Group ’s liquid assets;
- planning of operations in contingency situations..
The Treasury Department receives information from other business units regarding the liquidity profile of their financial assets and liabilities and the projected cash flows arising from projected future business. The Treasury Department maintains a portfolio comprised mostly of short-term and liquid securities, loans and advances to banks and other financial instruments to ensure that sufficient liquidity is maintained within the Group as a whole.
17
F-90
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(i) Liquidity risk management, continued
The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the Liquidity Management Committee. Daily reports cover the liquidity position of the Group . A summary report, including any exceptions and remedial actions taken, is submitted regularly to the Liquidity Management Committee.
Sgd Fqnto ’r etmcr `qd q`hrdc trhmf ` aqn`c q`mfd ne ehm`mbhmf hmrsqtldmsr hmbktchmf cdonrhsr+ btqqdms `bbntmsr `mc nsgdq anqqnvdc etmcr+ `r vdkk `r rg`qd b`ohs`k- Sghr dmg`mbdr etmchmf ekdwhahkhsx+ khlhsr cdodmcdmbd nm `mx nmd rntqbd ne etmcr `mc knvdqr sgd bnrs ne anqqnvdc etmcr- Sgd Fqnto l`jdr hsr adrs deenqsr sn l`hms`hm ` a`k`mbd adsvddm sgd l`stqhsx ne anqqnvdc etmc `mc ekdwhahkhsx sgqntfg sgd trd ne etmcr vhsg ` q`mfd ne l`stqhsx- Sgd Fqnto bnmshmt`kkx `rrdrrdr khpthchsx qhrj ax hcdmshexhmf `mc lnmhsnqhmf bg`mfdr hm etmchmf qdpthqdc sn ldds atrhmdrr fn`kr `mc s`qfdsr rds hm sdqlr ne sgd nudq`kk Fqnto rsq`sdfx- Hm `cchshnm sgd Fqnto gnkcr ` onqsenkhn ne khpthc `rrdsr `r o`qs ne hsr khpthchsx qhrj l`m`fdldms rxrsdl-.
(ii) Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks.
The ratios of net liquid assets to deposits from customers at the reporting date and during the reporting period are as follows:
2011 2010 As at 31 December 19.91% 25.12% Average for the period 23.40% 19.75% Maximum for the period 26.22% 25.12% Minimum for the period 18.70% 16.03%
18
F-91
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iii) Residual contractual maturities of financial liabilities
The table below shows the undiscounted cash flows on the Group ’s financial liabilities on the basis of their earliest possible maturity..
The gross nominal inflow/(outflow) is the contractual, undiscounted cash flow on the financial liability or commitment.
Carrying Gross
nominal Less than 1 - 3 3 months 1 – 5 Over In thousands of BGN Note value
cash (outflow) 1 month months to 1 year years 5 years
31 December 2011 Deposits from banks 23 30,856 (30,892) (26,853) (4,039) - - - Deposits from other financial institutions 23 115,659 (118,814) (33,810) (10,355) (67,222) (7,427) - Deposits from non-financial institutions and other customers 24 3,383,156 (3,445,408) (666,626) (467,518) (1,549,067) (762,197) - Other borrowed funds 25 86,630 (91,718) - (145) (438) (43,969) (47,166) 3,616,301 (3,686,832) (727,289) (482,057) (1,616,727) (813,593) (47,166) Unutilized credit commitments - (72,261) (72,261) - - - - 3.616.301 3,759,093 (799,550) (482,057) (1,616,727) (813,593) (47,166)
31 December 2010
Deposits from banks 23 64,317 (64,392)
(55,298)
(9,094)
-
- - Deposits from other financial institutions 23 96,565
(98,748)
(43,701)
(6,867)
(48,180)
-
-
Deposits from non-financial institutions and other customers 24
2,164,455
(2,192,179)
(789,231)
(411,314)
(598,502)
(393,132)
-
Other borrowed funds 25
40,539
(42,558) (3)
(154)
(178)
(223)
(42,000)
2,365,876
(2,397,877) (888,233)
(427,429)
(646,860)
(393,355)
(42,000) Unutilized credit commitments - (101,361) (101,361) - - - -
2,365,876
(2,499,238) (989,594)
(427,429)
(646,860)
(393,355)
(42,000)
2/
F-92
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iv) Expected maturities of assets and liabilities
The expected Group’s cash flows on financial liabilities significantly diverge from the maturity analysis shown above, with deposits at sight projected to sustain a stable or increasing balance and not all unrecognised loan commitments expected to be immediately utilized. Projecting cash flows the Group takes into account historical data on cash flows adjusted to establish seasonal fluctuations and prevailing economic and market conditions.
Maturity table as at 31 December 2011
In thousands of BGN Less than
1 month1 - 3
months3 months to 1 year
1 - 5 years Over 5 years
Total
Assets Cash and cash equivalents 643+612 - - - - 754,723Securities held for trading 0/0+045 602 219,596 - - 321,354Derivatives held for trading 100 , - - - 211Available-for-sale investments , 6+/24 1,438 121,320 18,911 148,704Held to maturity investments 41+8/8 , 4,058 - 19,877 76,844Investments in associates , , , , 13 13Receivables from banks and other financial institutions 0+676 3,165 11,285 17,853 9,804 43,894Loans to customers 038+023 161,453 583,798 1,406,205 328,472 2,629,062Property, plant and equipment - - - 9,551 52,972 62,523Intangible assets - - - 372 - 372Other assets 5,381 - 1,286 - - 6,667 1,065,301 172,255 821,461 1,555,301 430,060 4,044,378Liabilities Deposits from banks and other financial institutions 59,965 14,362 57,731 14,457 - 146,515Deposits from non-financial institutions and other customers 665,213 428,778 1,531,534 757,631 - 3,383,156Derivatives held for trading 214 - - - - 214Subordinated term debt - - - - 39,709 39,709Other borrowed funds - 144 211 41,311 44,964 86,630Other liabilities 3,522 - 353 - - 3,875 728,914 443,284 1,589,829 813,399 84,673 3,660,099
Gap in maturity of assets and liabilities 336,387 (271,029) (768,368) 741,902 345,387 384,279
20
F-93
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iv) Expected maturities of assets and liabilities
Maturity table as at 31 December 2010 In thousands of BGN Less
than 1 month
1 - 3 months
3 months to 1 year
1 - 5 years
Over 5 years
Total
Assets Cash and cash equivalents 458+/45 - - - - 569,056Securities held for trading 5/+677 977 - - - 61,765Derivatives held for trading 8 - - - - 8Available-for-sale investments 065+/55 , - - 730 176,796Held to maturity investments 45+527 , - - 19,787 76,425Investments in associates - 8,819 - - 3 7+712Receivables from banks and other financial institutions 15+060 3,193 14,166 20,273 9,790 73,593Loans to customers 70+814 141,304 443,071 831,186 162,217 1,659,703Property, plant and equipment - - - 9,316 54,991 64,307Intangible assets - - - 369 - 369Other assets 9,602 - 2,308 - - 11,910
980,254 154,293 459,545 861,144 247,519 2,702,755Liabilities Deposits from banks and other financial institutions 98,037 15,982 43,744 3,119 - 160,882Deposits from non-financial institutions and other customers 788,322 394,328 590,916 390,889 - 2,164,455Derivatives held for trading 324 - - - - 324Other borrowed funds 3 152 169 215 40,000 40,539Other liabilities 12,896 - 213 - - 13,109 899,582 410,462 635,042 394,223 40,000 2,379,309
Gap in maturity of assets and liabilities 80,672 (256,169) (175,497) 466,921 207,519 323,446
21
F-94
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES
(d) Market risk
Market risk is the risk that changes in market prices, such as interest rates, equity prices or foreign exchange rates will affect the Group ’s income or value of its holdings of financial instruments.
(i) Market risk management
Market risk management policies are aimed at managing and controlling market risk exposures within the admissible limits concurrently improving the risk/earnings ratio. The Group actively manages interest rate, foreign currency, price and other risks with a view to ensuring compliance with the adopted limits as to the acceptable level of risk. Group ’s risk limits are regularly reviewed with a view to assessing their adequacy given the goals and strategies of the Group and current market conditions. The Group separates its exposure to market risk between trading and non-trading portfolios, using a wide range of methods for assessing the inherent risk of its trade and banking positions, including in derivative and non-derivative instruments.
Market risk management is vested in the Liquidity Management committee. The Risk Management Department is responsible for the development of detailed risk management policies (subject to review and approval by the Management and Supervisory Boards) and for day-to-day review of their implementation.
(ii) Exposure to market risk – trading portfolio
The Group has active market trade positions in a limited number of derivative financial instruments (largely short-term forwards), as well as in non-derivative instruments. Most of Group ’s trading operations were directed to customers. To satisfy customer requirements the Group maintains a package of capital market instruments, quoting bid/offer rates, and actively trade with other market participants. These operations include trade in financial instruments and allow the Group to provide to its customers capital market products at competitive prices. Since the trade strategy depends equally on the Group ’s role in determining market and its positions in various financial instruments, the Group aims to improve its net earnings from trade operations given the relationship between instruments and the market. The Group manages its trade operations dependant on the type of risk and on the basis of the variety of holdings of trade instruments.
@kk sq`cd hmrsqtldmsr `qd rtaidbs sn l`qjds qhrj cdsdqlhmdc `r qhrj ne hlo`hqldms qdrtkshmf eqnl sgd nbbtqqdmbd ne etstqd bg`mfdr hm l`qjds bnmchshnmr- Sgd hmrsqtldmsr `qd du`kt`sdc `s e`hq u`ktd `mc `kk bg`mfdr hm l`qjds bnmchshnmr chqdbskx qdekdbs nm mds d`qmhmfr eqnl sq`cd nodq`shnmr-
The Group manages its holdings of trade instruments in response to changing market conditions. The exposure regarding market risk is managed in accordance with risk limits determined by the management through purchase and sale of instruments or through opening an offsetting position.
22
F-95
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(ii) Exposure to market risk – trading portfolio, continued
The principal tool used to measure and control market risk exposure within the trading portfolio is Value at Risk (VaR). VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used by the Group is based upon a 99% percent confidence level and assumes a 10-day holding period. The VaR model is based mainly on historical values. Taking account of market data from the previous two years, the model generates a wide range of plausible future scenarios for market price movement.
Although VaR is an important tool for measuring market risk, the assumptions on which the model is based do give rise to some limitations, including the following:
• A 99% percent confidence level does not reflect losses that may occur beyond this level. Even within the model used there is 1% probability that losses could exceed VaR;
• VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day/trading session;
• The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature;
• The VaR measure is dependent upon the Group ’s position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa.
The Group has applied the VaR methodology since early 2007 and uses the limits/range of VaR for measuring interest rate risk of its trading portfolio.
VaR positions of Group ’s trading portfolio at 31 December 2011 and 31 December 2010 are as follows:
In BGN As At Average Maximum Minimum 31 December 2011 Interest rate risk 4,081,418 650,613 5,210,966 114,251 31 December 2010 Interest rate risk 118,906 430,267 1,086,815 118,906
The limitations of the VaR methodology are monitored by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Group uses a wide range of stress tests to model the financial impact of exceptional market scenarios on individual trading portfolios and the Group ’s overall position.
23
F-96
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iii) Interest rate risk
The Group ’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-earning liabilities mature or reprise at different times or in different amounts. In the case of floating rate assets and liabilities the Group is also exposed to risk of changes in base interest rates (e.g. Basic Interest Rate, the LIBOR and EURIBOR), which are the basis for determining interest rate terms. The risk management policy aims to improve net interest income and to reach market interest rate levels matching the Group ’s strategy.
Interest rate management procedures regarding the balance between borrowings and placements apply in respect of Group ’s sensitivity to changes in interest rate levels. This depends on various factors, including the degree of compliance with the negotiated repayment terms, as well as on interest rate fluctuations.
The principal risk to which the Group is exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The Liquidity Management Committee monitors the compliance with the set interest rate limits and is assisted by the Risk Management Department.
A summary of the Group ’s interest rate gap position on interest-bearing assets and liabilities is as follows:
In thousands of BGN Less than 1 month
1-3 months
3-6 months
6 months to 1 year
1-5 years
Over 5 years
31 December 2011 Sns`k hmsdqdrs,ad`qhmf `rrdsr 612+85/ 062+062 106+631
258+747
0+425+531 261+4/5
Sns`k hmsdqdrs,ad`qhmf kh`ahkhshdr 686+313 45/+2// 665+001
0+1/6+12/
57+13/ 68+006
Sns`k f`o ne `rrdsr `mc kh`ahkhshdr '62+353( '276+016( '447+26/(
'726+261(
0+357+3/1 182+278
Btltk`shud f`o ne `rrdsr `mc kh`ahkhshdr '62+353( '35/+480( '0+/07+850(
'0+745+222(
'276+820( '83+431(
31 December 2010 Sns`k hmsdqdrs,ad`qhmf `rrdsr 311+210 040+750 060+325 2/8+761 857+583 111+264 Sns`k hmsdqdrs,ad`qhmf kh`ahkhshdr 575+760 388+5/7 277+665 55/+836
2/+/17 3/+///
Sns`k f`o ne `rrdsr `mc kh`ahkhshdr '153+44/( '236+636( '106+23/( '240+/64(
827+555 071+264
Btltk`shud f`o ne `rrdsr `mc kh`ahkhshdr '153+44/( '501+186( '718+526( '0+07/+601(
'131+/35( '48+560(
24
F-97
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iii) Interest rate risk, continued
Analysis of sensitivity – interest rate risk
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of Group ’s financial assets and liabilities to various standard and non-standard interest rate scenarios.
Standard scenarios that are considered on a monthly basis include 200 basis points parallel rise and fall of yield curves in all currencies. An analysis of the Group ’s sensitivity to an increase or decrease in market interest rates (assuming a constant position and no asymmetrical movement in yield curves) is as follows:
Effect of change in the profit and
loss
In thousands of BGN 200 basis points
parallel rise 200 basis points
parallel decrease 31 December 2011
Change in net interest income
'07,0//( 07,0// 31 December 2010 Change in net interest income (8,276) 8,276
Interest risk positions are managed by the Treasury Department, which uses securities, receivables from banks, deposits from banks and derivative instruments to manage the Group ’s overall position.
(iv) Currency risk
Sgd Fqnto hr dwonrdc sn btqqdmbx qhrj sgqntfg sq`mr`bshnmr hm ehm`mbh`k hmrsqtldmsr sg`s `qd cdmnlhm`sdc hm ` enqdhfm btqqdmbx-
@r ` qdrtks ne sgd Btqqdmbx An`qc hm ok`bd hm sgd Qdotakhb ne Atkf`qh` sgd Atkf`qh`m btqqdmbx hr odffdc sn sgd dtqn- @r sgd btqqdmbx hm vghbg sgd Fqnto oqdrdmsr hs ehm`mbh`k rs`sdldmsr hr sgd Atkf`qh`m kdu+ sgd Fqnto ’r ehm`mbh`k rs`sdldmsr `qd `eedbsdc ax lnudldmsr hm sgd dwbg`mfd q`sdr adsvddm sgd Atkf`qh`m kdu `mc btqqdmbhdr nsgdq sg`m sgd dtqn-
Sgd Fqnto ’r sq`mr`bshnm`k dwonrtqdr fhud qhrd sn enqdhfm btqqdmbx f`hmr `mc knrrdr sg`s `qd qdbnfmhrdc hm sgd hmbnld rs`sdldms- Sgdrd dwonrtqdr bnloqhrd sgd lnmds`qx `rrdsr `mc lnmds`qx kh`ahkhshdr ne sgd Fqnto sg`s `qd mns cdmnlhm`sdc hm btqqdmbx nsgdq sg`m sgd oqdrdms`shnm btqqdmbx hm sgd Fqnto ’r ehm`mbh`k rs`sdldmsr-
Sgdrd dwonrtqdr vdqd `r enkknvr9
25
F-98
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iv) Currency risk, continued In thousands of BGN 2011 2011 2011
BGN Foreign
currency Total
Assets
Cash and cash equivalents 464,569 290,154 754,723
Securities held for trading 61,575 259,779 321,354 Derivatives held for trade - 211 211 Available-for-sale investments 41,296 107,408 148,704 Held to maturity investments 73,677 3,167 76,844 Investments in associates 24 - 24 Receivables from banks and other financial institutions
21,735 22,159 43,894
Loans to customers 523,878 2,105,184 2,629,062 Property, plant and equipment 62,523 - 62,523 Intangible assets 372 - 372 Other assets 6089 578 6,667
0+144+627 1+677+53/ 3+/33+267 Liabilities
Deposits from banks and other financial institutions
71,819 74,696 146,515
Deposits from non-financial institutions and other customers
1,630,215 1,752,941 3,383,156
Derivatives held for trade - 214 214 Subordinated term debt - 39,709 39,709 Other borrowings 40,227 46,403 86,630 Other liabilities 3,750 125 3,875
1,746,011 1,914,088 3,660,099
In respect of monetary assets and liabilities in foreign currency that are not hedged, the Group maintains acceptable net exposure, buying and selling foreign currency when it deems appropriate.
26
F-99
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iv) Currency risk, continued
In thousands of BGN 2010 2010 2010
BGN Foreign
currency Total
Assets
Cash and cash equivalents 077+/55 27/+88/ 458+/45
Securities held for trading 26+760 12+783 50+654
Derivatives held for trade 7 , 7 Available-for-sale investments 08+/77 046+6/7 065+685 Held to maturity investments 62+123 2+080 65+314 Investments in associates 7+712 , 7+712 Receivables from banks and other financial institutions
28+210 23+161 62+482
Loans to customers 363+328 0+074+153 0+548+6/2 Property, plant and equipment 53+2/6 , 53+2/6
Intangible assets 258 , 258
Other assets 00+331 357 00+80/
805+857 0+674+676 1+6/1+644
Liabilities Deposits from banks and other financial institutions
40+173 0/8+487 05/+771
Deposits from non-financial institutions and other customers
725+441 0+216+8/2 1+053+344
Derivatives held for trade , 213 213 Other borrowings 3/+0/7 320 3/+428 Other liabilities 02+/45 42 02+0/8
830+/// 0+327+2/8 1+268+2/8
Analysis of sensitivity – currency risk
A 10% increase in the Bulgarian lev exchange rate to major currencies other than the euro, at 31 December 2011 would increase (decrease) gains and losses by the amounts specified below. The analysis assumes that all other variables, including also interest rates, are constant. The analysis is conducted on the same basis for 2010. Effect in thousands of BGN at 2011 2010 US dollars 227 199 British pounds (16) (44) Swiss francs (12) (13)
A 10% depreciation of the Bulgarian lev to the above currencies, at 31 December would have the same effect as amounts but an opposite effect as a direction all other conditions being equal
27
F-100
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(e) Operational risk
Operational risk is the risk of direct or indirect losses arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors, other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour.
The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group ’s reputation with overall cost effectiveness.
The responsibility for development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of Group rules and standards for the management of operational risk in the following areas:
• Requirements for appropriate segregation of duties, including the independent authorisation of documents
• Requirements for the reconciliation and monitoring of transactions
• Compliance with regulatory and other legal requirements
• Documentation of controls and procedures
• Requirements for the regular assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified
• Requirements for the reporting of operational losses and proposed remedial action
• Development of contingency plans
• Training and professional development
• Risk mitigation, including insurance where this is effective.
Compliance with the Group standards is supported by a programme of regular reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with reports submitted to Management and Supervisory Boards.
28
F-101
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(f) Compliance with capital adequacy requirements
Bulgarian banks apply the principles of Basel II in respect of measuring capital adequacy requirements. In accordance with the statutory framework the Group allocate capital for covering capital requirements for credit risk, market risk and operational risk. Over the period to 31 December 2010 Corporate Commercial Bank applied the standardized approach in respect of credit and market risks and the basis indicator approach in respect of operational risk.
The minimum requirements applicable to Bulgaria include total capital adequacy ratio of not less than 12% and tier 1 capital adequacy ratio of not less than 6%.
(i) Capital base (Own funds)
The capital base (own funds) includes primary and secondary capital as defined by the Bulgarian National Bank. As at 31 December 2011 the non-consolidated capital base of Corporate Commercial Bank is comprised of:
In thousands of BGN Share capital 60,000Premium reserves 48,500Reserve fund 187,580Current profit 30,530Other reserves 135Total capital and reserves 326,745 Less Unrealized loss from available-for-sale financial instruments (2,121)Intangible assets (370)Total deductions (2,491) Total tier 1 capital 324,254 Revaluation reserves of the premises in which the Group is situated 25,536Subordinated term debt 39,117Total tier 2 capital 64,653 Additional deductions of tier 1 capital and tier 2 capital (13,663)Investments in shares and other equity securities (165)Specific provisions for credit risk (13,498)
Total capital base 375,244
Additional deductions of the capital base are associated with the Group ’s participations in non-consolidated companies which accounts for 10 percent or more than 10 percent of their registered capital. For regulatory purposes these participations are deducted equally from tier 1 capital and tier 2 capital.
3/
F-102
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
30
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(f) Compliance with capital adequacy requirements, continued
(ii) Capital requirements
As at 31 December 2010 capital requirements for credit, market and operational risks are as follows: In thousands of BGN
Capital
requirementsCapital requirements for credit risk Exposures to: Local and regional government bodies 23 Administrative authorities and non for profit organization - Institutions 4,460 Enterprises 188,498 Retail exposures 207 Exposures secured by property 25,044 Past-due exposures 196 Other exposures 9,356Total capital requirements for credit risk 227,785Capital requirements for market risk 1,210Capital requirements for operational risk 13,228
Total capital requirements for credit, market and operational risks 242,223 Additional capital requirements by virtue of BNB national discretion 121,111Total regulatory capital requirements 363,334 Capital base 375,244Of which tier 1 capital 317,423 Free capital 11,910Total capital adequacy ratio 12.39%Tier 1 capital adequacy ratio 10.48%
Capital requirements for credit risk cover both credit risk and dispersion risk in the banking and trading portfolio and counterparty risk of entire operations.
Capital requirements for market risk include market risk in the trading portfolio, currency risk of entire operations and commodity risk of entire operations.
F-103
31
4. PR
ESE
NT
AT
ION
OF FA
IR V
AL
UE
OF FIN
AN
CIA
L IN
STR
UM
EN
TS
In accordance with IFR
S 7 the Group discloses inform
ation on the fair value of financial assets and liabilities for which m
arket information is available and w
hose fair value significantly diverges from
the carrying value. In thousands of BG
N
Held for trading
Held to
maturity
Loans and receivables
Available for
sale Investm
ents in associates
Other
amortized cost
Total carrying am
ount Fair value
31 Decem
ber 2011
C
ash and cash equivalents -
- 754,723
- -
- 754,723
754,723 Financial assets held for trading
321,354 -
- -
- -
321.354 321.354
Investments
- 76,844
- 148,728
- ,
225,572 227,864
Receivables from
banks and other financial institutions -
- 43,894
- -
, 32+783
32+783 Loans to non-financial institutions and other custom
ers -
- 2,629,062
- -
- 2,629,062
2,629,062
210+243 65+733
2+316+568 037+617
, ,
2+863+5/4 2+865+786
Deposits from
banks and other financial institutions
146,515 146,515
146,515 D
eposits from non-financial institutions and other
customers
- -
- -
- 3,383,156
3,383,156 3,383,156
Other borrow
ings -
- -
- -
86,630 86,630
86,630 Subordinated term
debt -
- -
- -
39,709 39,709
39,709
- -
- -
, 2+545+/0/
2+545+/0/ 2+545+/0/
31 Decem
ber 2010
C
ash and cash equivalents -
- 569,056
- -
- 569,056
569,056 Financial assets held for trading
61,765 -
- -
- -
61,765 61,765
Investments
- 76,425
- 185,619
- -
262,044 260,160
Receivables from
banks and other financial institutions -
- 73,593
- -
- 73,593
73,593 Loans to non-financial institutions and other custom
ers -
- 1,659,703
- -
- 1,659,703
1,659,703
50+654 65+314
1+2/1+241 074+508
, ,
0+855+740 1+513+166
Deposits from
banks and other financial institutions -
- -
- -
200,882 200,882
200,882 D
eposits from non-financial institutions and other
customers
- -
- -
- 2,164,455
2,164,455 2,164,455
Other borrow
ings -
- -
- -
40,539 40,539
40,539
- -
- -
, 1+3/4+765
1+3/4+765 1+3/4+765
F-104
4. PRESENTATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED The fair value of cash, cash equivalents, deposits, as well as all other loans and advances extended to banks and other financial institutions is approximately equal to their carrying value because of their short-term maturity. The market value of loans and advances to customers is approximately equal to their carrying value due to fact that the main part of the loan portfolio carries floating interest rates which reflect the changes in the market conditions.
5. NET INTEREST INCOME In thousands of BGN 2011 2010
Interest income Interest income arise from: Receivables from banks 2,009 915 Loans to non-financial institutions and other
customers 207,858
161,290
Financial instruments held for trading and available-for-sale investments
18,360
9,996
228,227 172,201 Interest expense: Interest expense arise from: Deposits from banks (5,291) (1,606) Deposits from other customers (140,529) (93,712) Depreciation of securities premiums (946) (27) Subordinated term debt (593) - (147,359) (95,345) Net interest income
80,868 76,856
Interest income on loans to non-financial institutions and other customers includes BGN 48 thousand (31 December 2010: BGN 17 thousand) accrued on individually impaired financial assets.
6. NET FEE AND COMMISSION INCOME Hm sgntr`mcr ne AFM 2011 2010
Net fee and commission income In Bulgarian leva 8,472 9,973 In foreign currency 5,205 5,681 13,677 15,654 Fee and commission expense In Bulgarian leva (826) (757) In foreign currency (222) (174) (1,048) (931)
Net fee and commission income
12,629 14,723
32
F-105
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
7. NET TRADING INCOME Hm sgntr`mcr ne AFM 2011 2010
Net trading income arises from: Trade in debt instruments and similar
derivatives
6,154 3,713 Revaluation of debt instruments and similar
derivatives
4 (2) 6,158 3,711 Net trading income arises from: Gains from foreign currency transactions 1,152 17,934 Gains from foreign currency revaluation 13,433 6,698 14,585 24,632 Net trading income 20,743 28,343
8. OTHER OPERATING INCOME Hm sgntr`mcr ne AFM 2011 2010
Gains from sale/exchange of fixed assets, net 7 (223) Other non-financial services sold 2,453 4,279 Other net income 2,410 115
Other operating income 4,870 4,171
9. GENERAL ADMINISTRATIVE EXPENSES In thousands of BGN 2011 2010
General administrative expenses: Personnel cost (18,581) (15,551) Materials, rents and hired services (8,724) (7,941) Cdoqdbh`shnm (4,272) (4,362) Administrative, marketing and other expenses (12,294) (11,265)
General administrative expenses (43,871) (39,119)
Personnel costs include wage and salaries, social and health security accrued in compliance with the provisions of local legislation. As at 31 December 2011 the number of Group’s employees was 731 (31 December 2010: 706).
33
F-106
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
10. IMPAIRMENT LOSSES Hm sgntr`mcr ne AFM 2011 2010
Increases Impairment losses on loans extended (15,186) (8,357) Reversals on loan impairment 6,367 5,305
Net impairment losses (8,819) (3,052)
11. INCOME TAX Hm sgntr`mcr ne AFM 2011 2010
Btqqdms s`w (6,707) (8,266) (6,707) (8,266) Cdedqqdc s`w 165 (46) Total income taxes recognized in Income statement
(6,542) (8,312)
In compliance with Bulgaria’s tax legislation commercial company profit in 2011 is subject to income tax amounting to 10%.
Reconciliation between the accounting profit before taxation and tax expenses is as follows:
Hm sgntr`mcr ne AFM 2011 2010
Accounting profit 56+530 73+780 Corporate tax at applicable tax rate (10% - 2011 and 2010)
5+654 7+382
Tax effect of non-deductible expenses in determining the taxable profit
630 691
Effect of tax exempt income (688) (918)
Current tax expenses 6,707 8,266
Deferred taxes (165) 46
Tax expense 5+431 7+201
Effective tax rate 9.67% 9.94%
34
F-107
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
12. DEFERRED TAXES
Recognized deferred tax assets and liabilities
Deferred income tax is calculated for all temporary tax differences under the liability method using the base tax rate of 10% for 2011 (2010: 10%), when differences may arise at earliest.
Deferred tax balances are attributable to the following: In thousands of BGN
Assets Liabilities Net (Assets) / Liabilities
2011 2010 2011 2010 2011 2010 Available-for-sale financial assets (212) (324) 250 187 38 (137)
Other assets and liabilities (29) (39) - - (29) (39)Available-for-sale financial assets – recognised in annual tax declaration
(250) (187) 263 375 13 188
Revaluation of fixed assets (21) (21) 2,844 2,844 2,823 2,823
Net tax assets (512) (571) 3,357 3,406 2,845 2,835
Movements in temporary differences during the period:
In thousands of BGN Balance Recognised during the year Balance
2010In Income Statement
In equity 2011
Available-for-sale financial assets 51 (175) 175 51 Other assets and liabilities (39) 10 - (29) Revaluation of non-current assets 2,823 - - 2,823 Net (assets)/ liabilities 2,835 (165) 175 2,845
13. EARNINGS PER SHARE
2011 2010
Mds oqnehs `ssqhats`akd sn A`mj’r nqchm`qx rg`qdgnkcdqr 'AFM ‘///( 48+700 63+304Vdhfgsdc `udq`fd mtladq ne nqchm`qx rg`qdr 'AFM ‘///( 5+/// 5+///
Basic earnings per share (in levs) 8-86 01-3/ No new shares were issued during 2011.
Basic earnings per share in accordance with IAS 33 are calculated on the basis of the profit attributable to ordinary shareholders. Since the Group did not issue potential diluted ordinary shares in 2011 and 2010 diluted earnings per share correspond to the basic earnings per share.
35
F-108
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
14. CASH AND CASH EQUIVALENTS In thousands of BGN 2011 2010
Cash on hand In Bulgarian leva 24,681 68,216 In foreign currency 46,197 105,544 Current account with the BNB 436,849 166,015 Current accounts and balances with local banks with a maturity of up to 3 months
80,918 149,881
Current accounts and amounts with foreign banks with a maturity of up to 3 months
166,078 79,400
754,723 569,056
The current account with the central bank is used for direct participation in money and securities markets, as well as for settlement. The balances on current accounts with the BNB also include the Group ’s minimum required reserves. For the purpose of cash flow reporting, cash and cash equivalents include cash on hand, balances on current accounts with the central bank, and deposits with maturity of up to 3 months.
15. SECURITIES HELD FOR TRADING
Hm sgntr`mcr ne AFM 2011 2010
Government bonds issued by the government of the Republic of Bulgaria
285 -
Medium-term government securities denominated in leva
34+674
23+78/
Medium-term government securities denominated in foreign currency
48+168 8+183
Long-term government securities denominated in leva
04+4/4 0+/16
Long-term government securities denominated in foreign currency
62+128 01+458
Securities denominated in foreign currencies 016+150 , Foreign securities denominated in leva , 0+843 Foreign securities denominated in foreign currency , 1+/20 210+243 50+654
16. HELD TO MATURITY INVESTMENTS In thousands of BGN 2011 2010
Government securities issued by the government of the Republic of Bulgaria
Long-term government securities denominated in leva
62+566 62+123
Long-term government securities denominated in foreign currency
2+056 2+080
65+733 65+314
36
F-109
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
17. AVAILABLE-FOR-SALE INVESTMENTS
 õèëÿäè ëåâà 2011 2010
Government securities issued by the government of the Republic of Bulgaria
Medium-term government securities denominated in leva
, 0+/04
Long-term government securities denominated in leva
, 1
Long-term government securities denominated in foreign currency
0+16/ ,
Foreign government securities denominated in foreign currency
, ,
Short -term government securities denominated in foreign currency
, 25+607
Medium-term government securities denominated in foreign currency
, 25+635
Corporate bonds in leva , 5+345 Bonds denominated in foreign currency 0/5+024 73+130 Equity investments 30+188 00+507 037+6/3 065+685
Equity investments are shares in local companies and settlement institutions related to the Group ’s membership in them. Investments classified as equity and other non-fixed income instruments for sale are stated at cost price as their fair value cannot be duly identified.
18. RECEIVABLES FROM BANKS AND OTHER FINANCIAL INSTITUTIONS
Hm sgntr`mcr ne AFM 2011 2010
Receivables from local banks and other financial institutions
23+014 52+717
Receivables from foreign banks and other financial institutions
8+7/2 8+677
Less impairment losses
'23( '12(
32+783 62+482
19. LOANS TO NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS
Analysis by borrower Hm sgntr`mcr ne AFM 2011 2010
Retail Customers In leva 3,872 4,303 In foreign currency 15,455 11,341 Corporate Customers In leva 524,722 473,315 In foreign currency 2,107,517 1,184,453 Total receivables from customers 1,673,412
Impairment losses (22,504) (13,709) 2,629,062 1,659,703
37
F-110
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
19. LOANS TO NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS, CONTINUED
Impairment losses on individual basis: In thousands of BGN 2011 2010
As at 1 January (2,485) (1,370) Charge for impairment losses (3,560) (2,042) Reversed impairment losses 850 878 Disposals - 49
As at 31 December
(5,195) (2,485)
Impairment losses on a portfolio basis: In thousands of BGN 2011 2010
As at 1 January (11,224) (9,304) Charge for impairment losses (11,602) (6,315) Reversed impairment losses 5,517 4,395
As at 31 December
(17,309) (11,224)
Total impairment losses
(22,504) (13,709)
20. PROPERTY, PLANT AND EQUIPMENT
In thousands of BGN Land and
buildings
Plant and equipment
Motor vehicles
Fixtures and fittings
Other assets
Assets in progress
Total
Cost As at 1 January 2011 59,905 6,454 2,156 3,735 117 5,618 77,985Additions - 20 49 - - 2,315 2,384Transfers from assets in progress 358 684 157 369 10 (1,578) -Revaluation - - - - - -Disposals - 321 127 45 4 - 497As at 31 December 2011 60,263 6,837 2,235 4,059 123 6,355 79,872 Depreciation
As at 1 January 2011 4,913 5,143 1,408 2,155 59 - 13,678Charge for the period 2,378 827 441 461 15 - 4,122On disposals - 321 82 44 4 - 451As at 31 December 2011 7,291 5,649 1,767 2,572 70 - 17,349
Book value As at 1 January 2011 54,992 1,311 748 1,580 58 5,618 64,307 As at 31 December 2011 52,972 1,188 468 1,487 53 6,355 62,523
38
F-111
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
21. INTANGIBLE ASSETS
In thousands of BGN Cost As at 1 January 2011 1,916Additions 153Disposals (exchanges) 30As at 31 December 2011 2,039 Amortization As at 1 January 2011 1,547Charge for the period 150
On disposals 30
As at 31 December 2011 1,667
Book value As at 1 January 2011 369 As at 31 December 2011 372
22. OTHER ASSETS In thousands of BGN 2011 2010
Advance payments 1,122 1,064 Prepaid expenses 1,854 828 Tax receivables 2,213 7,952 Assets for resale 84 74 Other assets 1,394 1,992
6,667
11,910
23. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS In thousands of BGN 2011 2010
In leva 60+708 40+174 In foreign currency 63+585 0/8+486
035+404 05/+771
4/
F-112
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
24. DEPOSITS FROM NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS In thousands of BGN 2011 2010
Individuals In leva 505+178 176+187 In foreign currency 750+677 5/6+418 Non-financial institutions and other customers In leva 0+/03+/46 438+143 In foreign currency 780+/11 61/+263
2+272+045 1+053+344
25. OTHER BORROWED FUNDS In thousands of BGN 2011 2010
Due to customers 130 431 Due to banks 86,403 40,000 Finance lease liabilities 86 0/7
75+52/ 3/+428
Deposits in banks include funding from the Bulgarian Development Bank at the amount of BGN 40,000 thousand (2010 – BGN 40,000 thousand). This funding has been obtained under the Program for target financing of commercial banks to provide for medium-term, long-term and project financing of Small and Medium-Sized Enterprises. In addition, the Group has received funding from Societe General for the amount of EUR 21,000 thousand under a contract for target financing of small and medium enterprises.
26. OTHER LIABILITIES In thousands of BGN 2011 2010
Tax liabilities 1+882 00+663 Deferred fees and commissions 0/8 28/ Other creditors 383 368 Other liabilities 168 355 2+764 02+0/8
40
F-113
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
27. CAPITAL AND RESERVES
(a) Subscribed share capital In thousands of BGN
Number of shares
Nominal value
Subscribed share capital
5+///+/// 5/+///
5+///+/// 5/+///
At 31 December 2011 the subscribed share capital of the Group amounted to BGN 60,000 thousands and was fully paid. The Group’s capital comprised 6,000 thousands ordinary voting shares, each of them with a par value of BGN 10. The procedure of transformation of CCB into a public company was finalized in the second quarter of 2007 and in May as a result of successful public offering an issue of 1,000 thousands new registered shares was sold on the Bulgarian Stock Exchange – Sofia.
(б) Statutory reserves
Statutory reserves comprise the amounts set aside for purposes regulated by local legislation under which the Group is obliged to set aside at least one-fifth of its profit after taxation until the amount of statutory reserves reaches 1.25% of the sum total of statement of financial position assets and credit commitments and financial guarantees.
28. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Credit commitments
The Group provides bank guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year.
The contractual amounts of commitments and contingent liabilities are set out in the following table below. The values reflected in the table for commitments are considered entirely transferred. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the reporting date if counterparts failed completely to perform as contracted.
In thousands of BGN 2011 2010
Ehm`mbh`k ft`q`msddr `mc kdssdqr ne bqdchs Hm kdu` 001+6/8 018+741 Hm enqdhfm btqqdmbx 3/+534 30+688
042+243 060+540
Issued guarantees are secured by fixed assets, deposits or other assets pledged in favour of the Group . These commitments and contingent liabilities have off-balance credit risk. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows.
41
F-114
Corporate Commercial Bank AD Consolidated Financial Statements
For the year ended 31 December 2011
29. RELATED PARTY TRANSACTIONS
Transactions with
associated companies
Transactions with
Management and Directors
of the Bank
Transactions with relatives of
administrators of the Bank
Transactions with
employees of the Bank
Hm sgntr`mcr ne AFM Loans granted
Exposure as at 1 January 2011 , 1,007 5,845 2,180 Changes during period , 324 13,430 459 Exposure as at 31 December 2011 , 1,331 19,275 2,639
Deposits and current accounts Exposure as at 1 January 2011 1,541 40,945 22,698 5,376 Changes during period (1,432) 1,873 3,621 1,834 Exposure as at 31 December 2011 109 42,818 26,319 7,210
Contingent liabilities Exposure as at 1 January 2011 , 163 3,284 121 Changes during period , 120 47 35 Exposure as at 31 December 2011 , 283 3,331 156
Remuneration of Directors , 1,407 - -
30. SUBSIDIARIES AND ASSOCIATES
Control and significant influence of the entities in the Group
CCB’s Group parent company is Corporate Commercial Bank.
Onwnership % Onwnership %
2011 2010
„Dar 02” OOD 90% 90% „Velder Konsult” OOD 67% 67% „CCB Asset Management” AD 51% 51% „Fara Konsult” OOD 25% 25%
31. EVENTS AFTER THE REPORTING DATE
No events arising after the reporting date requiring additional disclosures or adjustments to the Group’s financial statements.
42
F-115
Corporate Commercial Bank AD
Consolidated financial statements
For the year ended 31 December 2010
With independent auditors’ report
F-116
IIIItIIIIIIIIIIIItIIt
KPMG Bu lga r i a OOD45rA, Bubarh eoub'ra:isofb 1404BubFrh
T F l 5 n h ^ n p + ? q q l 7 ) C 6 q 7 3 0 0
Tebax +359 Q) 9805 340Em aiL bgorFie@ ]pm g ccmtrrEmet www Jqm gbg
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
ConponelE COMMERCIAL BANK AD
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Corporate Commercial
Bank and its subsidiaries ("the Bank") which comprise the consolidated statement of financial
position as at 31 December 2010, the consolidated statements of comprehensive income,
changes in equity and cash flows for the year then ended, and notes, comprising a summary of
significant accounting policies and other explanatory information'
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards as adopted
by the European Union, and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material
misstatement. whether due to fraud or error.
Audi tor's Respo ns ibi lity
Our responsibility is to express an opinion on these consolidated financial statements based on
our audit. We conducted our audit in accordance with International Standards on Auditing.
Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on ourjudgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. ln making those risk assessments, we
consider intemal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity's internal control. An audit also includes evaluating the appropriateness of accountingprinciples used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated frnancial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
K ? Y G 3 - i j d - oodnFEd w h the- - . : r iependen! commeEia lRegb@raLthe
! . - t . ' . ' - B u b d i n R e g b t r y A g m c y
. : - - . : i l I l sEvcode 04059585r
B A N B G 0 6 R Z B B 9 1 5 5 1 0 5 0 2 6 6 4 1 8
Raif tbesdk Bubdb) sDF-117
IITIItIIIt Sofia. 2 March 2011
IIIIT)
IItII
Opinion
In our opinion, the consolidated financial statements give a true and fair view of theconsolidated financial position of the Bank as at 31 December 2010, and of its consolidatedfinancial performance and its consolidated cash flows for the year then ended in accordancewith lnternational Financial Reporting Standards as adopted by the European Union.
Tzvetelinka KolevaAutho ri s ed repres entati
KPMG Bulgaria OOD
Margarita GolevaRegistered auditor
F-118
9
l 0
r
tItIIItIIIIIIIIItII
Consolidated Income Statement
For the year ended 3 I December 20 | 0
In thousands of BGN
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net trading income
Other operating income
Total operating income
General administrative expenses
Impairment losses
Profit before tax
Tax expenses
Profit after tax
Profit attributable to:Shareholders of Bank
Minority interest holders
Net profit
Corporate Commercial Bank ADC o ns o I ida te d F i nanc ial S tateme nts
For the year ended 3l December 2010
2010 2009Note
t l , t 2
is to be read in conjunctionstatements.
Orlin RusseExecutive
73.610 65,313
172,201
(95,345)
147,t49
(81,495)
76,856
15,654
(e3 1)
65,654
15,099
(t , t '17)
14,723
28,343
4 , t 7 |
13,922
30, r 07
3,128
124,093
(39, I 19)
(3,052)
ll2,8ll
(35,938)
(4,t79)
81,922
(8,3 r2)
72,694
(7,381)
74,4t5
(80s)
63,653
1,660
-__J],610_ 65,313
KPMG Bulgaria OOD
Tzvetelinka KolevaAuthorised re pre sentati ,*ttt-!g%.t-t-tA
cffiF-119
ItIIIIIIItIIIIIIIIIII
Corporate Comrnercial Bank ADCo nso I idate d F i nanc ia I S tate me nt s
For tlrc year ended 3l December 2010
Consolidated Statement of Comprehensive Income
For the vear ended 3 I December 20 I 0
In thousands of BGN Note
Profit after tax
Revaluation of available for sale investments
Deferred tax on revaluation
Other comprehensive income
Total comprehensive income for the year
Total comprehensive income attributable to:
Shareholders of Bank
Minority interest holders
Total comprehensive income
per share with
The con
2010
73,610
1 9 1
( le)
t72
73,782
74,587
(805)
2009
65,313
1,054
(105 )
949
66,262
64,602
l ,660
73,782 66,262
Basic eamings per share and diluted eamings 13 12.40 10 .61value (BGN)
atement of comprehensive income is to be read in coniunction with the notes set out onpages 7 m an integral part of the financipl stateme
/ -,4
Orlinfxecutiveve Director
KPMC Bulgaria OOD
Tzvetelinka KolevaAutho rised reD re se ntat i
MargaritaGoreva /t Ul
Registered auditor i
ffi
F-120
2009
L )
242526
IttIII)
t
Corporate Commercial Bank ADC o ns o I idate d F inanc ia I St ate me nts
For the year ended 3l December 2010
Consolidated Statement of Financial Position
As at 31 December 2010In thousands of BGN
ASSETS
Cash and cash equivalentsSecurities held for tradingDerivatives held for tradingHeld to maturity investmentsInvestment in associatesAvailable-for-sale investmentsReceivables from banks and other financialinstitutionsLoans to non-financial institutions and othercustomersProperty, plant and equipmentIntangible assetsOther assets
Total assets
LIABILITIESDerivatives held for tradingDeposits from banks and other financial institutionsDeposits from non-financial institutions and othercustomefsOther borrowed fundsOther liabilities
Total liabilities
EQUITY AND RESRVESShare CapitalReserves
Total equity and reserves
Total liabilities and shareholder equity
Minority interest
Total group liabilities and shareholder equity 2,702.755 2.041.758
notes set out on pages 7 to
Note
t4l 5
t 6
l t
l 8
l 9202 l22
2727
2010
569,0566t ,765
876,4258,823
t't6,796
71 5q?
|,659,70364,307
369l 1 , 9 1 0
351,32912,t78
4t476,027
480,882
58,674
t,387,7576 l , 850
48912.154
2,702,755 2.041.758
324200,882
2,164,455539
13 ,109
22I 50,148
1,596,59 I880
12.954
2,379,309
60,000262,4r7
322,417
1.760.s9s
60,000? r q l ? q
279,329
2,701,726
t,029
2,039,924
I ,834
The consolidated st of financial position is to be read i50 that form an i of the financial statements.
IliyanZafirov Orlin RussevExecutive
KPMG Bulg
Tzvetelinka KolevaAutho rised rep rese ntati
,WF-121
Corporate Commercinl Bank ADC o n so I idated F inanc ial State me nt s
For the year ended 3l December 2010
Consolidated Statement of cash flows
For the year ended 3 I December 2010In thousands of BGN
Net cash flow from operating activitiesProfit after taxation
Impairment losses
Depreciation
Loss from sale ofnon-current assets, net
Unrealised (gains)/losses from dealing securitiesTax expense
Changes in operating assets
Change in securities held for tradingChange in receivables from banks and other financialinstitutionsChange in loans to non-financial institutionsChange in other assets
Changes in operating liabilities
Change in due to customersChange in other bonowed fundsChange in other liabilities
Income taxes paid
Net cash flows from operating activities
Cash flows from investing activities
Acquisition of property, plant and equipment(Purchase) of investments
Net cash flows from investing activities
Cash flows from financing activities(Payments) of finance lease liabilities
Dividend paid
Net cash flows from financing activities
Note
l09,20,21
l t . t 2
2010
73,610
3,0524,362
223(2)
8 ,3 12
(49,204)
( 14,5 l3)(274,998)
8,089
2009
65 ,313
4,t794,407
1,1287 .381
82.408
3,035
(17,647)(238,2r0)
(2,43s)(330,626)
6 I 8,598. (303)(8,006)(7,842)602,447
361,378
(6,800)( r0s,32 l )(lt2,tzl)
(38)
(31,492)
(3 l ,530)
(2ss,257)
(r33,729)(t44)
(4,058)(4,890)
(142,821)
(315,670)
(5,636)(2,259)(7,995)
(74)
(74)
F-122
Corporate Commercial Bank ADConsolidated Financial Statements
For the vear ended 31 December 2010
Consolidated Statement of Cash Flows. continued
For the year ended 3 I December 20 l0In thousands of BGN
Net (decrease) in cash and cash equivalents
Cash and cash equivalents as at the beginning of theperiod
Cash and cash equivalents as at the end of the period
Executive
/tKPMG Bulgaria OOD
Tzvetelinka KolevaAutho rised re Dre sentative
14 569,056 351,329
Note2010
2t'7,727
351,329
2009
(323,639)
674,968
ment of cash flows is to be read in conjunction with the notes set out on pages 7 to 50 thatof the financial statements
Orlin Russev
Registered auditor /r7/
The consolidated
F-123
Corporate Commercinl Bank ADC o nso I ida te d F i nanc ial S tate me nt s
For the year ended 3l December 2010Consolidated Statement of Changes in EquityFor the period ended 3 I December 2010
ln thousands of BGN Share Sharecapital
premtum
reserve
Statu- Retained
. earningsrory
reserve
Revaluation Revaluatio Otherreserves from n reserves reseryes
available for from non-sale current
investments assets
MinorityInterest
Total
60,000 48.500 42.4s0 40,405 (2,357) 25,594 13s 174 214,901
63,653 1,660 65,313
1,0541,054
Balance as at L January 2009
Total comprehensive income for the year
Net profit for the year
Other comprehensive income, net of
income taxes
Revaluation of,available for sale
lnvestments
Deferred tax on revaluation
Total comprehensive income
Transactions with owners recordeddirectly in equity
Distribution of statutory reserves
Balance as at 31 December 2009
Total comprehensive income for the year
Net profit for the year
Other comprehensive income, net ofincome taxes
Revaluation o[available for salelnvestments
Deferred tax on revaluation
Total comprehensive income
Transactions with owners recordeddirectly in equity
Distribution of statutory reserves
Other movements
Dividends paid
Total of transactions with shareholdersreflected directly in capital
60,000 48,500 92,693 63,915 (1,408) 25,594 135 1.E34 281.163
tIIIII
74,415 (805) 73,610
- l 9 r- fl9)
- - _ TaAE 172 (805) 73,782
l 9 l
( l9)
' - - (31,492) - -el,4g2)
- - 3t,182 (62,691) (3r,499)
3 1 , 1 8 9 ( 3 1 , 1 8 9 )
(7)
Balance as at 31 December 201060,000
IZvetei lnKa Koleva
Authorised re p re s e n tat ir e
75,549 25,594pages 7 to 50 that form an
Orl in Russe"E.recuti te A
/^f- -*'*" ̂ t:r/.c.-: /'
i : i !s* ;nt : ;' ' - ' s { a l l r n r j l J ; l
f*.-:rc:
F-124
Notes to the Financial Statements Corporate Commercial Bank AD
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6
1. BASIS OF PREPARATION
(a) Legal status
Corporate Commercial Bank AD (the Group) is a bank domiciled in the Republic of Bulgaria and has its registered office in Sofia, 10 “Graf Ignatiev” Str.
The Group has a banking license issued in accordance with the effective legislation. Major activities include all types of banking transactions on the domestic and foreign markets.
The consolidated financial statements for the year ended 31 December 2010 include the assets, liabilities, share capital and the financial results of Corporate Commercial Bank AD together with its subsidiaries – Velder Consult OOD, CCB Asset Management AD and Dar 02 OOD and its associate entities – Fara Consult OOD and Agro Finance ADSCIS, described in Note 30.
(b) Statement of compliance
These Consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Commission.
(c) Presentation of the financial statements
These Consolidated financial statements are presented in Bulgarian Leva (BGN) rounded to the nearest thousand and have been prepared on historical cost basis except for:
• derivative financial instruments measured at fair value;
• financial instruments held for trading and all other instruments designated at fair value through profit or loss measured at fair value, where such can be reliably determined;
• available-for-sale financial instruments measured at fair value, where such can be reliably determined;
• investments in properties measured at fair value, based on regular independent appraiser’s valuation.
(d) Functional and presentation currency
These Consolidated financial statements are prepared in Bulgarian Leva (BGN) rounded to the nearest thousand. The Bulgarian Lev is the functional and presentation currency of the Group.
F-125
Notes to the Financial Statements Corporate Commercial Bank AD
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7
1. BASIS OF PREPARATION, CONTINUED
(e) Basis of consolidation
These Consolidated financial statements are prepared in accordance with IAS 27 “Separate and Consolidated Financial Statements”, where all participations in entities where the Group exercises control by holding more than 50% of the voting rights are consolidated applying full consolidation method and all participations in entities, where the Group exercises significant influence by holding more than 20% of the voting rights are consolidated applying equity method.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Income recognition
Interest income and expense is recognized as it accrues, taking into account the effective yield of the asset or an applicable floating rate. Interest income and expense include the amortization of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis.
Fee and commission income arises on financial services provided by the Group and is recognized when the corresponding service is provided.
Net trading income includes gains and losses arising from disposals and changes in the fair value of financial assets and liabilities held for trading.
(b) Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the exchange rates at the reporting date of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Translation differences on non-monetary items are reported as part of the fair value gain or loss or are included in the revaluation reserve in equity.
F-126
Notes to the Financial Statements Corporate Commercial Bank AD
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8
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) Financial assets
The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
(i) Financial assets at fair value through profit or loss
This category includes two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless they are designated as hedges.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable.
(iii) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale.
(iv) Available-for-sale
Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.
(v) Recognition and subsequent measurement of financial assets
Purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized on the date of the actual delivery of the assets. Loans are recognized when cash is advanced to the borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or when the Group has transferred substantially all risks and rewards of ownership.
Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis optional price models and other valuation techniques often used by the market participants.
F-127
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
0/
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) Cash and cash equivalents
Cash and cash equivalents comprise cash balances on hand, cash deposited with the central bank and short-term highly-liquid investments with maturity of three months or less when purchased.
(e) Securities borrowing and lending business and repurchase agreements
(i) Securities borrowing and lending
Investments lent under securities lending arrangements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for assets held for trading or available for-sale as appropriate. Cash collateral received in respect of securities lent is recognised as liabilities to either banks or customers. Investments borrowed under securities borrowing agreements are not recognised. Cash collateral placements in respect of securities borrowed are recognised under loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognised on an accrual basis over the period of the transactions and are included in interest income or expense.
(ii) Repurchase agreements
The Group enters into purchases (sales) of investments under agreements to resell (repurchase) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised in loans to either banks or customers. The receivables are shown as collateralised by the underlying security. Investments sold under repurchase agreements continue to be recognised in the statement of financial position and are measured in accordance with the accounting policy for either assets held for trading or available-for-sale as appropriate. The proceeds from the sale of the investments are reported as liabilities to either banks or customers.
The difference between the sale and repurchase considerations is recognised on an accrual basis over the period of the transaction and is included in interest.
(f) Borrowings
Borrowings are recognised initially at ‘cost’, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest rate method.
(g) Offsetting
Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when the Group has a legally enforceable right to set off the recognised amounts and the transactions are intended to be settled on a net basis.
F-128
Notes to the Financial Statements Corporate Commercial Bank AD
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00
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(h) Impairment of financial assets
The carrying amounts of the Group’s financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.
(i) Loans and advances
The recoverable amount of originated loans and advances and purchased loans is calculated as the present value of the expected future cash flows, discounted at the instrument’s original effective interest rate. Short-term balances are not discounted.
Loans are presented net of specific and general allowances for impairment. Specific allowances are made against the carrying amount of loans that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans to their recoverable amounts. General allowances are maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the statement of financial position date. The expected cash flows for portfolios of similar assets are estimated based on previous experience and considering the credit rating of the underlying customers and late payments of interest or penalties. Increases in the allowance account are recognised in the income statement. When a loan is identified to be not recoverable, all the necessary legal procedures have been completed, and the final loss has been determined, the loan is written off directly.
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the write down, the write-down or allowance is reversed through the income statement.
(ii) Financial assets remeasured to fair value directly through equity
The recoverable amount of an equity instrument is its fair value. The recoverable amount of debt instruments and purchased loans remeasured to fair value is calculated as the present value of expected future cash flows discounted at the current market rate of interest.
When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.
If, in a subsequent period, the fair value of a financial instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss.
F-129
Notes to the Financial Statements Corporate Commercial Bank AD
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01
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(i) Property, plant and equipment
The Group adopted a policy to carry its class of fixed assets, comprising the land and buildings, at revalued amount under the alternative approach of IAS 16, Property, plant and equipment.
The other classes of fixed assets are stated in the statement of financial position at their acquisition cost less accumulated depreciation.
Depreciation is calculated on a straight line basis at prescribed rates designed to decrease the cost or valuation of fixed assets over their expected useful lives. The following are approximations of the annual rates used:
Assets %
• Buildings 4
• Plant and equipment 30
• Computer equipment 50
• Motor vehicles 25
• Other 15
Assets are not depreciated until they are brought into use and transferred from assets in the course of construction into the relevant asset category.
(j) Intangible assets
Intangible assets, which are acquired by the Group, are stated at cost less accumulated amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over the expected useful life of the asset. The annual rates of amortisation are as follows:
Assets %
• Computer software and licenses 50
• Other intangible assets 04
(k) Provisions
A provision is recognised in the statement of financial position when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
F-130
Notes to the Financial Statements Corporate Commercial Bank AD
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02
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(l) Taxation
Tax on the profit for the year comprises current tax and the deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rates enacted by the reporting date, and any adjustment of tax payable for previous years.
Deferred tax is provided using the statement of financial position liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculated on the basis of the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. The effect on deferred tax of any changes in tax rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(m) Employee benefits
(i) Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The Government of Bulgaria is responsible for providing pensions in Bulgaria under a defined contribution pension plan. The Group’s contributions to the defined contribution pension plan are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.
(ii) Defined benefit plans
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value.
The Group has obligation to pay certain amounts to each employee who retires with the Bank in accordance with Art. 222, § 3 of the Labor Code. According to these regulations in the LC, when a labor contract of a company’s employee, who has acquired a pension right, is ended, the Group is obliged to pay him compensations amounted to two gross monthly salaries. In case the employee’s length of service in the Group equals to or is greater than 10 or more years, as at retirement date, then the compensation amounts to six gross monthly salaries. As at the reporting date, the Management of the Group estimates the approximate amount of the potential expenditures for every employee based on a calculation using the projected unit credit method.
(iii) Termination benefits
Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment
F-131
Notes to the Financial Statements Corporate Commercial Bank AD
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03
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(m) Employee benefits, continued
before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.
(iv) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. The Group recognises as a liability the undiscounted amount of the estimated costs related to annual leave expected to be paid in exchange for the employee’s service for the period completed
(n) Earnings per share
The Group presents data on basic earnings per share and diluted earnings per share for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary equity holders of the Group for a particular period by the average weighted number of ordinary shares during the period. Diluted earnings per share is calculated by adjusting the profit or loss attributable to ordinary equity holders of the Group for a particular period and the weighted average number of ordinary shares during the period for the effects of all dilutive potential ordinary shares comprised of convertible liabilities and options on shares.
(o) Critical accounting estimates and judgments in applying accounting policies The preparation of the financial statements requires Management of the Group to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
(i) Impairment losses on loans and advances
Assets accounted for at amortised cost are reviewed for impairment on a basis described in accounting policy h) (i) above.
The specific allowances for impairment, applied to loans and receivables evaluated individually for impairment, are based upon management’s best estimate of the present value of the cash flows that are expected to be received.
In estimating these cash flows, management makes judgments about counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the estimate of cash flows considered recoverable is independently approved by the Credit Committee of the Group.
F-132
Notes to the Financial Statements Corporate Commercial Bank AD
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04
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(o) Critical accounting estimates and judgments in applying accounting policies, continued
(i) Impairment losses on loans and advances, continued
Impairment losses determined on a portfolio basis cover credit losses inherent for exposures with similar economic characteristics where an objective evidence suggests that they include impaired exposures which cannot be individually identified yet.
In estimating the needs of impairment losses on a portfolio basis, the Management of the Group takes into account factors such as the type of the loan, impairment, collateral, the amount of the portfolio, concentrations and economic factors. Loans are grouped in portfolios by customer’s economic activity according to the National Classification of Economic Activities. This criterion is used for the purpose of grouping as it allows to analyze and review the general business environment for development of the respective economic activity. To calculate the amount of required impairment, assumptions were made as to how to model inherent losses and to determine the required input parameters based on the historical experience and current economic conditions. The accuracy of impairment depends on how precisely the probability of losses has been forecasted, as well as on the assumptions and parameters of the used model for determining portfolio provisions.
(ii) Fair value measurement principles
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.
F-133
Notes to the Financial Statements Corporate Commercial Bank AD
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05
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(o) Critical accounting estimates and judgments in applying accounting policies, continued
(ii) Fair value measurement principles, continued
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction.
The Group measure fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
Level 1: Quoted market price (unadjusted) in an active market for and identical assets or liabilities;
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes quotes for instruments on markets considered as less then active or instruments valued using valuation techniques;
Level 3: Valuation techniques using significant unobservable inputs for financial assets and liabilities. In addition, this category includes equity investments in subsidiaries and associates, as well as other financial institutions measured at cost that have no observable market data.
The following table analyzes the financial instruments measured at fair value according to the valuation models used:
Hm sgntr`mcr ne AFM
31 December 2009 Level 1 Level 2 Level 3 Total
Hmudrsldmsr gdkc enq sq`chmf 50+654 , , 61,765
@u`hk`akd,enq,r`kd hmudrsldmsr 74+26/ , 80+315 176,796
Total 147,135 - 91,426 238,561
(p) Segment reporting
The Group does not prepare segment reporting because the main source of risk and return is corporate segment, there is not a single external customer the income from which exceeds 10%, and the Group carries out its activities on the territory of the country. In case those fact change in the future and the Group presents its financial statements by segments, they will be determined and presented in accordance with the provisions of IFRS 8 Operating segments, as disclosed in note 1(e).
F-134
Notes to the Financial Statements Corporate Commercial Bank AD
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2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(a) International Financial Reporting Standards (IFRS) and interpretations adopted from European Commission not yet effective as of the date of the Statement.
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2010, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Bank.
IASB/IFRIC documents not yet endorsed by EC:
Management believes that it is appropriate to disclose that the following revised standards, new interpretations and amendments to current standards, which are already issued by the International Accounting Standards Board (IASB), are not yet endorsed for adoption by the European commission, and therefore are not taken into account in preparing these financial statements. The actual effective dates for them will depend on the endorsement decision by the EC.
• IFRS 9 Financial Instruments (issued November 2009 and Additions to IFRS 9 issued October 2010)
has an effective date 1 January 2013 and could change the classification and measurement of financial instruments. The extent of the potential impact has not been determined.
• Amendments to IFRS 7 Financial Instruments: Disclosures (issued October 2010) has an effective date 1 July 2011 – not expected to have a significant impact on the financial statements of the Bank.
• Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets (issued December 2010) has an effective date 1 January 2012 – not expected to have a significant impact on the financial statements of the Bank.
• Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (issued December 2010) has an effective date 1 July 2012 – not expected to have a significant impact on the financial statements of the Bank.
• Improvements to IFRSs 2010 (issued April 2010), various effective dates, generally 1 January 2011 - not expected to have a significant impact on the financial statements of the Bank.
F-135
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES
(а) Introduction and general overview
In carrying out its transactions with financial instruments, the Group is exposed to the following types of risks:
• Credit risk
• Liquidity risk
• Market risk
• Operational risk
This note provides information about Group’s exposures to any of above mentioned risks, objectives policies implemented for risk measuring and management, as well as for capital management.
General overview of risk management
The Group operates hm sgd bnmchshnm ne ` cxm`lhb`kkx cdudknohmf fkna`k ehm`mbh`k `mc dbnmnlhb bqhrhr- Hsr etqsgdq cdudknoldms lhfgs qdrtks hm mdf`shud hlokhb`shnmr nm sgd ehm`mbh`k `mc khpthchsx onrhshnm ne sgd A`mj-
Management is responsible for the preparation and implementation of these general provisions of Group’s risk management. The Supervisory Board on the proposal by the Management Board establishes Liquidity Management Committee (LMC), Credit Committee and Operational Risk Management Council that are responsible for implementing the Group’s risk management policies in their specific areas. These bodies regularly reports to the Management Board on their work.
The Group’s risk management policies are designed to identify and analyse risks faced by the Group, to determine appropriate risk limits and controls and to oversee the compliance with the set limits. Risk management policies and systems are regularly reviewed to reflect changes in market conditions, products and provided services. Through its training programmes, management standards and procedures, the Group aims to develop a strict and effective control environment in which all employees understand their role and responsibilities.
The Group’s internal audit oversees and assesses the efficiency of risk management system, as well as risks and controls associated with management, operations and information systems of the Group. The internal audit monitors the compliance of implemented risk management policies with the approved risk management policies and to what degree the risk faced by the Group complies with the adopted levels of bank risks. The results of the independent audits are reported to the Supervisory and Management Board
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Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk
The Group is subject to credit risk through its lending, trading and investing activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees.
The risk that counterparties to both derivative and other instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Group deals with counterparties of good credit standing.
The Group ’s primary exposure to credit risk arises through its loans and advances. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the statement of financial position. In addition, the Group is additionally exposed to credit risk through commitments to extend credit and guarantees issued.
Concentrations of credit risk (whether on or off the statement of financial position) that arise from financial instruments exist for Group s of counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other.
(i) Credit risk in the trading book Enq sgd otqonrdr ne lhshf`shmf sgd bntmsdqo`qsx qhrj `mc rdsskdldms qhrj vhsg qdf`qc sn sgd cd`kr hm sgd sq`chmf annj+ Fqnto bnmbktcdr cd`kr vhsg ghfg q`mjhmf bkhdmsr vhsg rsqhmf bqdchsvnqsghmdrr- Enq l`mx rtbg bkhdmsr Fqnto g`r `ooqnudc bqdchs khlhsr- Qdftk`snqx sq`chmf annj hmbktcdr ehm`mbh`k `rrdsr gdkc enq sq`chmf otqonrdr Sgd `m`kxrhr a`rdc nm bkhdms bqdchs pt`khsx `mc q`shmf 'vgdqd `u`hk`akd( `r ne 20 Cdbdladq 1/0/ `mc 20 Cdbdladq 1//8 hr rgnvm hm sgd mdws s`akd9
In thousands of BGN
2010 2009 Government bonds Rated ВВВ+ 57,780 - Bonds of credit institutions Rated AAA 3,985 4,950 Corporate bonds: Not rated - 7,228 Total trading assets 61,765 12,178
(ii) Credit risk in the banking book
The Group ’s lending policy is based on profitability, liquidity and security principles. Lending activity is also based on the principles of economy, segregation of functions and competences in conducting analysis, concluding, managing and controlling loan transaction in order to minimize credit risk. Depending on the degree of credit risk in concluding credit transactions the Group follows the principle of sufficiency and liquidity of accepted security in order to minimize risk.
The Group ’s lending policy is oriented mostly to corporate customers but it is not a limit in respect of other borrowers with proved loan efficiency.
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Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(ii) Credit risk in the banking book, continued
Credit risk management is an element of the comprehensive model applied by the Group to manage Group risks. To manage the quality of individual loans and the whole portfolio and to differentiate the degree of credit risk the Group applies a system of internal rating of borrowers corresponding to the nature, size and complexity of its lending operations. The rating is determined in accordance with the Methods of Determining Credit Risk.
By the system in internal rating customers are classified in different groups by conducting qualitative evaluation of credit risk degree. In determining the borrower’s credit rating regarding the potential changes in the economic environment and its financial stability. For this purpose the Group measures:
• Total business risk including systemic risk or risk of change in external factors for credit borrowers and specific or non-systemic reflecting the management quality and borrower’s financial stability;
• Risk ensuing from the Group ’s historical experience in regarding the respective customer.
The internal rating system is also used to determine whether it is necessary to accrue impairment loss for particular credit exposures. This framework for grading risk includes 11 grades reflecting inherent risk and other factors related to credit risk
The Group manages the credit risk level by establishing limits for any individual credit borrower and groups of economically related persons, as well as other limits in accordance with the nature, size and complexity of its lending operations and in accordance with BNB supervisory requirements.
The major credit risk management bodies include:
• Credit Council. The Credit Council is a permanent specialized consultative body. The Credit Council considers the proposals of the Lending Department and the heads of subsidiaries for concluding credit transactions and submits to the executive directors, or where this is beyond their competence to the Management Board an unbiased evaluation of the parameters of proposed credit transaction. The renewal and review of credit exposures are subject to the same review. The Group ’s Management Board determines the number and the staff of the Credit Council. The Credit Council acts under the rules and procedures adopted by the Management Board and approved by the Supervisory Board.
• On 01.11.2009 within the “Analysis and control of risk” Department in the Group, “Credit risk” Division starts functioning. It carries out analyses over the financial position and the creditworthiness of the potential borrowers, the subject and the purpose of the loan, the collateral offered and the economic relatedness of the potential borrowers. Within the division comprehensive credit ratings of borrowers within the Group are given and regularly updated. The division also evaluates the impact of newly offered loans to the application of the BNB Ordinance No. 8 requirements and the approved internal limits. In addition, an independent opinion for the appropriateness of the new loans as a risk generation factor in the context of the risks the Group has already been exposed to.
Effective from the same date, The Credit Council ceases its activities.
F-138
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(ii) Credit risk in the banking book, continued
• Credit Committee. The Credit Committee is a specialized internal body for monitoring, evaluation, classification and provisioning of risk exposures, including those of concluded credit transactions. The Management board of the Group determines the number and the staff of the Credit Committee. The Credit Committee acts under the rules and procedures adopted by the by the Management Board and approved by the Supervisory Board.
The Group monitors the state of individual loans and the adequacy of allocated funds for covering credit risk on an ongoing basis.
All risk exposures of the Group , including credit exposures are evaluated on a monthly basis by the Group ’s Credit Committee in accordance with the adopted Rules of Review, Evaluation and Classification of CCB Risk Exposures (the Rules).
According to the Rules and by the internal rating system, the Credit Committee classifies risk exposures into the following four classification groups consistent with the degree of credit risk:
• Standard risk exposures on loans and other claims are those risk exposures which are serviced and information on the debtor’s financial state gives no ground to assume that the debtor will not repay in full his debts.
• Watch exposures are the risk exposures on loans and other claims where insignificant weaknesses exist with respect to their servicing or there is a possibility of deterioration in the debtor’s financial state, which may question the full repayment of the obligation.
• Substandard exposures are the risk exposures on loans and other claims where significant weaknesses exist with respect to their servicing, or the available information points to the debtor’s unstable financial state, current and anticipated proceeds are insufficient for the full repayment of his obligations to the Group and to other creditors, as well as where weaknesses have been found with the distinct possibility that the Group will sustain some loss.
• Loss exposures are those risk exposures where grave weaknesses exist with respect to their servicing or as a result of the debtor’s deteriorated financial state his obligations are deemed uncollectible, even though they have partial recovery value that may be realized in the future.
The classification of risk exposures is submitted for approval to the Management Board.
Any Group ’s business unit is required to implement credit policies and procedures and is responsible for the quality of its credit portfolio, for monitoring and controlling all credit risks in its portfolios, including those subject to central approval. Regular audits of business units and processes in the Lending Department are undertaken by the specialized Internal Audit.
F-139
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure
In thousands of BGN Note 2010 2009
Cash and cash equivalents 14 569,056 351,329 Securities held for trading 15 61,765 12,178 Derivatives held for trading 8 414 Held to maturity investments 16 76,425 76,027 Investments in associates 8,823 4 Available-for-sale investments 17 176,796 80,882 Receivables from banks and other financial institutions 18 73,593 58,674 Loans to non-financial institutions and other customers 19 1,659,703 1,387,757 Individually impaired Watch 3,112 3,349 Substandard - 1,131 Loss 3,061 297 Gross carrying value 6,173 4,777 Impairment loss (2,311) (1,372) Book value 3,862 3,405 Impaired on a portfolio basis Loans to legal entities 1,497,940 1,250,567 Loans to individuals 8,594 8,133 Carrying value 1,506,534 1,258,700 Impairment loss (11,398) (9,302) Book value 1,495,136 1,249,398 Incl. renegotiated exposures 228,358 224,037 Past due, fully secured but not impaired Watch 6,104 6,898 Substandard - 1,809 Loss - - Gross carrying value 6,104 8,707 Neither past due nor impaired Loans to legal entities 147,570 120,039 Loans to individuals 7,031 6,208 Book value 154,601 126,247 Incl. renegotiated exposures 22,601 28,272 Total net book value of loans to non-financial institutions and other customers 1,659,703 1,387,757
Credit commitments and financial guarantees Unutilized overdrafts and credit lines 101,361 70,806 Guarantees and letters of credit 28 171,651 248,851 Total 273,012 319,657
F-140
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
(iii) Maximum credit risk exposure, continued
Impaired loans and securities
Impaired loans and securities are loans and securities for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities arrangements.
Past due but not impaired loans
Loans and securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of collateral available and/or the stage of collection of amounts owed to the Group .
Loans with renegotiated terms
Loans with renegotiated terms are Group ’s risk exposures that have been renegotiated or restructured. An exposure is considered restructured where due to deterioration in the borrower’s financial position resulting in inability to repay its debt, the Group has made concessions by changing the original terms and conditions of the arrangement that it would not otherwise consider. Once the loan of a legal entity is restructured, it remains in this classification group independent of satisfactory performance after restructuring, unless it persistently satisfies all the conditions for the corresponding lower-risk classification group for a period of not less than six months. An exposure is deemed renegotiated where it has not been identified as deteriorated, it is fully secured and there is a ground to believe that the Group will collect the principal and interest.
Impairment loss
The Group ’s policies as to impairment loss allowances on financial assets is described above in item 2 (h).
Write-off policy
The Group writes off a receivable on a loan or security classified as non-performing fully covered by allowances for impairment losses by a decision of the Management Board on a motion by the Credit Committee for the account of allocated provisions for impairment losses. This determination is reached after considering the following information: occurrence of significant changes in the borrower/issuer’ financial position such that the borrower/issuer can no longer pay the obligation, or the proceeds from collateral will not be sufficient to pay back the entire exposure. The off-balance reporting of exposures is discontinued by a decision of the Management Board, provided the Group ’s Credit Committee has determined the loans or securities uncollectible due to occurrence of any of the following circumstances: the debtor is a legal entity deleted from the trade or any other public register and has no legal successor; a deceased natural person who has not left heirs or the heirs have given up their rights of inheritance; the debtor has made a prescribed claim.
F-141
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued
The table below represents an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by classification group:
Loans to non-financial institutions and other customers
In thousands of BGN Gross Net 31 December 2010 Watch 9,216 8,719 Substandard - - Loss 3,061 1,247 Total 12,277 9,966 31 December 2009 Watch 10,247 9,793 Substandard 2,940 2,319 Non-performing 297 - Total 13,484 12,112
In compliance with the implemented Group ’s policy prior to extending the approved loans, customers are required to provide appropriate collateral. According to the Group ’s requirements the total amount of extended loans should be fully secured. Group guarantees and L/C are also subject to strict preliminary study.
Collateral on loans, guarantees and L/C most often include cash, property, plants and equipments, registered securities or any other property. The table below presents a breakdown of total loans extended to customers by the Group , by type of collateral:
Hm sgntr`mcr ne AFM 2010 2009
Lnqsf`fdr 547,420 451,819 Cash and deposits 15,645 43,865 Other collaterals 1,026,360 782,876 Tmrdbtqdc 83,987 119,871
Less impairment losses (13,709)
(10,674) 1,659,703 1,387,757 Other collaterals include pledge on non-current assets and promissory notes.
Major concentration of credit risk occurs dependent on the sector of activity and the type of borrower in respect of Group investments, loans and advances, arrangements for extending loans and issuing guarantees.
F-142
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(b) Credit risk, continued The total amount of loans extended by the Group to non-financial institutions and other customers by economic sector is presented in the table below
In thousands of BGN 2010 2009
Trade and services 672,070 522,560 Manufacturing 274,745 244,916 Construction 269,304 197,297 Agriculture 47,814 47,427 Transport and communication 86,610 90,937 Other industries 322,869 295,294 1,673,412 1,398,431 Less impairment losses (13,709) (10,674) 1,659,703 1,387,757
(c) Liquidity risk
Liquidity risk arises in the general funding of the Group’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations.
(i) Liquidity risk management
The Group ’s liquidity management system is based on the following principles:
- centralised control over Group ’s liquidity carried out by Liquidity Management Committee;
- persistent monitoring and evaluation of future cash flows and sufficiency of Group ’s liquid assets;
- planning of operations in contingency situations.
The Treasury Department receives information from other business units regarding the liquidity profile of their financial assets and liabilities and the projected cash flows arising from projected future business. The Treasury Department maintains a portfolio comprised mostly of short-term and liquid securities, loans and advances to banks and other financial instruments to ensure that sufficient liquidity is maintained within the Group as a whole.
The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the Liquidity Management Committee. Daily reports cover the liquidity position of the Group . A summary report, including any exceptions and remedial actions taken, is submitted regularly to the Liquidity Management Committee.
F-143
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(i) Liquidity risk management, continued
The Group ’s funds are raised using a broad range of financing instruments including deposits, current accounts and other borrowed funds, as well as share capital. This enhances funding flexibility, limits dependence on any one source of funds and lowers the cost of borrowed funds. The Group makes its best efforts to maintain a balance between the maturity of borrowed fund and flexibility through the use of funds with a range of maturity. The Group continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Group strategy. In addition the Group holds a portfolio of liquid assets as part of its liquidity risk management system..
(ii) Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks.
The ratios of net liquid assets to deposits from customers at the reporting date and during the reporting period are as follows:
2010 2009 As at 31 December 25.12% 17.09% Average for the period 19.75% 26.94% Maximum for the period 25.12% 40.88% Minimum for the period 16.03% 17.09%
F-144
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iii) Residual contractual maturities of financial assets
The table below shows the undiscounted cash flows on the Group ’s financial liabilities on the basis of their earliest possible maturity.
The gross nominal inflow/(outflow) is the contractual, undiscounted cash flow on the financial liability or commitment.
Carrying Gross
nominal Less than 1 - 3 3 months 1 – 5 Over In thousands of BGN
Note value cash
(outflow) 1 month months to 1 year years 5 years 31 December 2010
Deposits from banks 23 104,317 (106,392) (55,298) (9,094) - - (42,000) Deposits from other financial institutions 23 96,565 (98,748) (43,701) (6,867) (48,180) (1,849) - Deposits from non-financial institutions and other customers 24 2,164,455 (2,192,179) (789,231) (411,314) (598,502) (383,297) -
Other borrowed funds 25 539 (558) (3) (154) (178) (459) -
2,365,876 (2,397,877) (888,233) (427,429) (646,860) (385,605) (42,000)
Unutilized credit commitments - (101,361) (101,361) - - - -
2,365,876 (2,499,238) (989,594) (427,429) (646,860) (385,605) (42,000) 31 December 2009
Deposits from banks 23 80,606 (82,749) (26,583) (14,166) - - (42,000) Deposits from other financial institutions 23 69,542 (70,573) (36,042) (10,085) (22,597) (1,849) - Deposits from non-financial institutions and other customers 24 1,596,591 (1,616,874) (391,857) (228,893) (612,827) (383,297) -
Other borrowed funds 25 880 (916) (140) (156) (161) (459) -
1,747,619 (1,771,112) (454,622) (253,300) (635,585) (385,605) (42,000)
Unutilized credit commitments - (70,806) (70,806) - - - -
1,747,619 (1,841,918) (525,428) (253,300) (635,585) (385,605) (42,000)
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Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iv) Expected maturities of assets and liabilities
The expected Group’s cash flows on financial liabilities significantly diverge from the maturity analysis shown above, with deposits at sight projected to sustain a stable or increasing balance and not all unrecognised loan commitments expected to be immediately utilized. Projecting cash flows the Group takes into account historical data on cash flows adjusted to establish seasonal fluctuations and prevailing economic and market conditions.
Maturity table as at 31 December 2010 In thousands of BGN Less
than 1 month
1 - 3 months
3 months to 1 year
1 - 5 years
Over 5 years
Total
Assets Cash and cash equivalents 458+/45 - - - - 569,056Securities held for trading 5/+677 977 - - - 61,765Derivatives held for trading 8 - - - - 8Available-for-sale investments 065+/55 , - - 730 176,796Held to maturity investments 45+527 , - - 19,787 76,425Investments in associates - 8,819 - - 3 8,823Receivables from banks and other financial institutions 15+060 3,193 14,166 20,273 9,790 73,593Loans to customers 70+814 141,304 443,071 831,186 162,217 1,659,703Property, plants and equipment - - - 9,316 54,991 64,307Intangible assets - - - 369 - 369Other assets 9,602 - 2,308 - - 11,910
980,254 154,293 459,545 861,144 247,519 2,702,755Liabilities Deposits from banks and other financial institutions 98,037 15,982 43,744 3,119 40,000 200,882Deposits from non-financial institutions and other customers 788,322 394,328 590,916 390,889 - 2,164,455Derivatives held for trading 324 - - - - 324Other borrowed funds 3 152 169 215 - 539Other liabilities 12,896 - 213 - - 13,109 899,582 410,462 635,042 394,223 40,000 2,379,309
Gap in maturity of assets and liabilities 80,672 (256,169) (175,497) 466,921 207,519 323,446
F-146
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(c) Liquidity risk, continued
(iv) Expected maturities of assets and liabilities, continued
Maturity table as at 31 December 2009 In thousands of BGN Less
than 1month
1 - 3 months
3 months to 1 year
1 - 5 years Over 5 years
Total
Assets
Cash and cash equivalents 351,329 - - - - 351,329Securities held for trading 12,178 - - - - 12,178Derivatives held for trading - - 414 - - 414Available-for-sale investments 79,159 - - 1,271 452 80,882Held to maturity investments 1,495 - 40 - 74,492 76,027Investments in associates
- - - - 4 4Receivables from banks 934 1,680 11,473 33,624 10,963 58,674Loans to customers
33,088 114,488 412,872 735,366 91,943 1,387,757Property, plants and equipment - - - 10,303 51,547 61,850Intangible assets - - - 489 - 489Other assets 11,655 - 499 - - 12,154 489,838 116,168 425,298 781,053 229,401 2,041,758Liabilities
Deposits from banks and other financial institutions 62,568 25,001 20,832 1,747 40,000 150,148Deposits from non-financial institutions and other customers 391,074 222,267 604,472 378,778 - 1,596,591Derivatives held for trading 22 - - - - 22Other borrowed funds 140 152 148 440 - 880Other liabilities 5,521 6,832 348 253 - 12,954 459,325 254,252 625,800 381,218 40,000 1,760,595
Gap in maturity of assets and liabilities 30, 513 (138,084) (200,502) 399,835 189,401 281,163
F-147
Notes to the Financial Statements Corporate Commercial Bank AD
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3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk
Market risk is the risk that changes in market prices, such as interest rates, equity prices or foreign exchange rates will affect the Group ’s income or value of its holdings of financial instruments.
(i) Market risk management
Market risk management policies are aimed at managing and controlling market risk exposures within the admissible limits concurrently improving the risk/earnings ratio. The Group actively manages interest rate, foreign currency, price and other risks with a view to ensuring compliance with the adopted limits as to the acceptable level of risk. Group ’s risk limits are regularly reviewed with a view to assessing their adequacy given the goals and strategies of the Group and current market conditions. The Group separates its exposure to market risk between trading and non-trading portfolios, using a wide range of methods for assessing the inherent risk of its trade and banking positions, including in derivative and non-derivative instruments.
Market risk management is vested in the Liquidity Management committee. The Risk Management Department is responsible for the development of detailed risk management policies (subject to review and approval by the Management and Supervisory Boards) and for day-to-day review of their implementation.
(ii) Exposure to market risk – trading portfolio
The Group has active market trade positions in a limited number of derivative financial instruments (largely short-term forwards), as well as in non-derivative instruments. Most of Group ’s trading operations were directed to customers. To satisfy customer requirements the Group maintains a package of capital market instruments, quoting bid/offer rates, and actively trade with other market participants. These operations include trade in financial instruments and allow the Group to provide to its customers capital market products at competitive prices. Since the trade strategy depends equally on the Group ’s role in determining market and its positions in various financial instruments, the Group aims to improve its net earnings from trade operations given the relationship between instruments and the market. The Group manages its trade operations dependant on the type of risk and on the basis of the variety of holdings of trade instruments.
@kk sq`cd hmrsqtldmsr `qd rtaidbs sn l`qjds qhrj cdsdqlhmdc `r qhrj ne hlo`hqldms qdrtkshmf eqnl sgd nbbtqqdmbd ne etstqd bg`mfdr hm l`qjds bnmchshnmr- Sgd hmrsqtldmsr `qd du`kt`sdc `s e`hq u`ktd `mc `kk bg`mfdr hm l`qjds bnmchshnmr chqdbskx qdekdbs nm mds d`qmhmfr eqnl sq`cd nodq`shnmr-
The Group manages its holdings of trade instruments in response to changing market conditions. The exposure regarding market risk is managed in accordance with risk limits determined by the management through purchase and sale of instruments or through opening an offsetting position.
F-148
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
20
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(ii) Exposure to market risk – trading portfolio, continued
The principal tool used to measure and control market risk exposure within the trading portfolio is Value at Risk (VaR). VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used by the Group is based upon a 99% percent confidence level and assumes a 10-day holding period. The VaR model is based mainly on historical values. Taking account of market data from the previous two years, the model generates a wide range of plausible future scenarios for market price movement.
Although VaR is an important tool for measuring market risk, the assumptions on which the model is based do give rise to some limitations, including the following:
• A 99% percent confidence level does not reflect losses that may occur beyond this level. Even within the model used there is 1% probability that losses could exceed VaR;
• VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day/trading session;
• The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature;
• The VaR measure is dependent upon the Group ’s position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa.
The Group has applied the VaR methodology since early 2007 and uses the limits/range of VaR for measuring interest rate risk of its trading portfolio.
VaR positions of Group ’s trading portfolio at 31 December 2010 and 31 December 2009 are as follows:
In BGN As At Average Maximum Minimum 31 December 2010 Interest rate risk 118,906 430,267 1,086,815 118,906 31 December 2009 Interest rate risk 360,322 321,974 914,777 -
The limitations of the VaR methodology are monitored by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Group uses a wide range of stress tests to model the financial impact of exceptional market scenarios on individual trading portfolios and the Group ’s overall position.
F-149
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
21
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iii) Interest rate risk
The Group ’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-earning liabilities mature or reprise at different times or in different amounts. In the case of floating rate assets and liabilities the Group is also exposed to risk of changes in base interest rates (e.g. Basic Interest Rate, the LIBOR and EURIBOR), which are the basis for determining interest rate terms. The risk management policy aims to improve net interest income and to reach market interest rate levels matching the Group ’s strategy.
Interest rate management procedures regarding the balance between borrowings and placements apply in respect of Group ’s sensitivity to changes in interest rate levels. This depends on various factors, including the degree of compliance with the negotiated repayment terms, as well as on interest rate fluctuations.
The principal risk to which the Group is exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The Liquidity Management Committee monitors the compliance with the set interest rate limits and is assisted by the Risk Management Department.
A summary of the Group ’s interest rate gap position on interest-bearing assets and liabilities is as follows:
In thousands of BGN Less than 1 month
1-3 months
3-6 months
6 months to 1 year
1-5 years
Over 5 years
31 December 2010
Sns`k hmsdqdrs,ad`qhmf `rrdsr 311+210 040+750 060+325 2/8+761
857+583 111+264 Sns`k hmsdqdrs,ad`qhmf kh`ahkhshdr 575+760 388+5/7 277+665 55/+836
2/+/17 3/+///
Sns`k f`o ne `rrdsr `mc kh`ahkhshdr '153+44/( '236+636( '106+23/( '240+/64(
827+555 071+264
Btltk`shud f`o ne `rrdsr `mc kh`ahkhshdr '153+44/( '501+186( '718+526( '0+07/+601(
'131+/35( '48+560(
31 December 2009
Sns`k hmsdqdrs,ad`qhmf `rrdsr 254,608 121,742 163,379 246,995 813,284 163,502Sns`k hmsdqdrs,ad`qhmf kh`ahkhshdr 503,851 262,341 398,212
549,537
737 -
Sns`k f`o ne `rrdsr `mc kh`ahkhshdr (249,243) (140,599) (234,833)
(302,542)
812,547 163,502
Btltk`shud f`o ne `rrdsr `mc kh`ahkhshdr (249,243) (389,842) (624,675)
(927,217)
(114,670) 48,832
F-150
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
22
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
Analysis of sensitivity – interest rate risk
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of Group ’s financial assets and liabilities to various standard and non-standard interest rate scenarios.
Standard scenarios that are considered on a monthly basis include 200 basis points parallel rise and fall of yield curves in all currencies. An analysis of the Group ’s sensitivity to an increase or decrease in market interest rates (assuming a constant position and no asymmetrical movement in yield curves) is as follows:
Effect of change in the profit and
loss
In thousands of BGN 1// a`rhr onhmsr
o`q`kkdk qhrd
1// a`rhr onhmsr o`q`kkdk
cdbqd`rd 31 December 2010 Change in net interest income (8,276) 8,276 31 December 2009 Change in net interest income (6,977) 6,977
Interest risk positions are managed by the Treasury Department, which uses securities, receivables from banks, deposits from banks and derivative instruments to manage the Group ’s overall position.
(iv) Currency risk
Sgd Fqnto hr dwonrdc sn btqqdmbx qhrj sgqntfg sq`mr`bshnmr hm ehm`mbh`k hmrsqtldmsr sg`s `qd cdmnlhm`sdc hm ` enqdhfm btqqdmbx-
@r ` qdrtks ne sgd Btqqdmbx An`qc hm ok`bd hm sgd Qdotakhb ne Atkf`qh` sgd Atkf`qh`m btqqdmbx hr odffdc sn sgd dtqn- @r sgd btqqdmbx hm vghbg sgd Fqnto oqdrdmsr hs ehm`mbh`k rs`sdldmsr hr sgd Atkf`qh`m kdu+ sgd Fqnto ’r ehm`mbh`k rs`sdldmsr `qd `eedbsdc ax lnudldmsr hm sgd dwbg`mfd q`sdr adsvddm sgd Atkf`qh`m kdu `mc btqqdmbhdr nsgdq sg`m sgd dtqn-
Sgd Fqnto ’r sq`mr`bshnm`k dwonrtqdr fhud qhrd sn enqdhfm btqqdmbx f`hmr `mc knrrdr sg`s `qd qdbnfmhrdc hm sgd hmbnld rs`sdldms- Sgdrd dwonrtqdr bnloqhrd sgd lnmds`qx `rrdsr `mc lnmds`qx kh`ahkhshdr ne sgd Fqnto sg`s `qd mns cdmnlhm`sdc hm btqqdmbx nsgdq sg`m sgd oqdrdms`shnm btqqdmbx hm sgd Fqnto ’r ehm`mbh`k rs`sdldmsr-
Sgdrd dwonrtqdr vdqd `r enkknvr9
F-151
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
23
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iv) Currency risk, continued
In thousands of BGN 2010 2010 2010
BGN Foreign
currency Total
Assets
Cash and cash equivalents 077+/55 27/+88/ 458+/45
Securities held for trading 26+760 12+783 50+654
Derivatives held for trade 7 , 7
Available-for-sale investments 08+/77 046+6/7 065+685
Held to maturity investments 62+123 2+080 65+314 Investments in associates 7+712 , 7+712 Receivables from banks and other financial institutions
28+210 23+161 62+482
Loans to customers 363+328 0+074+153 0+548+6/2 Property, plant and equipment 53+2/6 , 53+2/6
Intangible assets 258 , 258
Other assets 00+331 357 00+80/
916,968 1,785,787 2,702,755
Liabilities Deposits from banks and other financial institutions
80+173 0/8+487 1//+771
Deposits from non-financial institutions and other customers
725+441 0+216+8/2 1+053+344
Derivatives held for trade , 213 213 Other borrowings 0/7 320 428 Other liabilities 02+/45 42 02+0/8
941,000 1,438,309 2,379,309
In respect of monetary assets and liabilities in foreign currency that are not hedged, the Group maintains acceptable net exposure, buying and selling foreign currency when it deems appropriate.
F-152
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
24
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(d) Market risk, continued
(iv) Currency risk, continued In thousands of BGN 2009 2009 2009
BGN Foreign
currency Total
Assets Cash and cash equivalents 69,486 281,843 351,329 Securities held for trading 1,879 10,299 12,178 Derivatives held for trade 414 - 414 Available-for-sale investments 40,515 40,367 80,882 Held to maturity investments 72,813 3,214 76,027 Investments in associates 4 - 4 Receivables from banks and other financial institutions
48,891 9,783 58,674
Loans to customers 476,483 911,274 1,387,757 Property, plants and equipment 61,850 - 61,850 Intangible assets 489 - 489 Other assets 11,836 318
12,154
784,660 1,257,098 2,041,758
Liabilities Deposits from banks and other financial institutions
101,161 48,987 150,148
Deposits from non-financial institutions and other customers
637,814 958,777 1,596,591
Derivatives held for trade 22 - 22 Other borrowings 161 719 880 Other liabilities 12,893 61 12,954
752,051 1,008,544 1,760,595
Analysis of sensitivity – currency risk
A 10% increase in the Bulgarian lev exchange rate to major currencies other than the euro, at 31 December 2010 would increase (decrease) gains and losses by the amounts specified below. The analysis assumes that all other variables, including also interest rates, are constant. The analysis is conducted on the same basis for 2009. Effect in thousands of BGN at 2010 2009 US dollars 199 2,031 British pounds (44) (20) Swiss francs (13) (4)
A 10% depreciation of the Bulgarian lev to the above currencies, at 31 December would have the same effect as amounts but an opposite effect as a direction all other conditions being equal.
F-153
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
25
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(e) Operational risk
Operational risk is the risk of direct or indirect losses arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors, other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour.
The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group ’s reputation with overall cost effectiveness.
The responsibility for development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of Group rules and standards for the management of operational risk in the following areas:
• Requirements for appropriate segregation of duties, including the independent authorisation of documents
• Requirements for the reconciliation and monitoring of transactions
• Compliance with regulatory and other legal requirements
• Documentation of controls and procedures
• Requirements for the regular assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified
• Requirements for the reporting of operational losses and proposed remedial action
• Development of contingency plans
• Training and professional development
• Risk mitigation, including insurance where this is effective.
Compliance with the Group standards is supported by a programme of regular reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with reports submitted to Management and Supervisory Boards.
F-154
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
26
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(f) Compliance with capital adequacy requirements
Bulgarian banks apply the principles of Basel II in respect of measuring capital adequacy requirements. In accordance with the statutory framework the Group allocate capital for covering capital requirements for credit risk, market risk and operational risk. Over the period to 31 December 2010 Corporate Commercial Bank applied the standardized approach in respect of credit and market risks and the basis indicator approach in respect of operational risk.
The minimum requirements applicable to Bulgaria include total capital adequacy ratio of not less than 12% and tier 1 capital adequacy ratio of not less than 6%.
(i) Capital base (Own funds)
The capital base (own funds) includes primary and secondary capital as defined by the Bulgarian National Bank. As at 31 December 2010 the non-consolidated capital base of Corporate Commercial Bank is comprised of:
In thousands of BGN Share capital 60,000Premium reserves 48,500Reserve fund 113,043Current profit 37,997Other reserves 135Total capital and reserves 259,675 Less Unrealized loss from available-for-sale financial instruments (3,429)Intangible assets (365)Total deductions (3,794) Total tier 1 capital 255,881 Revaluation reserves of the premises in which the Group is situated 25,536Total tier 2 capital 25,536 Additional deductions of tier 1 capital and tier 2 capital (19,440)
Total capital base 261,977
Additional deductions of the capital base are associated with the Group ’s participations in non-consolidated companies which accounts for 10 percent or more than 10 percent of their registered capital. For regulatory purposes these participations are deducted equally from tier 1 capital and tier 2 capital.
F-155
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
27
3. FINANCIAL RISK MANAGEMENT DISCLOSURES, CONTINUED
(f) Compliance with capital adequacy requirements, continued
(ii) Capital requirements
As at 31 December 2010 capital requirements for credit, market and operational risks are as follows: In thousands of BGN
Capital
requirementsCapital requirements for credit risk Exposures to: Local and regional government bodies 344 Administrative authorities and non for profit organization - Institutions 5,003 Enterprises 110,530 Retail exposures 197 Exposures secured by property 33,100 Past-due exposures - Other exposures 6,229Total capital requirements for credit risk 155,403Capital requirements for market risk 327Capital requirements for operational risk 10,024
Total capital requirements for credit, market and operational risks 165,754 Additional capital requirements by virtue of BNB national discretion 82,877Total regulatory capital requirements 248,631
Capital base 261,977Of which tier 1 capital 246,161 Free capital 13,346Total capital adequacy ratio 12.64%Tier 1 capital adequacy ratio 11.88%
Capital requirements for credit risk cover both credit risk and dispersion risk in the banking and trading portfolio and counterparty risk of entire operations.
Capital requirements for market risk include market risk in the trading portfolio, currency risk of entire operations and commodity risk of entire operations.
F-156
Notes to the F
inancial Statements
Corporate C
omm
ercial Bank AD
Bnmrnkhc`sdc E
hm`mbh`k Rs`sdldmsr
Enq sgd xd`q dmcdc 20 C
dbdladq 1/0/
28
4. PR
ESE
NT
AT
ION
OF FA
IR V
AL
UE
OF FIN
AN
CIA
L IN
STR
UM
EN
TS
Hm `bbnqc`mbd vhsg HRE
Q 6 sgd F
qnto chrbknrdr hmenql`shnm nm sgd e`hq u`ktd ne ehm`mbh`k `rrdsr `mc kh`ahkhshdr enq v
ghbg l`qjds hmenql
`shnm hr `u`hk`akd `mc vgnrd e`hq
u`ktd rhfmhehb`mskx chudqfdr eqnl sgd b`qqxhmf u`ktd-
In thousands of BGN
H
eld for trading
Held to
maturity
Loans and receivables
Available for
sale Investm
ents in associates
Other
amortized cost
Total carrying am
ount Fair value
31 Decem
ber 2010
C
ash and cash equivalents -
- 569,056
- -
- 569,056
569,056 Financial assets held for trading
61,765 -
- -
- -
61,765 61,765
Investments
- 76,425
- 185,619
- -
262,044 260,160
Receivables from
banks and other financial institutions -
- 73,593
- -
- 73,593
73,593 Loans to non-financial institutions and other custom
ers -
- 1,659,703
- -
- 1,659,703
1,659,703
61,765 76,425
2,302,352 185,619
- -
1,966,851 2,624,277
Deposits from
banks and other financial institutions -
- -
- -
200,882 200,882
200,882 D
eposits from non-financial institutions and other
customers
- -
- -
- 2,164,455
2,164,455 2,164,455
Other borrow
ings -
- -
- -
539 539
539
- -
- -
- 2,365,876
2,365,876 2,365,876
31 Decem
ber 2009
C
ash and cash equivalents -
- 351,329
- -
- 351,329
351,329 Financial assets held for trading
12,178 -
- -
- -
12,178 12,178
Investments
- 76,027
- 80,882
4 -
156,913 150,948
Receivables from
banks and other financial institutions -
- 58,674
- -
- 58,674
58,674 Loans to non-financial institutions and other custom
ers -
- 1,387,757
- -
- 1,387,757
1,387,757
12,178 76,027
1,797,760 80,822
4 -
1,966,851 1,960,886
Deposits from
banks and other financial institutions -
- -
- -
150,148 150,148
150,148 D
eposits from non-financial institutions and other
customers
- -
- -
- 1,596,591
1,596,591 1,596,591
Other borrow
ings -
- -
- -
880 880
880
- -
- -
- 1,747,619
1,747,619 1,747,619
F-157
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
3/
4. PRESENTATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of cash, cash equivalents, deposits, as well as all other loans and advances extended to banks and other financial institutions is approximately equal to their carrying value because of their short-term maturity.
The market value of loans and advances to customers is approximately equal to their carrying value due to fact that the main part of the loan portfolio carries floating interest rates which reflect the changes in the market conditions.
5. NET INTEREST INCOME In thousands of BGN 2010 2009 Interest income Interest income arise from: Receivables from banks 915 3,612 Loans to non-financial institutions and other
customers 161,290
128,885
Financial instruments held for trading and available-for-sale investments
9,996
14,652
172,201 147,149 Interest expense: Interest expense arise from: Deposits from banks (1,606) (336) Deposits from other customers (93,712) (81,112) Depreciation of securities premiums (27) (47) (95,345) (81,495) Net interest income
76,856 65,654
Interest income on loans to non-financial institutions and other customers includes BGN 17 thousand (31 December 2009: BGN 9 thousand) accrued on individually impaired financial assets.
6. NET FEE AND COMMISSION INCOME In thousands of BGN 2010 2009 Net fee and commission income In Bulgarian leva 9,973 10,439 In foreign currency 5,681 4,660 15,654 15,099 Fee and commission expense In Bulgarian leva (757) (951) In foreign currency (174) (226) (931) (1,177)
Net fee and commission income
14,723 13,922
F-158
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
30
7. NET TRADING INCOME In thousands of BGN 2010 2009
Net trading income arises from: Trade in debt instruments and similar
derivatives
3,713 15,875 Revaluation of debt instruments and similar
derivatives
(2) (1,128) 3,711 14,747 Net trading income arises from: Gains from foreign currency transactions 17,934 9,166 Gains from foreign currency revaluation 6,698 6,194 24,632 15,360 Net trading income 28,343 30,107
8. OTHER OPERATING INCOME In thousands of BGN 2010 2009
Gains from sale/exchange of fixed assets, net (223) 26 Other non-financial services sold 4,279 2,946 Other net income 115 156
Other operating income 4,171 3,128
9. GENERAL ADMINISTRATIVE EXPENSES In thousands of BGN 2010 2009 General administrative expenses: Personnel cost (15,551) (14,282) Materials, rents and hired services (7,941) (7,801) Cdoqdbh`shnm (4,362) (4,407) Administrative, marketing and other expenses (11,265) (9,448)
General administrative expenses (39,119) (35,938)
Personnel costs include wage and salaries, social and health security accrued in compliance with the provisions of local legislation. As at 31 December 2010 the number of Group’s employees was 706 (31 December 2009: 645).
F-159
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
31
10. IMPAIRMENT LOSSES In thousands of BGN 2010 2009 Increases
Impairment losses on loans extended (8,357) (8,211)
Reversals on loan impairment 5,305 4,032
Net impairment losses (3,052) (4,179)
11. INCOME TAX In thousands of BGN 2010 2009 Btqqdms s`w (8,266) (7,503) (8,266) (7,503) Cdedqqdc s`w (46) 122 Total income taxes recognized in Income statement
(8,312) (7,381)
In compliance with Bulgaria’s tax legislation commercial company profit in 2010 is subject to income tax amounting to 10%.
Reconciliation between the accounting profit before taxation and tax expenses is as follows:
In thousands of BGN 2010 2009
Accounting profit 73+780 61+583 Corporate tax at applicable tax rate (10% - 2010 and 2009)
7+382 6+157
Tax effect of non-deductible expenses in determining the taxable profit
691 593
Effect of tax exempt income (918) (358)
Current tax expenses 8,266 7,503
Deferred taxes 46 (122)
Tax expense 7+201 6+270
Effective tax rate 9.94% 10.17%
F-160
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
32
12. DEFERRED TAXES Recognized deferred tax assets and liabilities
Deferred income tax is calculated for all temporary tax differences under the liability method using the base tax rate of 10% for 2010 (2009: 10%), when differences may arise at earliest.
Deferred tax balances are attributable to the following: In thousands of BGN
Assets Liabilities Net (Assets) / Liabilities
2010 2009 2010 2009 2010 2009 Available-for-sale financial assets (324) (192) 187 35 (137) (157)
Other assets and liabilities (39) (54) - - (39) (54)Available-for-sale financial assets – recognised in annual tax declaration
(187) (35) 375 192 188 157
Revaluation of fixed assets (21) (21) 2,844 2,844 2,823 2,823
Net tax assets (571) (302) 3,406 3,071 2,835 2,769
Movements in temporary differences during the period:
In thousands of BGN Balance Recognised during the year Balance
2009 In Income Statement
In equity 2010
Available-for-sale financial assets - 31 20 51 Other assets and liabilities (54) 15 - (39) Revaluation of non-current assets 2,823 - - 2,823 Net (assets)/ liabilities 2,769 46 20 2,835
13. EARNINGS PER SHARE 2010 2009Mds oqnehs `ssqhats`akd sn A`mj’r nqchm`qx rg`qdgnkcdqr 'AFM ‘///( 74,415 63,653Vdhfgsdc `udq`fd mtladq ne nqchm`qx rg`qdr 'AFM ‘///( 5+/// 5+///
Basic earnings per share (in levs) 12.40 10.61
No new shares were issued during 2010.
Basic earnings per share in accordance with IAS 33 are calculated on the basis of the profit attributable to ordinary shareholders. Since the Group did not issue potential diluted ordinary shares in 2010 and 2009 diluted earnings per share correspond to the basic earnings per share.
F-161
Notes to the Financial Statements Corporate Commercial Bank AD
Bnmrnkhc`sdc Ehm`mbh`k Rs`sdldmsr Enq sgd xd`q dmcdc 20 Cdbdladq 1/0/
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14. CASH AND CASH EQUIVALENTS In thousands of BGN 2010 2009
Cash on hand In Bulgarian leva 68,216 39,659 In foreign currency 105,544 57,960 Current account with the BNB 166,015 88,460 Current accounts and balances with local banks with a maturity of up to 3 months
149,881 6,282
Current accounts and amounts with foreign banks with a maturity of up to 3 months
79,400 158,968
569,056 351,329
The current account with the central bank is used for direct participation in money and securities markets, as well as for settlement. The balances on current accounts with the BNB also include the Group ’s minimum required reserves. For the purpose of cash flow reporting, cash and cash equivalents include cash on hand, balances on current accounts with the central bank, and deposits with maturity of up to 3 months.
15. SECURITIES HELD FOR TRADING
In thousands of BGN 2010 2009
Government bonds issued by the government of the Republic of Bulgaria
Short-term government securities denominated in leva 23+78/ , Medium-term government securities denominated in leva 8+183 , Long-term government securities denominated in leva 0+/16 , Long-term government securities denominated in foreign currency
01+458 ,
Securities denominated in foreign currencies , 6+117 Foreign securities denominated in leva 0+843 0+768 Foreign securities denominated in leva 1+/20 2+/60 61,765 12,178
16. HELD TO MATURITY INVESTMENTS
In thousands of BGN 2010 2009
Government securities issued by the government of the Republic of Bulgaria
Long-term government securities denominated in leva 62+123 61+702
Long-term government securities denominated in foreign currency
2+080 2+103
76,425 76,027
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17. AVAILABLE-FOR-SALE INVESTMENTS
In thousands of BGN 2010 2009
Government securities issued by the government of the Republic of Bulgaria
Medium-term government securities denominated in leva 0+/04 1+134 Long-term government securities denominated in leva 1 01+305
Foreign government securities denominated in foreign currency Short Term government securities 25+607 , Long-term government securities 25+635 ,
Corporate bonds in leva 5+345 13+024 Bonds denominated in foreign currency 73+130 3/+253 Equity investments 00+507 0+611 176,796 80,882
Equity investments are shares in local companies and settlement institutions related to the Group ’s membership in them. Investments classified as equity and other non-fixed income instruments for sale are stated at cost price as their fair value cannot be duly identified.
18. RECEIVABLES FROM BANKS AND OTHER FINANCIAL INSTITUTIONS
In thousands of BGN 2010 2009
Receivables from local banks and other financial institutions
52+717 37+835 Receivables from foreign banks and other financial institutions 8+677 8+672
Less impairment losses '12( '44(
73,593 58,674
19. LOANS TO NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS
Analysis by borrower In thousands of BGN 2009 2008
Retail Customers In leva 4,303 4,458 In foreign currency 11,341 10,416 Corporate Customers In leva 473,315 475,747 In foreign currency 1,184,453 907,810 Total receivables from customers 1,673,412 1,398,431 Impairment losses (13,709) (10,674) 1,659,703 1,387,757
F-163
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35
19. LOANS TO NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS, CONTINUED
Impairment losses on individual basis: In thousands of BGN 2010 2009 As at 1 January (1,370) (1,031) Charge for impairment losses (2,042) (1,177) Reversed impairment losses 878 838 Disposals 49 -
As at 31 December
(2,485) (1,370)
Impairment losses on a portfolio basis: In thousands of BGN 2010 2009 As at 1 January (9,304) (5,519) Charge for impairment losses (6,315) (6,979) Reversed impairment losses 4,395 3,194
As at 31 December
(11,224) (9,304)
Total impairment losses
(13,709) (10,674)
20. PROPERTY, PLANT AND EQUIPMENT
In thousands of BGN Land and buildings
Plant and equipment
Motor vehicles
Fixtures and fittings
Other assets
Assets in progress
Total
Cost As at 1 January 2010 54,185 6,040 2,094 3,478 104 6,119 72,020Additions - - 5 - - 6,973 6,978Transfers from assets in progress 6,096 737 302 326 13 (7,474) -Revaluation - - - - - - -Disposals 376 323 245 69 - - 1,013As at 31 December 2010 59,905 6,454 2,156 3,735 117 5,618 77,985 Depreciation
As at 1 January 2010 2,637 4,552 1,164 1,770 47 - 10,170Charge for the period 2,290 914 450 454 12 - 4,120On disposals 14 323 206 69 - - 612As at 31 December 2010 4,913 5,143 1,408 2,155 59 - 13,678
Book value As at 1 January 2010 51,548 1,488 930 1,708 57 6,119 61,850
As at 31 December 2009 54,992 1,311 748 1,580 58 5,618 64,307
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36
21. INTANGIBLE ASSETS
In thousands of BGN Cost As at 1 January 2010 1,848Transfers from assets in progress Additions 122Disposals (exchanges) 54As at 31 December 2010 1,916 Depreciation As at 1 January 2010 1,359Charge for the period 242On disposals 54
As at 31 December 2010 1,547
Book value As at 1 January 2010 489 As at 31 December 2010 369
22. OTHER ASSETS In thousands of BGN 2010 2009
Advance payments 1,064 5,636 Prepaid expenses 828 510 Tax receivables 7,952 5,192 Assets for resale 74 86 Other assets 1,992 730
11,910 12,154
23. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS In thousands of BGN 2010 2009
In leva 80+174 0/0+050 In foreign currency 0/8+486 37+876
200,882 150,148
Deposits in banks include funding from the Bulgarian Development Bank at the amount of BGN 40,000 thousand (2009: BGN 40,000 thousand). This funding has been obtained under the Program for target financing of commercial banks to provide for medium-term, long-term and project financing of Small and Medium-Sized Enterprises.
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24. DEPOSITS FROM NON-FINANCIAL INSTITUTIONS AND OTHER CUSTOMERS In thousands of BGN 2010 2009
Individuals In leva 176+187 073+170 In foreign currency 5/6+418 330+14/ Non-financial institutions and other customers In leva 438+143 342+422 In foreign currency 61/+263 406+416
2,164,455 1,596,591
25. OTHER BORROWED FUNDS In thousands of BGN 2010 2009
Due to customers 431 140 Due to banks - 719 Finance lease liabilities 0/7 10 539 880
26. OTHER LIABILITIES In thousands of BGN 2010 2009
Tax liabilities 00+663 00+263 Deferred fees and commissions 28/ 515 Other creditors 368 528 Other liabilities 355 204 13,109 12,954
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27. CAPITAL AND RESERVES
(a) Subscribed share capital In thousands of BGN
Number of shares
Nominal value
Subscribed share capital
5+///+/// 5/+///
5+///+/// 5/+///
At 31 December 2010 the subscribed share capital of the Group amounted to BGN 60,000 thousands and was fully paid. The Group’s capital comprised 6,000 thousands ordinary voting shares, each of them with a par value of BGN 10. The procedure of transformation of CCB into a public company was finalized in the second quarter of 2007 and in May as a result of successful public offering an issue of 1,000 thousands new registered shares was sold on the Bulgarian Stock Exchange – Sofia.
(b) Statutory reserves
Statutory reserves comprise the amounts set aside for purposes regulated by local legislation under which the Group is obliged to set aside at least one-fifth of its profit after taxation until the amount of statutory reserves reaches 1.25% of the sum total of statement of financial position assets and credit commitments and financial guarantees.
28. COMMITMENTS AND CONTINGENT LIABILITIES
(a) Credit commitments
The Group provides bank guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year.
The contractual amounts of commitments and contingent liabilities are set out in the following table below. The values reflected in the table for commitments are considered entirely transferred. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the reporting date if counterparts failed completely to perform as contracted.
In thousands of BGN 2010 2009
Ehm`mbh`k ft`q`msddr `mc kdssdqr ne bqdchs Hm kdu` 018+741 048+543 Hm enqdhfm btqqdmbx 30+688 78+086
171,651 248,851
Issued guarantees are secured by fixed assets, deposits or other assets pledged in favour of the Group . These commitments and contingent liabilities have off-balance credit risk. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows.
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4/
29. RELATED PARTY TRANSACTIONS In thousands of BGN
Transactions with
associated companies
Transactions with
Management and Directors
of the Bank
Transactions with relatives of
administrators of the Bank
Transactions with
employees of the Bank
In thousands of BGN Loans granted
Exposure as at 1 January 2010 , 1,027 5,778 1,739 Changes during period , (20) 67 441 Exposure as at 31 December 2010 - 1,007 5,845 2,180
Deposits and current accounts Exposure as at 1 January 2010 4 39,303 36,211 4,797 Changes during period 1,537 1,642 (13,513) 579 Exposure as at 31 December 2010 1,541 40,945 22,698 5,376
Contingent liabilities Exposure as at 1 January 2010 , 280 2,773 292 Changes during period , (117) 511 (171) Exposure as at 31 December 2010 , 163 3,284 121
Remuneration of Directors , 1,280 - -
30. SUBSIDIARIES AND ASSOCIATES
Control and significant influence of the entities in the Group
CCB’s Group parent company is Corporate Commercial Bank.
Onwnership %
Onwnership %
2010 2009 „Dar 02” OOD 90% 90% „Velder Konsult” OOD 67% 67% „CCB Asset Management” AD 51% 51% „Fara Konsult” OOD 25% 25% „Agro Finance” ADSIC 27.4% -
31. EVENTS AFTER THE REPORTING DATE
No events arising after the reporting date requiring additional disclosures or adjustments to the Group’s financial statements.
F-168
- 148 -
ANNEX: THE FACILITY AGREEMENT
Commencing on the following page
CLIFFORD CHANCE LLP
CONFORMED COPY
Up to USD150,000,000
FACILITY AGREEMENT
DATED 7 AUGUST 2012
AS AMENDED ON 20 SEPTEMBER 2012
for
CORPORATE COMMERCIAL BANK AD
as Borrower
arranged by
VTB CAPITAL PLC
with
VTB CAPITAL PLC
acting as Agent
TERM FACILITY AGREEMENT
79776-5-18-v7.0 70-40526173
CONTENTS
Clause Page
1. Definitions and Interpretation ........................................................................................ 1
2. The Facility .................................................................................................................. 16
3. Purpose ......................................................................................................................... 17
4. Conditions of Utilisation .............................................................................................. 17
5. Utilisation ..................................................................................................................... 18
6. Repayment ................................................................................................................... 19
7. Prepayment and Cancellation ...................................................................................... 19
8. Interest.......................................................................................................................... 22
9. Interest Periods............................................................................................................. 23
10. Changes to the Calculation of Interest ......................................................................... 24
11. Fees .............................................................................................................................. 25
12. Tax Gross Up and Indemnities .................................................................................... 26
13. Increased Costs ............................................................................................................ 29
14. Other Indemnities ......................................................................................................... 31
15. Mitigation by the Lenders ............................................................................................ 33
16. Costs and Expenses ...................................................................................................... 33
17. Representations ............................................................................................................ 34
18. Information Undertakings ............................................................................................ 38
19. Financial Covenants ..................................................................................................... 43
20. General Undertakings .................................................................................................. 44
21. Events of Default ......................................................................................................... 51
22. Changes to the Lenders ................................................................................................ 56
23. Changes to the Borrower ............................................................................................. 61
24. Role of the Agent and the Arranger ............................................................................. 62
25. Conduct of Business by the Finance Parties ................................................................ 68
26. Sharing among the Lenders ......................................................................................... 68
27. Payment Mechanics ..................................................................................................... 70
28. Set-off .......................................................................................................................... 74
29. Notices ......................................................................................................................... 74
30. Calculations and Certificates ....................................................................................... 76
31. Partial Invalidity........................................................................................................... 76
32. Remedies and Waivers ................................................................................................. 76
33. Non-Petition ................................................................................................................. 77
34. Limited Recourse ......................................................................................................... 77
79776-5-18-v7.0 70-40526173
35. Amendments and Waivers ........................................................................................... 77
36. Confidentiality ............................................................................................................. 78
37. Counterparts ................................................................................................................. 82
38. Governing Law ............................................................................................................ 82
39. Enforcement ................................................................................................................. 82
40. Power of Attorney ........................................................................................................ 83
Schedule 1 Conditions Precedent to Utilisation ....................................................................... 84
Schedule 2 Utilisation Request ................................................................................................ 86
Schedule 3 Mandatory Cost Formulae ..................................................................................... 87
Schedule 4 Form of Transfer Certificate ................................................................................. 89
Schedule 5 Form of Assignment Agreement ........................................................................... 91
Schedule 6 Form of Compliance Certificate ............................................................................ 94
Schedule 7 Issue Date Notice .................................................................................................. 95
Schedule 8 Timetables ............................................................................................................. 97
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THIS AGREEMENT is dated 7 August 2012 as amended on 20 September 2012 and made
between:
(1) CORPORATE COMMERCIAL BANK AD (in Bulgarian: "КОРПОРАТИВНА
ТЪРГОВСКА БАНКА" АД) a bank incorporated under Bulgarian law having its
seat and registered office at 10 Graf Ignatiev Street, Sredetz Region, , Sofia 1000,
Capital City Municipality, Bulgaria, entered in the Commercial Register with the
Registry Agency at the Ministry of Justice under UIC 831184677, represented jointly
by executive director Ilian Atanasov Zafirov with PIN 6402046768 and executive
director Georgi Pankov Hristov; (the "Borrower");
(2) VTB CAPITAL PLC as mandated lead arranger ( the "Arranger");
(3) VTB CAPITAL PLC as lender (the "Original Lender"); and
(4) VTB CAPITAL PLC as agent of the other Finance Parties (the "Agent").
IT IS AGREED as follows:
SECTION 1
INTERPRETATION
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Agreement:
"Acceptable Bank" means:
(a) a bank or financial institution which has a rating for its long-term unsecured
and non credit-enhanced debt obligations of at least BBB- and a short term
IDR of at least F3 by Fitch (or the equivalent by S&P or Moody's) or a
comparable rating from an internationally recognised credit rating agency; or
(b) any other bank or financial institution approved by the Agent.
"Account Bank" means, in relation to the SPV, The Bank of New York Mellon (so
long as it satisfies paragraph (a) of the definition of Acceptable Bank) or such other
Acceptable Bank approved by the Agent.
"Additional Cost Rate" has the meaning given to it in Schedule 3 (Mandatory Cost
Formulae).
"Affiliate" means, in relation to any person, a Subsidiary of that person or a Holding
Company of that person or any other Subsidiary of that Holding Company.
"Agency Agreement" means, if the SPV becomes a Lender pursuant to Clause 22
(Changes to the Lenders), the agency agreement between, inter alios, such SPV and
the paying agent (if any) for the SPV Notes, as such agreement may be amended,
supplemented and/or restated from time to time.
79776-5-18-v7.0 - 2 - 70-40526173
"Assignment Agreement" means an agreement substantially in the form set out in
Schedule 6 (Form of Assignment Agreement) or any other form agreed between the
relevant assignor and assignee.
"Auditors" means KPMG or any of Ernst & Young, Deloitte Touche Tohmatsu or
PricewaterhouseCoopers (as the Borrower may select) or such other firm approved in
advance by the Agent.
"Authorisation" means an authorisation, consent, approval, resolution, licence,
exemption, filing, notarisation or registration.
"Availability Period" means:
(a) the period from and including the date of this Agreement to and including the
date falling seven days after the date of this Agreement; and
(b) in respect of a Facility Increase, with respect to the amount of such Facility
Increase only, the Issue Date.
"Available Commitment" means a Lender's Commitment minus:
(a) the amount of its participation in any outstanding Loans; and
(b) in relation to any proposed Utilisation, the amount of its participation in any
Loan that is due to be made on or before the proposed Utilisation Date.
"Available Facility" means the aggregate for the time being of each Lender's
Available Commitment.
"Banking Licence" means the licence granted to the Borrower by the Central Bank
and renewed on 16 October 2009 (issue number RD22-2265/16.11.2) authorising,
inter alia, the Borrower to conduct general banking operations in local and foreign
currencies.
"Borrower's Official Website" means www.corpbank.bg.
"Break Costs" means the amount (if any) by which:
(a) the interest which a Lender should have received for the period from the date
of receipt of all or any part of its participation in the relevant Loan or Unpaid
Sum to the last day of the current Interest Period in respect of that Loan or
Unpaid Sum, had the principal amount or Unpaid Sum received been paid on
the last day of that Interest Period;
exceeds:
(b) the amount which that Lender would be able to obtain by placing an amount
equal to the principal amount or Unpaid Sum received by it on deposit with a
leading bank in the Relevant Interbank Market for a period starting on the
Business Day following receipt or recovery and ending on the last day of the
current Interest Period.
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"Bulgaria" means the Republic of Bulgaria.
"Business Day" means a day (other than a Saturday or Sunday) on which banks are
open for general business in London and Sofia and (in relation to any date for the
payment or purchase of dollars) New York.
"Central Bank" means the Bulgarian National Bank or any successor thereto as the
primary state agency regulating the activities of banks in Bulgaria.
"Change of Control" has the meaning ascribed thereto in paragraph (b) of Clause 7.2
(Change of Control).
"Commitment" means:
(a) in relation to an Original Lender, USD90,000,000; and
(b) in relation to any other Lender, the amount of any Commitment transferred to
it under this Agreement and its Facility Increase Commitment (if any),
to the extent not cancelled, reduced or transferred by it under this Agreement.
"Compliance Certificate" means a certificate substantially in the form set out
in Schedule 6 (Form of Compliance Certificate).
"Confidential Information" means all information relating to the Borrower, the
Finance Documents or the Facility of which a Finance Party becomes aware in its
capacity as, or for the purpose of becoming, a Finance Party or which is received by a
Finance Party in relation to, or for the purpose of becoming a Finance Party under, the
Finance Documents or the Facility from either:
(a) the Borrower or any of its advisers; or
(b) another Finance Party, if the information was obtained by that Finance Party
directly or indirectly from the Borrower or any of its advisers,
in whatever form, and includes information given orally and any document, electronic
file or any other way of representing or recording information which contains or is
derived or copied from such information but excludes information that:
(i) is or becomes public information other than as a direct or indirect
result of any breach by that Finance Party of Clause 36
(Confidentiality); or
(ii) is identified in writing at the time of delivery as non-confidential by
the Borrower or any of its advisers; or
(iii) is known by that Finance Party before the date the information is
disclosed to it in accordance with paragraphs (a) or (b) above or is
lawfully obtained by that Finance Party after that date, from a source
which is, as far as that Finance Party is aware, unconnected with the
Borrower and which, in either case, as far as that Finance Party is
79776-5-18-v7.0 - 4 - 70-40526173
aware, has not been obtained in breach of, and is not otherwise subject
to, any obligation of confidentiality.
"Confidentiality Undertaking" means a confidentiality undertaking substantially in a
recommended form of the LMA from time to time or in any other form agreed
between the Borrower and the Agent.
"Debt Purchase Transaction" means, in relation to a person, a transaction where
such person:
(a) purchases by way of assignment or transfer;
(b) enters into any sub-participation in respect of; or
(c) enters into any other agreement or arrangement having an economic effect
substantially similar to a sub-participation in respect of,
any Commitment or amount outstanding under this Agreement.
"Default" means an Event of Default or any event or circumstance specified in
Clause 21 (Events of Default) which would (with the expiry of a grace period, the
giving of notice, the making of any determination under the Finance Documents or
any combination of any of the foregoing) be an Event of Default.
"De-Listing Event" means:
(a) the Shares cease (or will cease) to be listed, freely traded or publicly quoted on
the Exchange (or any of the foregoing will occur) or the Exchange announces
this; or
(b) any event occurs (other than anything already referred to in paragraph (a)) that
disrupts or impairs (as determined by the Agent (acting reasonably)) the
ability of market participants in general to effect transactions in, or obtain
market values for, any Shares on the Exchange and such event continues for
more than three Business Days in total.
"Disruption Event" means either or both of:
(a) a material disruption to those payment or communications systems or to those
financial markets which are, in each case, required to operate in order for
payments to be made in connection with the Facility (or otherwise in order for
the transactions contemplated by the Finance Documents to be carried out)
which disruption is not caused by, and is beyond the control of, any of the
Parties; or
(b) the occurrence of any other event which results in a disruption (of a technical
or systems-related nature) to the treasury or payments operations of a Party
preventing that, or any other Party:
(i) from performing its payment obligations under the Finance
Documents; or
79776-5-18-v7.0 - 5 - 70-40526173
(ii) from communicating with other Parties in accordance with the terms of
the Finance Documents,
and which (in either such case) is not caused by, and is beyond the control of, the
Party whose operations are disrupted.
"Event of Default" means any event or circumstance specified as such in Clause 21
(Events of Default).
"Exchange" means the Bulgarian Stock Exchange or any other recognised investment
exchange (as that term is used in the Financial Services and Markets Act 2000) or any
exchange or market replacing the same as approved by the Agent.
"Facility" means the term loan facility made available under this Agreement as
described in Clause 2 (The Facility).
"Facility Increase" means an increase of the Total Commitments to a total aggregate
amount not exceeding USD150,000,000, as may be notified by the Agent to the
Borrower.
"Facility Increase Commitment" means in relation to a Lender, the amount that such
Lender agrees, in its absolute discretion and without any obligation to do so, to make
available pursuant to a Facility Increase and specified as such in any Issue Date
Notice.
"Facility Increase Effective Date" means, subject to the delivery by the Agent of an
Issue Date Notice pursuant to Clause 2.2 (Facility Increase), the Issue Date.
"Facility Increase Lender" has the meaning given to that term in Clause 2.2 (Facility
Increase).
"Facility Office" means the office or offices notified by a Lender to the Agent in
writing on or before the date it becomes a Lender (or, following that date, by not less
than five Business Days' written notice) as the office or offices through which it will
perform its obligations under this Agreement.
"Fee Letter" means any letter or letters dated on or about the date of this Agreement
between the Arranger and the Borrower (or the Agent and the Borrower) setting out
any of the fees referred to in Clause 11 (Fees) and any other document designated as a
"Fee Letter" by the Agent and the Borrower.
"Filing" means the filing of a completed declaration in respect of this Agreement by
the Borrower with the Central Bank, and the stamping of such declaration by or on
behalf of the Central Bank, pursuant to and in accordance with the Bulgarian Foreign
Exchange Act 2000.
"Finance Document" means this Agreement, any Fee Letter and any other document
designated as a "Finance Document" by the Agent and the Borrower.
"Finance Party" means the Agent, the Arranger or a Lender.
"Financial Indebtedness" means any indebtedness for or in respect of:
79776-5-18-v7.0 - 6 - 70-40526173
(a) moneys borrowed;
(b) any amount raised by acceptance under any acceptance credit facility or
dematerialised equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds,
notes, debentures, loan stock or any similar instrument;
(d) the amount of any liability in respect of any lease or hire purchase contract
which would, in accordance with IFRS, be treated as a finance or capital lease;
(e) receivables sold or discounted (other than any receivables to the extent they
are sold on a non-recourse basis);
(f) any amount raised under any other transaction (including any forward sale or
purchase agreement) having the commercial effect of a borrowing;
(g) any derivative transaction entered into in connection with protection against or
benefit from fluctuation in any rate or price (and, when calculating the value
of any derivative transaction, only the marked to market value shall be taken
into account);
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond,
standby or documentary letter of credit or any other instrument issued by a
bank or financial institution;
(i) any amount raised by the issue of redeemable shares;
(j) any amount of any liability under an advance or deferred purchase agreement
if one of the primary reasons behind the entry into this agreement is to raise
finance; and
(k) (without double counting) the amount of any liability in respect of any
guarantee or indemnity for any of the items referred to in paragraphs (a) to (j)
above.
"Fitch" means Fitch Ratings Limited.
"Fixed Rate" means 9.6 per cent. per annum.
"Fixed Rate Make-Whole Amount" means an amount equal to the interest payable
at the Fixed Rate on a Loan in the amount of the repaid or prepaid amount (including
all amounts repaid or prepaid by acceleration or by set off, whether such set-off is
voluntary or involuntary or results from operation of law or otherwise) from the date
of such repayment or prepayment until the Maturity Date (discounted at the then
prevailing dollar swap rate).
"Group" means the Borrower and its Subsidiaries.
"Holding Company" means, in relation to a person, any other person in respect of
which it is a Subsidiary.
79776-5-18-v7.0 - 7 - 70-40526173
"IFRS" means international accounting standards within the meaning of the IAS
Regulation 1606/2002 to the extent applicable to the relevant financial statements.
"Interest Period" means, in relation to a Loan, each period determined in accordance
with Clause 9 (Interest Periods) and, in relation to an Unpaid Sum, each period
determined in accordance with Clause 8.3 (Default interest).
"Issue Date" means the first date on which the SPV issues any SPV Notes pursuant to
the relevant Issue Documents (as certified by the Agent).
"Issue Date Notice" means a notice substantially in the form set out in Schedule 7
(Issue Date Notice).
"Issue Documents" means, in respect of any SPV Notes:
(a) the Agency Agreement;
(b) the Prospectus;
(c) any SPV Note;
(d) the Trust Deed; and
(e) any other document entered into by the SPV in respect of the SPV Notes,
and "Issue Document" means any one of them.
"Legal Reservations" means:
(a) the principle that equitable remedies (and similar remedies under the laws of
any relevant jurisdiction) may be unavailable or granted or refused at the
discretion of a court;
(b) the limitation of validity and enforcement by laws relating to fraud (other than
fraud on the part of the Borrower) or public policy (including the principles of
non-recognition of judgments on the grounds of lack of natural justice or res
judicata);
(c) the limitation of validity and enforcement by the principle that a court will not
enforce a penalty or any other contractual provision held to be in terrorem;
(d) the limitation of validity and enforcement by laws relating to bankruptcy,
liquidation, winding-up, dissolution, administration, insolvency,
reorganisation and/or other laws generally affecting the rights of creditors
(other than in relation to any facts or circumstances existing at the date
hereof);
(e) the time barring of claims under the Limitation Acts or similar acts in any
relevant jurisdiction, the possibility that an undertaking to assume liability for
or indemnify a person against non-payment of stamp duty may be void and
defences of set-off or counterclaim and similar principles of law;
79776-5-18-v7.0 - 8 - 70-40526173
(f) the principle that where a party to the Finance Documents is vested with a
discretion or may determine a matter in its opinion that party may be required
to exercise that discretion reasonably or hold that opinion on reasonable
grounds;
(g) the principle that any determination or certification which provides for such
determination or certificate to be conclusive may not be upheld if shown to
have been incorrect, unreasonable, arbitrary or given other than in good faith;
(h) the fact that courts may regulate the conduct of judicial proceedings and the
award and enforcement of judgments and costs in accordance with the rules of
the relevant lex fori notwithstanding any contractual stipulations to the
contrary; and
(i) any other relevant qualification as to matters of law of general application in
any legal opinion delivered to the Lender under Clause 4.1 (Initial conditions
precedent), but not including any qualification that relates to:
(i) any breach by the Borrower of any contract, duty, law or regulation or
the commission of any tort;
(ii) any fraud, misrepresentation, misstatement, duress or undue influence
on the part of the Borrower;
(iii) any action required to be taken by the Borrower (or any director or
shareholder thereof) for the purposes of maintaining its corporate
existence, performing any obligation under the Finance Documents or
satisfying any condition under Clause 4.1 (Initial conditions
precedent)); or
(iv) illegality (including any sanctions reservations) or public policy.
"Lender" means:
(a) the Original Lender; and
(b) any person which has become a Party in accordance with Clause 22 (Changes
to the Lenders),
which in each case has not ceased to be a Party in accordance with the terms of this
Agreement.
"LIBOR" means, in relation to the relevant Loan:
(a) the applicable Screen Rate; or
(b) (if no Screen Rate is available for dollars for the Interest Period of that Loan)
the arithmetic mean of the rates (rounded upwards to four decimal places) as
supplied to the Agent at its request quoted by the Reference Banks to leading
banks in the London interbank market,
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as of the Specified Time on the Quotation Day for the offering of deposits in dollars
and for a period comparable to the Interest Period for that Loan and, if any such rate is
below zero, LIBOR will be deemed to be zero.
"Limitation Acts" means the Limitation Act 1980 and the Foreign Limitation Periods
Act 1984.
"LMA" means the Loan Market Association.
"Loan" means a loan made or to be made under the Facility or the principal amount
outstanding for the time being of that loan.
"Majority Lenders" means:
(a) if there are no Loans then outstanding, a Lender or Lenders whose
Commitments aggregate more than 662/3% of the Total Commitments (or, if
the Total Commitments have been reduced to zero, aggregated more than
662/3% of the Total Commitments immediately prior to the reduction); or
(b) at any other time, a Lender or Lenders whose participations in the Loans then
outstanding aggregate more than 662/3% of that Loan then outstanding.
"Mandatory Cost" means the percentage rate per annum calculated by the Agent in
accordance with Schedule 3 (Mandatory Cost Formulae).
"Margin" means 10.00 per cent. per annum.
"Material Adverse Effect" means a material adverse effect on:
(a) the business, operations and financial condition of the Borrower;
(b) the ability of the Borrower to perform its obligations under the Finance
Documents; or
(c) the validity or enforceability of the Finance Documents or the rights or
remedies of any Finance Party under the Finance Documents.
"Material Company" means, at any time, a Subsidiary of the Borrower which:
(a) has profits before interest and tax representing 5 per cent. or more of the
consolidated profits before interest and tax of the Group; and/or
(b) has tangible net worth representing 5 per cent. or more of the consolidated
tangible net worth of the Group; and/or
(c) has turnover representing 5 per cent, or more of consolidated turnover of the
Group,
in each case calculated on a consolidated basis.
Compliance with the conditions set out in paragraphs (a), (b) and (c) shall be
determined by reference to the most recent Compliance Certificate supplied by the
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Borrower and the latest audited consolidated financial statements of the Group but if a
Subsidiary has been acquired since the date as at which the latest audited consolidated
financial statements of the Group were prepared, the financial statements shall be
adjusted in order to take into account the acquisition of that Subsidiary (that
adjustment being certified by the Auditors as representing an accurate reflection of the
revised consolidated profits before interest and tax, consolidated net tangible worth or
turnover of the Group).
A report by the Auditors that a Subsidiary is or is not a Material Company shall, in the
absence of manifest error, be conclusive and binding on all Parties.
"Maturity Date" means the date falling 24 Months after the date of this Agreement
and if such date is not a Business Day, the immediately preceding Business Day.
"Month" means a period starting on one day in a calendar month and ending on the
numerically corresponding day in the next calendar month, except that:
(a) (subject to paragraph (c) below) if the numerically corresponding day is not a
Business Day, that period shall end on the next Business Day in that calendar
month in which that period is to end if there is one, or if there is not, on the
immediately preceding Business Day;
(b) if there is no numerically corresponding day in the calendar month in which
that period is to end, that period shall end on the last Business Day in that
calendar month; and
(c) if an Interest Period begins on the last Business Day of a calendar month, that
Interest Period shall end on the last Business Day in the calendar month in
which that Interest Period is to end.
The above rules will only apply to the last Month of any period.
"Moody's" means Moody's Investors Service, Inc.
"New Lender" has the meaning given to that term in Clause 22 (Changes to the
Lenders).
"Noteholder" means the investor or participant of any SPV Note defined as such in
the Trust Deed.
"Note Trustee" means the trustee under the Trust Deed and any successor thereto or
co-trustee thereof as provided thereunder.
"Original Financial Statements" means the audited consolidated financial
statements of the Borrower for the financial year ended 31 December 2011.
"Participating Member State" means any member state of the European Union that
adopts or has adopted and retained the euro as its lawful currency in accordance with
the legislation of the European Union relating to Economic and Monetary Union.
"Party" means a party to this Agreement.
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"Prepayment Date" means the date on which the Borrower is obliged to prepay the
whole or any part of a Loan as specified by a Party pursuant to paragraph (a) of
Clause 7.3 (Restrictions).
"Prospectus" means any prospectus and any other offering document or marketing
material produced in respect of any SPV Note.
"Quotation Day" means, in relation to any period for which an interest rate is to be
determined, two London Business Days before the first day of that period unless
market practice differs in the Relevant Interbank Market, in which case the Quotation
Day will be determined by the Agent in accordance with market practice in the
Relevant Interbank Market (and if quotations would normally be given by leading
banks in the Relevant Interbank Market on more than one day, the Quotation Day will
be the last of those days).
"Reference Banks" means the principal offices in London of three major banks in the
Relevant Interbank Market as may be appointed by the Agent in consultation with the
Borrower.
"Related Fund" in relation to a fund (the "first fund"), means a fund which is
managed or advised by the same investment manager or investment adviser as the
first fund or, if it is managed by a different investment manager or investment adviser,
a fund whose investment manager or investment adviser is an Affiliate of the
investment manager or investment adviser of the first fund.
"Relevant Interbank Market" means in relation to dollars, the London interbank
market.
"Relevant Jurisdiction" means in relation to the Borrower:
(a) its jurisdiction of incorporation; and
(b) any jurisdiction where it conducts business.
"Repeating Representations" means each of the representations set out in
Clauses 17.1 (Status) to 17.7 (Governing law and enforcement), Clauses 17.10 (No
default) to 17.14 (No proceedings pending or threatened) and Clauses 17.18 (Private
and commercial acts) to 17.20 (Centre of main interests and establishments).
"Representative" means any delegate, agent, manager, administrator, nominee,
attorney, trustee or custodian.
"Screen Rate" means, in relation to LIBOR, the British Bankers' Association Interest
Settlement Rate for dollars for the relevant period, displayed on the appropriate page
of the Reuters screen. If the agreed page is replaced or service ceases to be available,
the Agent may specify another page or service displaying the appropriate rate after
consultation with the Borrower and the Lenders.
"Security" means a mortgage, charge, pledge, lien or other security interest securing
any obligation of any person or any other agreement or arrangement having a similar
effect.
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"Shares" means the ordinary voting shares of the Borrower.
"Specified Time" means a time determined in accordance with Schedule 8
(Timetables).
"SPV" means Northern Lights Bulgaria B.V., a private company incorporated with
limited liability (besloten vennootschap met beperkte aansprakelijkheid) under the
laws of The Netherlands, whose registered office is at Luna Arena, Herikerbergweg
238, 1101 CM Amsterdam Zuidoost, The Netherlands.
"SPV Notes" means, if the SPV becomes a Lender pursuant to Clause 22 (Changes to
the Lenders), any loan participation notes or other limited recourse funding
instruments or similar debt instruments issued or entered into by the SPV as issuer or
obligor in relation to financing its investment in a Loan which, in the case of loan
participation notes, may be secured by the Trust Deed on the terms and subject to the
conditions set out in the Prospectus and the Trust Deed.
"Subsidiary" means any person (referred to as the "first person") in respect of which
another person (referred to as the "second person"):
(a) holds a majority of the voting rights in that first person or has the right under
the constitution of the first person to direct the overall policy of the first
person or alter the terms of its constitution; or
(b) is a member of that first person and has the right to appoint or remove a
majority of its board of directors or equivalent administration, management or
supervisory body; or
(c) has the right to exercise a dominant influence (which must include the right to
give directions with respect to operating and financial policies of the first
person which its directors are obliged to comply with whether or not for its
benefit) over the first person by virtue of provisions contained in the articles
(or equivalent) of the first person or by virtue of a control contract which is in
writing and is authorised by the articles (or equivalent) of the first person and
is permitted by the law under which such first person is established; or
(d) is a member of that first person and controls alone, pursuant to an agreement
with other shareholders or members, a majority of the voting rights in the first
person or the rights under its constitution to direct the overall policy of the
first person or alter the terms of its constitution; or
(e) has the power to exercise, or actually exercises dominant influence or control
over the first person; or
(f) together with the first person are managed on a unified basis,
and for the purposes of this definition, a person shall be treated as a member of
another person if any of that person's Subsidiaries is a member of that other person or,
if any shares in that other person are held by a person acting on behalf of it or any of
its Subsidiaries. A subsidiary undertaking shall include any person the shares or
ownership interests in which are subject to Security and where the legal title to the
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shares or ownership interests so secured are registered in the name of the secured
party or its nominee pursuant to such Security.
"S&P" means Standard & Poor’s Rating Services, a division of The McGraw-Hill
Companies Inc.
"Tax" means any tax, levy, impost, duty or other charge or withholding of a similar
nature (including any penalty or interest payable in connection with any failure to pay
or any delay in paying any of the same).
"Total Commitments" means the aggregate of the Commitments, being
USD90,000,000 at the date of this Agreement or such higher amount as the
Commitments may be increased to pursuant to a Facility Increase, up to a total
aggregate amount not exceeding USD150,000,000.
"Total Equity" means at any time the aggregate of the amounts paid up or credited as
paid up on the issued ordinary share capital of the Borrower and the aggregate amount
of the reserves of the Borrower including any amount credited to the share premium
account and any capital redemption reserve fund.
"Transfer Certificate" means a certificate substantially in the form set out
in Schedule 4 (Form of Transfer Certificate) or any other form agreed between the
Agent and the Borrower.
"Transfer Date" means, in relation to an assignment or a transfer, the later of:
(a) the proposed Transfer Date specified in the relevant Assignment Agreement or
Transfer Certificate; and
(b) the date on which the Agent executes the relevant Assignment Agreement or
Transfer Certificate.
"Trust Deed" means, if the SPV is a Lender or becomes a Lender pursuant to
Clause 22 (Changes to the Lenders), the trust deed between the SPV as issuer and the
Note Trustee thereunder concerning the constitution of the SPV Notes and/or Security
for the SPV Notes as such trust deed may be amended, supplemented or restated from
time to time.
"Unpaid Sum" means any sum due and payable but unpaid by the Borrower under
the Finance Documents.
"Unwind Costs" has the meaning ascribed thereto in Clause 14.4 (Unwind
indemnity).
"Utilisation" means a utilisation of the Facility.
"Utilisation Date" means the date of a Utilisation, being the date on which the
relevant Loan is to be made.
"Utilisation Request" means a notice substantially in the form set out in Schedule 2
(Utilisation Request).
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"VAT" means:
(a) any tax imposed in compliance with the Council Directive of 28 November
2006 on the common system of value added tax (EC Directive 2006/112); and
(b) any other tax of a similar nature, whether imposed in a member state of the
European Union in substitution for, or levied in addition to, such tax referred
to in paragraph (a) above, or imposed elsewhere.
"Website Lender" has the meaning given to that term in Clause 18.7 (Use of
websites).
1.2 Construction
(a) Unless a contrary indication appears any reference in this Agreement to:
(i) the "Agent", the "Arranger", any "Finance Party", any "Lender", the
"Borrower" or any "Party" shall be construed so as to include its
successors in title, permitted assigns and permitted transferees;
(ii) "assets" includes present and future properties, revenues and rights of
every description;
(iii) the "equivalent" on any given date in one currency (the "first
currency") of an amount denominated in another currency (the
"second currency") is a reference to the amount of the first currency
which could be purchased with the amount of the second currency at
the mid rate of (i) the rate of exchange quoted by the Agent at or about
11.00 a.m. on such date for the purchase of the first currency with the
second currency and (ii) the rate of exchange quoted by the Agent at or
about 11.00 a.m. on such date for the sale of the first currency for the
second currency;
(iv) a "Finance Document" or any other agreement or instrument is a
reference to that Finance Document or other agreement or instrument
as amended, novated, supplemented, extended, replaced or restated;
(v) "guarantee" includes any guarantee, letter of credit, bond, indemnity,
documentary, put option, call option or other credit or similar
assurance against loss, or any obligation, direct or indirect, actual or
contingent, to purchase, or assume, any indebtedness of any person or
to make an investment in or loan to any person or to purchase debts or
claims of any person;
(vi) "indebtedness" includes any obligation (whether incurred as principal
or as surety) for the payment or repayment of money, whether present
or future, actual or contingent;
(vii) the word "including" shall (other than in the measurement of time) be
construed as being by way of illustration or emphasis only and shall
not be construed as, nor shall it take effect as, limiting the generality of
any preceding or succeeding words;
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(viii) a "law" includes any law (including common or customary law),
statute, constitution, decree, judgment, treaty, regulation, directive, by-
law, order or any other legislative measure of any governmental,
intergovernmental or supranational body, agency, department or
regulatory, self-regulatory or other authority or organisation;
(ix) a "person" includes any individual, firm, company, corporation,
government, state or agency of a state or any association, trust, joint
venture, consortium or partnership (whether or not having separate
legal personality);
(x) a "regulation" includes any regulation, rule, official directive, request
or guideline (whether or not having the force of law) of any
governmental, intergovernmental or supranational body, agency,
department or of any regulatory, self-regulatory or other authority or
organisation (including the Central Bank);
(xi) a provision of law is a reference to that provision as amended,
supplemented or re-enacted; and
(xii) a time of day is a reference to London time.
(b) Section, Clause and Schedule headings are for ease of reference only.
(c) Unless a contrary indication appears, a term used in any other Finance
Document or in any notice given under or in connection with any Finance
Document has the same meaning in that Finance Document or notice as in this
Agreement.
(d) A Default (other than an Event of Default) is "continuing" if it has not been
remedied or waived and an Event of Default is "continuing" if it has not been
waived.
1.3 Currency Symbols and Definitions
"USD" and "dollars" denote the lawful currency of the United States of America.
1.4 Third party rights
(a) Unless expressly provided to the contrary in a Finance Document, a person
who is not a Party has no right under the Contracts (Rights of Third Parties)
Act 1999 (the "Third Parties Act") to enforce or to enjoy the benefit of any
term of this Agreement.
(b) Notwithstanding any term of any Finance Document, the consent of any
person who is not a Party is not required to rescind or vary this Agreement at
any time.
SECTION 2
THE FACILITY
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2. THE FACILITY
2.1 The Facility
Subject to the terms of this Agreement, the Lenders make available to the Borrower a
dollar term loan facility in an aggregate amount equal to the Total Commitments.
2.2 Facility Increase
(a) In connection with any participation in or related to the Facility (including the
issuance of any SPV Notes) after the date of this Agreement, one or more of
the Lenders (a "Facility Increase Lender") may assume a Facility Increase
Commitment subject to and in accordance with this Clause 2.2.
(b) The Agent may (acting on the instructions of all the Lenders acting in their
absolute discretion) notify the Borrower of a Facility Increase by issuing an
Issue Date Notice to the Borrower on or before the Issue Date. None of the
Lenders shall be under any obligation to instruct the Agent to issue such an
Issue Date Notice (which shall be determined in the absolute discretion of the
Lenders).
(c) Any Issue Date Notice shall:
(i) specify the proposed amount of the Facility Increase Commitment, the
proposed identity of the Facility Increase Lenders (which may only be
a Lender that is the SPV at such time) and the proposed date on which
the assumption by the Facility Increase Lenders of such Facility
Increase Commitment is to become effective;
(ii) be executed by the Agent;
(iii) confirm that the Facility Increase Lenders have agreed, with effect
from the Facility Increase Effective Date, to assume such Facility
Increase Commitment.
(d) The Agent shall notify the Parties as soon as reasonably practicable of the
occurrence of the Facility Increase Effective Date and shall specify the
Facility Increase Effective Date for such increase.
(e) On the Facility Increase Effective Date:
(i) the Facility Increase Commitment will be assumed by the Facility
Increase Lenders pro rata and pari passu to their Commitments prior to
the Facility Increase Effective Date;
(ii) the Commitments of the Lenders shall continue in full force and effect;
and
(iii) any increase in the Total Commitments shall take effect.
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2.3 Finance Parties' rights and obligations
(a) The obligations of each Finance Party under the Finance Documents are
several. Failure by a Finance Party to perform its obligations under the
Finance Documents does not affect the obligations of any other Party under
the Finance Documents. No Finance Party is responsible for the obligations of
any other Finance Party under the Finance Documents.
(b) The rights of each Finance Party under or in connection with the Finance
Documents are separate and independent rights and any debt arising under the
Finance Documents to a Finance Party from the Borrower shall be a separate
and independent debt.
(c) A Finance Party may, except as otherwise stated in the Finance Documents,
separately enforce its rights under the Finance Documents.
3. PURPOSE
3.1 Purpose
The Borrower shall apply all amounts borrowed by it under the Facility towards its
general corporate purposes.
3.2 Monitoring
No Finance Party is bound to monitor or verify the application of any amount
borrowed pursuant to this Agreement.
4. CONDITIONS OF UTILISATION
4.1 Initial conditions precedent
The Borrower may not deliver a Utilisation Request unless the Agent has received all
of the documents and other evidence listed in Schedule 1 (Conditions precedent to
Utilisation) in form and substance satisfactory to the Agent. The Agent shall notify
the Borrower and the Lenders promptly upon being so satisfied.
4.2 Further conditions precedent
The Lenders will only be obliged to comply with Clause 5.5 (Lenders' participation)
if on the date of a Utilisation Request and on the proposed Utilisation Date:
(a) no Default is continuing or would result from the proposed Loan; and
(b) the Repeating Representations to be made by the Borrower are true in all
material respects.
4.3 Waiver of conditions precedent
If, at the request of the Borrower, any of the conditions set out in Schedule 1
(Conditions precedent to Utilisation) are waived or deferred by the Agent, the Agent
may attach to such waiver or deferral such requirements and further or other
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conditions (acting reasonably) and the Borrower shall, to the extent within its
corporate powers and in accordance with applicable law, fulfil or procure fulfilment
of all such requirements and further or other conditions agreed in writing at the time
of the granting of such waiver as if such requirement or further or other condition was
a term of this Agreement.
4.4 Maximum number of Loans
(a) The Borrower may not deliver a Utilisation Request if as a result of the
proposed Utilisation more than one Loan would be outstanding except for a
single further Utilisation Request in respect of a Facility Increase.
(b) A Borrower may not request that the Loans be divided.
SECTION 3
UTILISATION
5. UTILISATION
5.1 Delivery of a Utilisation Request
The Borrower may utilise the Facility by delivery to the Agent of a duly completed
Utilisation Request not later than the Specified Time.
5.2 Completion of a Utilisation Request
(a) Any Utilisation Request is irrevocable and will not be regarded as having been
duly completed unless:
(i) the proposed Utilisation Date is a Business Day within the relevant
Availability Period; and
(ii) the currency and amount of the Utilisation comply with Clause 5.3
(Currency and amount).
(b) Only one Loan may be requested in each Utilisation Request.
5.3 Deemed Drawing
(a) If the Agent delivers an Issue Date Notice to the Borrower in accordance with
Clause 2.2 (Facility Increase), the Borrower shall be deemed on the Issue Date
to have delivered a Utilisation Request equal to the Available Facility (being
an amount not more than the amount specified in the Issue Date Notice)
pursuant to the Facility Increase to be applied for the purposes specified in
Clause 3.1 (Purpose).
(b) Such deemed drawing shall not oblige the Lenders to fund a Utilisation if they
are not otherwise obliged to fund such Utilisation pursuant to the other terms
of this Agreement provided that the Lenders waive:
(i) the requirement for actual delivery of a completed Utilisation Request
under Clause 5.1 (Delivery of a Utilisation Request); and
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(ii) any minimum notice required by paragraph (c) of Clause 5.5 (Lenders'
participation).
(c) A Lender which is the SPV shall not be obliged to fund a Utilisation unless it
(or paying agent on its behalf) has received cleared funds in accordance the
terms of the SPV Notes in an aggregate amount which equals its portion of the
amount of the Loan to be funded.
5.4 Currency and amount
(a) The currency specified in a Utilisation Request must be dollars.
(b) The amount of the proposed Loan must be an amount equal to the then
Available Facility.
5.5 Lenders' participation
(a) If the conditions set out in this Agreement have been met, each Lender shall
make its participation in each Loan available through its Facility Office.
(b) The amount of each Lender's participation in each Loan will be equal to the
proportion borne by its Available Commitment to the Available Facility
immediately prior to making the Loan.
(c) The Agent shall notify each Lender of the amount of each Loan and the
amount of its participation in the Loan, in each case by the relevant Specified
Time.
SECTION 4
REPAYMENT, PREPAYMENT AND CANCELLATION
6. REPAYMENT
6.1 Repayment of Loans
(a) The Borrower shall repay each Loan in full on the Maturity Date.
(b) The Borrower may not reborrow any part of the Facility which is repaid.
7. PREPAYMENT AND CANCELLATION
7.1 Illegality
If, at any time, it is or will become unlawful in any applicable jurisdiction for a
Lender to perform any of its obligations as contemplated by this Agreement or to fund
or maintain its participation in any Loan or for any Lender which is the SPV to
comply with its obligations under the SPV Notes or Issue Documents:
(a) that Lender shall promptly notify the Agent upon becoming aware of that
event;
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(b) upon the Agent promptly notifying the Borrower, the Commitment of that
Lender will be immediately cancelled; and
(c) the Borrower shall repay that Lender's participation in the Loans made to the
Borrower on the last day of the Interest Period for each Loan occurring after
the Agent has notified the Borrower or, if earlier, the date specified by the
Lender in the notice delivered to the Agent.
7.2 Change of control
(a) If a Change of Control occurs:
(i) the Borrower shall promptly notify the Agent upon becoming aware of
the Change of Control and, if requested to do so by the Agent, shall
provide to the Agent such necessary details of the Change of Control
as is available to it;
(ii) a Lender shall not be obliged to fund the Utilisation; and
(iii) if a Lender so requires and notifies the Agent, the Agent shall, by not
less than three Business Days notice to the Borrower, cancel the
Commitment of that Lender and declare the participation of that
Lender in all outstanding Loans, together with accrued interest and all
other amounts accrued under the Finance Documents, due and payable
on the date falling not less than ten Business Days after the date of
such notice to the Borrower was received by the Borrower from the
Agent, at which time the Commitment of that Lender will be cancelled
and all such outstanding amounts will become due and payable.
(b) For the purpose of paragraph (a) above:
(i) "Change of Control" means any person or group of persons acting in
concert gains control of the Borrower;
(ii) "control" means:
(A) the power (whether by way of ownership of shares, proxy,
contract, agency or otherwise) to:
(1) cast, or control the casting of, more than one-half of the
maximum number of votes that might be cast at a
general meeting of the shareholders of the Borrower; or
(2) appoint or remove all, or the majority, of the directors
or other equivalent officers of the Borrower; or
(3) give directions with respect to the operating and
financial policies of the Borrower which the directors or
other equivalent officers of the Borrower are obliged to
comply with; or
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(B) the holding of more than one-half of the issued share capital of
the Borrower (excluding any part of that issued share capital
that carries no right to participate beyond a specified amount in
a distribution of either profits or capital); and
(C) "acting in concert" means, a group of persons who, pursuant to
an agreement or understanding (whether formal or informal),
actively co-operate, through the acquisition by any of them,
either directly or indirectly, of shares in the Borrower, to obtain
or consolidate control of the Borrower.
7.3 Restrictions
(a) Any notice of cancellation or prepayment given by any Party under this
Clause 7 shall be irrevocable and, unless a contrary indication appears in this
Agreement, shall specify the date or dates upon which the relevant
cancellation or prepayment is to be made and the amount of that cancellation
or prepayment.
(b) Any prepayment under this Agreement shall be made together with accrued
interest on the amount prepaid and without premium or penalty subject to:
(i) any applicable Unwind Costs; and
(ii) either:
(A) where prepayment is made in the period prior to the Issue Date
and other than in respect of any prepayment pursuant to
Clause 7.1 (Illegality), any applicable Break Costs; or
(B) where prepayment is made in the period on or after the Issue
Date, the Fixed Rate Make-Whole Amount.
(c) The Borrower may not reborrow any part of the Facility which is prepaid.
(d) The Borrower shall not repay or prepay all or any part of the Loans or cancel
all or any part of the Commitments except at the times and in the manner
expressly provided for in this Agreement.
(e) No amount of the Total Commitments cancelled under this Agreement may be
subsequently reinstated.
(f) If the Agent receives a notice under this Clause 7 it shall promptly forward a
copy of that notice to either the Borrower or the affected Lender, as
appropriate.
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SECTION 5
COSTS OF UTILISATION
8. INTEREST
8.1 Calculation of interest
The rate of interest on each Loan for each Interest Period is the percentage rate per
annum which:
(a) prior to the Issue Date is the aggregate of
(i) the Margin;
(ii) LIBOR; and
(iii) Mandatory Cost, if any; or
(b) on and from the Issue Date equals the Fixed Rate.
8.2 Payment of interest
On the last day of each Interest Period the Borrower shall pay accrued interest on the
Loan to which that Interest Period relates.
8.3 Conversion of interest rate
(a) If the Agent delivers an Issue Date Notice to the Borrower in accordance with
Clause 2.2 (Facility Increase) or if the Agent otherwise notifies the Borrower
of the proposed Issue Date for the purposes of this Clause 8.3, interest shall
accrue on a Loan for each Interest Period on the basis of a fixed rate
calculation (as determined in accordance with paragraph (b) of Clause 8.1
(Calculation of interest)).
(b) If the Agent does not issue an Issue Date Notice in accordance with Clause 2.2
(Facility Increase) or if the Agent does not otherwise notify the Borrower of
the proposed Issue Date for the purposes of this Clause 8.3, interest shall
continue to accrue on the Loans for each Interest Period on the basis of a
floating rate calculation (as determined in accordance with paragraph (a) of
Clause 8.1 (Calculation of interest)).
8.4 Conversion further assurances
The Borrower shall, upon request of the Agent, enter into such amendment and other
documentation relating to the Finance Documents deemed necessary by the Agent to
give effect to the change in interest rate calculation contemplated by an Issue Date
Notice.
8.5 Default interest
(a) If the Borrower fails to pay any amount payable by it under a Finance
Document on its due date, interest shall accrue on the overdue amount from
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the due date up to the date of actual payment (both before and after judgment)
at a rate which, subject to paragraph (b) below, is two per cent higher than the
rate which would have been payable if the overdue amount had, during the
period of non-payment, constituted a Loan in the currency of the overdue
amount (each of a duration selected by the Agent (acting reasonably)). Any
interest accruing under this Clause 8.3 shall be immediately payable by the
Borrower on demand by the Agent.
(b) If any overdue amount consists of all or part of a Loan which became due on a
day which was not the last day of an Interest Period relating to that Loan:
(i) the first Interest Period for that overdue amount shall have a duration
equal to the unexpired portion of the current Interest Period relating to
that Loan; and
(ii) the rate of interest applying to the overdue amount during that first
Interest Period shall be one per cent. higher than the rate which would
have applied if the overdue amount had not become due.
(c) Default interest (if unpaid) arising on an overdue amount will be compounded
with the overdue amount at the end of each Interest Period applicable to that
overdue amount but will remain immediately due and payable.
8.6 Notification of rates of interest
The Agent shall promptly notify the Lenders and the Borrower of the determination of
a rate of interest under this Agreement.
9. INTEREST PERIODS
9.1 Selection of Interest Periods
(a) Subject to paragraph (b) below, and Clause 9.2 (Changes to Interest Periods)
below, each Interest Period shall be:
(i) three (3) Months; or
(ii) such other period as the Agent and the Borrower may agree,
and shall accrue interest in accordance with Clause 8.1 (Calculation of
interest).
(b) An Interest Period for a Loan shall not extend beyond:
(i) the Issue Date; and
(ii) the Maturity Date.
(c) Each Interest Period for a Loan shall start on a Utilisation Date or (if already
made) on the last day of its preceding Interest Period.
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(d) The first Interest Period for a Loan resulting from a Facility Increase (if any)
shall end on the same day as the then current Interest Period for the
outstanding Loan.
9.2 Changes to Interest Periods
(a) The Agent may alter an Interest Period for a Loan to ensure that that Loan has
an Interest Period ending on the last day of an interest period under the SPV
Notes.
(b) If the Agent makes any change to an Interest Period referred to in this
Clause 9.2, it shall promptly notify the Borrower and the Lenders.
9.3 Non-Business Days
If an Interest Period would otherwise end on a day which is not a Business Day, that
Interest Period will instead end on the next Business Day in that calendar month (if
there is one) or the preceding Business Day (if there is not).
9.4 Consolidation of Loans
If two or more Interest Periods end on the same date, those Loans will be consolidated
into, and treated as, a single Loan on the last day of the Interest Period.
10. CHANGES TO THE CALCULATION OF INTEREST
10.1 Absence of quotations
Subject to Clause 10.2 (Market disruption), if LIBOR is to be determined by
reference to the Reference Banks but a Reference Bank does not supply a quotation
by the Specified Time on the Quotation Day, the applicable LIBOR shall be
determined on the basis of the quotations of the remaining Reference Banks.
10.2 Market disruption
(a) If, prior to the Issue Date, a Market Disruption Event occurs in relation to a
Loan for any Interest Period, then the rate of interest on each Lender's share of
that Loan for the Interest Period shall be the percentage rate per annum which
is:
(i) the rate per annum notified to the Agent by that Lender as soon as
practicable and in any event before interest is due to be paid in respect
of that Interest Period, to be that which expresses as a percentage rate
per annum the cost to that Lender of funding its participation in that
Loan from whatever source it may reasonably select; or
(ii) the sum of:
(A) the Margin;
(B) the rate notified to the Agent by that Lender as soon as
practicable and in any event before interest is due to be paid in
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respect of that Interest Period, to be that which expresses as a
percentage rate per annum the cost to that Lender of funding its
participation in that Loan from whatever source it may
reasonably select; and
(C) the Mandatory Cost, if any, applicable to that Lender's
participation in that Loan.
(b) In this Agreement "Market Disruption Event" means (only if such event
occurs prior to the Issue Date):
(i) at or about noon on the Quotation Day for the relevant Interest Period
the Screen Rate is not available and none or only one of the Reference
Banks supplies a rate to the Agent to determine LIBOR for dollars and
the relevant Interest Period; or
(ii) before close of business in London on the Quotation Day for the
relevant Interest Period, the Agent receives notifications from a Lender
or Lenders (whose participations in a Loan exceed 50 per cent. of that
Loan) that the cost to it of obtaining matching deposits in the Relevant
Interbank Market would be in excess of LIBOR.
10.3 Alternative basis of interest or funding
(a) If a Market Disruption Event occurs and the Agent or the Borrower so
requires, the Agent and the Borrower shall enter into negotiations (for a period
of not more than thirty days) with a view to agreeing a substitute basis for
determining the rate of interest.
(b) Any alternative basis agreed pursuant to paragraph (a) above shall, with the
prior consent of all the Lenders and the Borrower, be binding on all Parties.
10.4 Break Costs
(a) The Borrower shall, within three Business Days of demand by a Finance
Party, pay to that Finance Party its Break Costs attributable to all or any part
of a Loan or Unpaid Sum being paid by the Borrower on a day other than the
last day of an Interest Period for that Loan or Unpaid Sum.
(b) Each Lender shall, as soon as reasonably practicable after a demand by the
Agent, provide a certificate confirming the amount of its Break Costs for any
Interest Period in which they accrue.
(c) This Clause 10.4 shall not apply after the Issue Date.
11. FEES
11.1 Upfront and other fees
The Borrower shall pay to the Arranger an upfront fee and such other fees as may be
agreed between the Borrower and the Arranger in the amount and at the times agreed
in a Fee Letter.
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11.2 Agency fee
The Borrower shall pay to the Agent (for its own account) an agency fee in the
amount and at the times agreed in a Fee Letter.
SECTION 6
ADDITIONAL PAYMENT OBLIGATIONS
12. TAX GROSS UP AND INDEMNITIES
12.1 Definitions
(a) In this Agreement:
"Protected Party" means a Finance Party which is or will be subject to any
liability, or required to make any payment, for or on account of Tax in relation
to a sum received or receivable (or any sum deemed for the purposes of Tax to
be received or receivable) under a Finance Document.
"Tax Credit" means a credit against, relief or remission for, or repayment of
any Tax.
"Tax Deduction" means a deduction or withholding for or on account of Tax
from a payment under a Finance Document.
"Tax Payment" means either the increase in a payment made by the Borrower
to a Finance Party under Clause 12.2 (Tax gross-up) or a payment under
Clause 12.3 (Tax indemnity).
(b) Unless a contrary indication appears, in this Clause 12 a reference to
"determines" or "determined" means a determination made in the absolute
discretion of the person making the determination.
12.2 Tax gross-up
(a) The Borrower shall make all payments to be made by it without any Tax
Deduction, unless a Tax Deduction is required by law.
(b) The Borrower shall promptly upon becoming aware that it must make a Tax
Deduction (or that there is any change in the rate or the basis of a Tax
Deduction) notify the Agent accordingly. Similarly, a Lender shall notify the
Agent on becoming so aware in respect of a payment payable to that Lender.
If the Agent receives such notification from a Lender it shall notify the
Borrower.
(c) If a Tax Deduction is required by law to be made by the Borrower, the amount
of the payment due from the Borrower shall be increased to an amount which
(after making any Tax Deduction) leaves an amount equal to the payment
which would have been due if no Tax Deduction had been required.
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(d) If the Borrower is required to make a Tax Deduction, it shall make that Tax
Deduction and any payment required in connection with that Tax Deduction
within the time allowed and in the minimum amount required by law.
(e) Within thirty (30) days of making either a Tax Deduction or any payment
required in connection with that Tax Deduction, the Borrower shall deliver to
the Agent for the Finance Party entitled to the payment evidence reasonably
satisfactory to that Finance Party that the Tax Deduction has been made or (as
applicable) any appropriate payment paid to the relevant taxing authority.
(f) Each Lender shall use reasonable endeavours to co-operate with the Borrower
in (i) completing any necessary procedural formalities; and (ii) providing such
other necessary assistance as the Borrower may reasonably require, for the
Borrower to obtain authorisation to make payments to the Lender without a, or
(as the case may be) with a reduced, Tax Deduction.
12.3 Notes Tax gross-up
If a Tax Deduction is required to be made by any Lender who is the SPV:
(a) such Lender shall, as soon as reasonably practicable upon becoming so aware,
notify the Borrower accordingly, and provide the Borrower with a certificate
describing in reasonable detail the basis for such Tax Deduction and any
additional amounts required to be paid by the Borrower to the Lender pursuant
to this Clause 12.3; and
(b) the Borrower shall, not later than 10.00am (New York City time) one Business
Day prior to the date on which the relevant payment is due, pay in same-day
funds to the Agent an amount which will enable the Lender who is the SPV
(after making the Tax Deduction) to pay an amount equal to the payment
which would have been due if no Tax Deduction had been required.
12.4 Tax indemnity
(a) If a Protected Party is or will be subject to any liability or required to make
any payment for or on account of Tax in relation to any sum received or
receivable (or any sum deemed for Tax purposes to be received or receivable)
under any Finance Document, the Borrower shall (within three Business Days
of demand by the Agent) pay to a Protected Party an amount equal to the loss,
liability or cost which that Protected Party determines will be or has been
(directly or indirectly) suffered for or on account of Tax by that Protected
Party in respect of a Finance Document.
(b) Paragraph (a) above shall not apply:
(i) with respect to any Tax assessed on a Finance Party:
(A) under the law of the jurisdiction in which that Finance Party is
incorporated or, if different, the jurisdiction (or jurisdictions) in
which that Finance Party is treated as resident for tax purposes;
or
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(B) under the law of the jurisdiction in which that Finance Party's
Facility Office is located in respect of amounts received or
receivable in that jurisdiction,
if that Tax is imposed on or calculated by reference to the net income
received or receivable (but not any sum deemed to be received or
receivable) by that Finance Party; or
(ii) to the extent a loss, liability or cost is compensated for by an increased
payment under Clause 12.2 (Tax gross-up) or Clause 12.3 (Notes tax
gross-up).
(c) A Protected Party making, or intending to make a claim under paragraph (a)
above shall promptly notify the Agent of the event which will give, or has
given, rise to the claim, following which the Agent shall notify the Borrower.
(d) A Protected Party shall, on receiving a payment from the Borrower under this
Clause 12.3, notify the Agent.
12.5 Tax Credit
If the Borrower makes a Tax Payment and the relevant Finance Party determines that:
(a) a Tax Credit is attributable either to an increased payment of which that Tax
Payment forms part, or to that Tax Payment; and
(b) that Finance Party has obtained, utilised and retained that Tax Credit,
the Finance Party shall pay an amount to the Borrower which that Finance Party
determines, in its sole discretion, will leave it (after that payment) in the same after-
Tax position as it would have been in had the Tax Payment not been required to be
made by the Borrower.
12.6 Stamp taxes
The Borrower shall pay and, within three Business Days of demand, indemnify each
Finance Party against any cost, loss or liability that Finance Party incurs in relation to
all stamp duty, registration and other similar Taxes payable in respect of any Finance
Document.
12.7 VAT
(a) All amounts set out, or expressed in a Finance Document to be payable by any
Party to a Finance Party which (in whole or in part) constitute the
consideration for a supply or supplies for VAT purposes shall be deemed to be
exclusive of any VAT which is chargeable on such supply or supplies, and
accordingly, subject to paragraph (b) below, if VAT is or becomes chargeable
on any supply made by any Finance Party to any Party under a Finance
Document, that Party shall pay to the Finance Party (in addition to and at the
same time as paying any other consideration for such supply) an amount equal
to the amount of such VAT (and such Finance Party shall promptly provide an
appropriate VAT invoice to such Party).
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(b) If VAT is or becomes chargeable on any supply made by any Finance Party
(the "Supplier") to any other Finance Party (the "Recipient") under a Finance
Document, and any Party other than the Recipient (the "Subject Party") is
required by the terms of any Finance Document to pay an amount equal to the
consideration for such supply to the Supplier (rather than being required to
reimburse the Recipient in respect of that consideration), such Party shall also
pay to the Supplier (in addition to and at the same time as paying such
amount) an amount equal to the amount of such VAT. The Recipient will
promptly pay to the Subject Party an amount equal to any credit or repayment
obtained by the Recipient from the relevant tax authority which the Recipient
reasonably determines is in respect of such VAT.
(c) Where a Finance Document requires any Party to reimburse or indemnify a
Finance Party for any cost or expense, that Party shall reimburse or indemnify
(as the case may be) such Finance Party for the full amount of such cost or
expense, including such part thereof as represents VAT, save to the extent that
such Finance Party reasonably determines that it is entitled to credit or
repayment in respect of such VAT from the relevant tax authority.
(d) Any reference in this Clause 12.7 to any Party shall, at any time when such
Party is treated as a member of a group for VAT purposes, include (where
appropriate and unless the context otherwise requires) a reference to the
representative member of such group at such time (the term "representative
member" to have the same meaning as in the Value Added Tax Act 1994).
13. INCREASED COSTS
13.1 Increased costs
(a) Subject to Clause 13.3 (Exceptions) the Borrower shall, within three Business
Days of a demand by the Agent, pay for the account of a Finance Party the
amount of any Increased Costs incurred by that Finance Party or any of its
Affiliates as a result of:
(i) the introduction of or any change in (or in the interpretation,
administration or application of) any law or regulation after the date of
this Agreement;
(ii) compliance with any law or regulation made after the date of this
Agreement; or
(iii) the implementation or application of, or compliance with, Basel III or
any law or regulation that implements or applies Basel III.
(b) In this Agreement:
(i) "Increased Costs" means:
(A) a reduction in the rate of return from the Facility or on a
Finance Party's (or its Affiliate's) overall capital;
(B) an additional or increased cost; or
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(C) a reduction of any amount due and payable under any Finance
Document,
which is incurred or suffered by a Finance Party or any of its Affiliates
to the extent that it is attributable to that Finance Party having entered
into its Commitment or funding or performing its obligations under
any Finance Document; and
(ii) "Basel III" means:
(A) the agreements on capital requirements, a leverage ratio and
liquidity standards contained in "Basel III: A global regulatory
framework for more resilient banks and banking systems",
"Basel III: International framework for liquidity risk
measurement, standards and monitoring" and "Guidance for
national authorities operating the countercyclical capital buffer"
published by the Basel Committee on Banking Supervision on
16 December 2010, each as amended, supplemented or
restated; and
(B) any further guidance or standards published by the Basel
Committee on Banking Supervision relating to Basel III.
13.2 Increased cost claims
(a) A Finance Party intending to make a claim pursuant to Clause 13.1 (Increased
costs) shall notify the Agent of the event giving rise to the claim, following
which the Agent shall promptly notify the Borrower.
(b) Each Finance Party shall, as soon as practicable after a demand by the Agent,
provide a certificate confirming the amount of its Increased Costs.
13.3 Exceptions
(a) Clause 13.1 (Increased costs) does not apply to the extent any Increased Cost
is:
(i) attributable to a Tax Deduction required by law to be made by the
Borrower;
(ii) compensated for by Clause 12.3 (Tax indemnity);
(iii) compensated for by the payment of the Mandatory Cost; or
(iv) attributable to the wilful breach by the relevant Finance Party or its
Affiliates of any law or regulation.
(b) In this Clause 13.3, a reference to a "Tax Deduction" has the same meaning
given to the term in Clause 12.1 (Definitions).
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14. OTHER INDEMNITIES
14.1 Currency indemnity
(a) If any sum due from the Borrower under the Finance Documents (a "Sum"),
or any order, judgment or award given or made in relation to a Sum, has to be
converted from the currency (the "First Currency") in which that Sum is
payable into another currency (the "Second Currency") for the purpose of:
(i) making or filing a claim or proof against the Borrower;
(ii) obtaining or enforcing an order, judgment or award in relation to any
litigation or arbitration proceedings,
the Borrower shall as an independent obligation, within three Business Days
of demand, indemnify each Finance Party to whom that Sum is due against
any cost, loss or liability arising out of or as a result of the conversion
including any discrepancy between (A) the rate of exchange used to convert
that Sum from the First Currency into the Second Currency and (B) the rate or
rates of exchange available to that person at the time of its receipt of that Sum.
(b) The Borrower waives any right it may have in any jurisdiction to pay any
amount under the Finance Documents in a currency or currency unit other than
that in which it is expressed to be payable.
14.2 Other indemnities
The Borrower shall, within three Business Days of demand, indemnify each Finance
Party against any cost, loss or liability incurred by that Finance Party as a result of:
(a) the occurrence of any Event of Default;
(b) a failure by the Borrower to pay any amount due under a Finance Document
on its due date, including any cost, loss or liability arising as a result of
Clause 26 (Sharing among the Lenders) or because of non-compliance with
paragraph (f) of Clause 27.1 (Payments to the Agent or the Account Bank); or
(c) a Loan (or part of a Loan) not being prepaid in accordance with a notice of
prepayment given by the Borrower.
14.3 Indemnity to the Agent
The Borrower shall promptly indemnify the Agent against any cost, loss or liability
incurred by the Agent (acting reasonably) as a result of:
(a) investigating any event which it reasonably believes is a Default; or
(b) acting or relying on any notice, request or instruction which it reasonably
believes to be genuine, correct and appropriately authorised.
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14.4 Unwind indemnity
The Borrower shall, within three Business Days of demand by the Agent, indemnify
each Lender against any cost, loss, expense or liability suffered or incurred by such
Lender as a result of (each an "Unwind Cost"):
(a) funding, or making arrangements to fund, its participation in a Loan but not
made by reason of the operation of any one or more of the provisions of this
Agreement (other than by reason of wilful default or negligence by such
Lender alone or by reason of the requirements in paragraph (b) of Clause 4.2
(Further conditions precedent) not being satisfied);
(b) any payment of the Borrower of principal or interest under this Agreement
(whether a repayment, prepayment or otherwise other than any prepayment
pursuant to Clause 7.1 (Illegality) being made other than on the Maturity Date,
or the last day of an Interest Period in respect of an amount equal to the
amount so due on that date and in the currency so due,
including in each of such cases any and all Unwind Costs in liquidating or
redeploying deposits or funds acquired or contracted for to fund, make or maintain
any Commitment or participation in a Loan and/or breakage costs and any and all
other Unwind Costs suffered by any of the Lenders arising out of termination or
unwinding any derivative contract or other hedging arrangements as a result of the
circumstances specified in paragraphs (a) or (b) of this Clause 14.4.
14.5 SPV indemnity
(a) In consideration for the role of the SPV in respect of funding its participation
in a Loan through an issuance of SPV Notes, the Borrower shall, within three
Business Days of demand, indemnify the Lender which is the SPV and each of
its respective officers, directors, employees and representatives (each an "SPV
Indemnified Party") from and against any and all claims, damages, losses,
liabilities, costs and expenses (including legal expenses) (altogether "Losses"),
joint or several, that may be incurred by or asserted or awarded against an
SPV Indemnified Party, in each case arising out of or in connection with or
relating to any claim, investigation, litigation or proceeding (or the preparation
of any defence with respect thereto) commenced or threatened wholly or
partly in relation to this Agreement, the Trust Deed (including any supplement
thereto), the Agency Agreement or the applicable SPV Notes and such Losses
shall include without limitation any Losses payable by the SPV to the Note
Trustee under or in connection with the Trust Deed (including any Supplement
thereto), the Agency Agreement, the SPV Notes or any other document
pursuant to which such Losses may arise, except to the extent such Losses are
found to have resulted from the SPV Indemnified Party's fraud, gross
negligence or wilful default.
(b) Amounts payable by the Borrower to any Lender pursuant to this Clause 14.5
shall be payable directly to the applicable Lender to an account or accounts to
be notified by the applicable Lender from time to time and shall not be subject
to the payment mechanics described in Clause 27 (Payment Mechanics) or be
subject to Clause 26 (Sharing among the Lenders).
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(c) Each of the Note Trustee, the Noteholders and any other party to an Issue
Document may rely on this Clause 14.5 subject to the terms hereof and
Clause 1.4 (Third party rights) and the provisions of the Third Parties Act.
15. MITIGATION BY THE LENDERS
15.1 Mitigation
(a) Each Finance Party shall, in consultation with the Borrower, take all
reasonable steps to mitigate any circumstances which arise and which would
result in any amount becoming payable under or pursuant to, or cancelled
pursuant to, any of Clause 7.1 (Illegality), Clause 12 (Tax gross-up and
indemnities), Clause 13 (Increased costs) or paragraph 3 of Schedule 3
(Mandatory Cost Formulae) including transferring its rights and obligations
under the Finance Documents to another Affiliate or Facility Office.
(b) Paragraph (a) above does not in any way limit the obligations of the Borrower
under the Finance Documents.
15.2 Limitation of liability
(a) The Borrower shall promptly indemnify each Finance Party for all costs and
expenses reasonably incurred by that Finance Party as a result of steps taken
by it under Clause 15.1 (Mitigation).
(b) A Finance Party is not obliged to take any steps under Clause 15.1
(Mitigation) if, in the opinion of that Finance Party (acting reasonably), to do
so might be prejudicial to it.
16. COSTS AND EXPENSES
16.1 Transaction expenses
Subject to any caps agreed in writing between the Borrower and the Agent, the
Borrower shall promptly on demand pay the Agent and the Arranger the amount of all
costs and expenses (including legal fees) reasonably incurred by any of them in
connection with the negotiation, preparation, printing, execution and syndication of:
(a) this Agreement and any other documents referred to in this Agreement; and
(b) any other Finance Documents executed after the date of this Agreement.
The aggregate amount of costs and expenses (including legal fees) referred to in this
Clause 16.1 (plus any VAT), may be deducted by the Agent from the amount of a
Loan to be advanced to the Borrower on a Utilisation Date to the extent such fees are
then due and payable. Notwithstanding such deduction the Borrower shall be liable to
repay the full amount of that Loan.
16.2 Amendment costs
If (a) the Borrower requests an amendment, waiver or consent; (b) an amendment is
required pursuant to Clause 2.2 (Facility Increase); (c) an amendment is required
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pursuant to Clause 8.4 (Conversion further assurances); or (d) an amendment is
required pursuant to Clause 27.9 (Change of currency), the Borrower shall, within
three Business Days of demand, reimburse each Finance Party for the amount of all
costs and expenses (including legal fees) reasonably incurred by that Finance Party in
responding to, evaluating, negotiating or complying with that request or requirement.
For the avoidance of doubt and without limitation, such costs and expenses in relation
to any Lender which is the SPV shall include any costs and expenses which such
Lender is required to pay to the Note Trustee pursuant to the terms of the Trust Deed
and/or any agent pursuant to the terms of any Agency Agreement.
16.3 Enforcement costs
The Borrower shall, within three Business Days of demand, pay to each Finance Party
the amount of all costs and expenses (including legal fees) incurred by it (and, if the
SPV is a Lender, the Note Trustee, the Noteholders and any other party to an Issue
Document) in connection with the enforcement of, or the preservation of any rights
under, any Finance Document.
16.4 Reliance
Each of the Note Trustee, the Noteholders and any other party to an Issue Document
may rely on this Clause 16 subject to the terms hereof and Clause 1.4 (Third party
rights) and the provisions of the Third Parties Act.
SECTION 7
REPRESENTATIONS, UNDERTAKINGS AND EVENTS OF DEFAULT
17. REPRESENTATIONS
The Borrower makes the representations and warranties set out in this Clause 17 to
each Finance Party on the date of this Agreement.
17.1 Status
(a) It is a bank (credit institution) within the meaning of article 2, paragraph (1) of
the Bulgarian Credit Institutions Act 2007, duly incorporated and validly
existing under, the laws of Bulgaria.
(b) It has the power to own its assets and carry on its business as it is being
conducted.
17.2 Binding obligations
Subject to the Legal Reservations, the obligations expressed to be assumed by it in
each Finance Document are legal, valid, binding and enforceable obligations.
17.3 Non-conflict with other obligations
The entry into and performance by it of, and the transactions contemplated by, the
Finance Documents do not and will not conflict with:
(a) any law or regulation applicable to it;
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(b) the articles of association of, or any internal regulation or protocol of it; or
(c) any agreement or instrument binding upon it or any of its assets which has or
would reasonably be expected to have a Material Adverse Effect.
17.4 Power and authority
It has the power to enter into, perform and deliver, and has taken all necessary action
to authorise its entry into, performance and delivery of, the Finance Documents to
which it is a party and the transactions contemplated by those Finance Documents.
17.5 Validity and admissibility in evidence and Certified Copies
(a) All Authorisations required:
(i) to enable it lawfully to enter into, exercise its rights and comply with
its obligations in the Finance Documents to which it is a party; and
(ii) to make the Finance Documents to which it is a party admissible in
evidence in its Relevant Jurisdictions,
have been obtained or effected and are in full force and effect.
(b) Any document provided to a Finance Party by or on behalf of the Borrower
which purports to be a Certified Copy is a true, complete and accurate copy of
the original document which has not been amended other than by a document
a Certified Copy of which is attached to it.
17.6 Insolvency
No:
(a) corporate action, legal proceeding or other procedure or step described in
paragraph (a) of Clause 21.8 (Insolvency proceedings); or
(b) creditors' process described in Clause 21.9 (Creditors' process),
has been taken or, to its knowledge, threatened in relation it or any Material Company
and none of the circumstances described in Clause 21.7 (Insolvency) applies to it or
any Material Company.
17.7 Governing law and enforcement
(a) Subject to the Legal Reservations, the choice of English law as the governing
law of the Finance Documents will be recognised and enforced in its Relevant
Jurisdictions.
(b) Subject to the Legal Reservations, any judgment obtained in England in
relation to a Finance Document will be recognised and enforced in its
Relevant Jurisdictions.
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17.8 Deduction of Tax
Subject to the relevant Finance Party obtaining clearance under the relevant double
tax treaty, it is not required by any applicable law to make any deduction for or on
account of Tax from any payment it may make under any Finance Document to a
Lender.
17.9 No filing or stamp taxes
Under the law of its Relevant Jurisdictions, other than the Filing, it is not necessary
that the Finance Documents be filed, recorded or enrolled with any court or other
authority in that jurisdiction or that any stamp, registration or similar tax be paid on or
in relation to the Finance Documents or the transactions contemplated by the Finance
Documents.
17.10 No default
(a) No Event of Default is continuing or might reasonably be expected to result
from the making of any Utilisation.
(b) No other event or circumstance is outstanding which constitutes a default
under any other agreement or instrument which is binding on it or to which its
assets are subject which has or would reasonably be expected to have a
Material Adverse Effect.
17.11 No misleading information
(a) All material information provided to a Finance Party by or on behalf of the
Borrower in connection with this Agreement on or before the date of this
Agreement and not superseded before that date is accurate and not misleading
in any material respect and all projections provided to any Finance Party on or
before the date of this Agreement have been prepared in good faith on the
basis of assumptions which were reasonable at the time at which they were
prepared and supplied.
(b) All other written information provided by the Borrower (including its
advisers) to a Finance Party was true, complete and accurate in all material
respects as at the date it was provided and is not misleading in any respect.
17.12 Original Financial Statements
(a) Its Original Financial Statements were prepared in accordance with IFRS
consistently applied.
(b) Its Original Financial Statements fairly represent its financial condition and
operations during the relevant financial year.
(c) There has been no material adverse change in its business or the consolidated
financial condition of the Group since the date on which the Original Financial
Statements are stated to have been prepared.
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17.13 Pari passu ranking
Its payment obligations under the Finance Documents rank at least pari passu with
the claims of all its other unsecured and unsubordinated creditors, except for
obligations mandatorily preferred by law applying to companies generally.
17.14 No proceedings pending or threatened
No litigation, arbitration or administrative proceedings of or before any court, arbitral
body or agency which, if adversely determined, might reasonably be expected to have
a Material Adverse Effect has (to the best of its knowledge and belief) been started or
threatened against it (or against its directors).
17.15 No breach of laws
It has not breached any law or regulation which breach has or is reasonably likely to
have a Material Adverse Effect.
17.16 Security
No Security exists over all or any of its present or future assets other than any
Security permitted under Clause 20.3 (Negative pledge).
17.17 Good title to assets
It has good, valid and marketable title to, or valid leases or licences of, and all
appropriate Authorisations to use, the assets necessary to carry on its business as
presently conducted.
17.18 Private and commercial acts
Its execution of the Finance Documents constitutes, and its exercise of its rights and
performance of its obligations under this Agreement will constitute, private and
commercial acts done and performed for private and commercial purposes.
17.19 Banking Act
Neither it nor any member of the Group is a bank, a holding company of a bank, a
building society or a credit union, or a group undertaking of any such entities as such
terms are defined in Part 1 of the Banking Act 2009.
17.20 Restrictive Measures
(a) None of the Borrower nor, so far as it is aware, any person acting on behalf of
the Borrower is currently a target of any economic sanctions administered by
the Office of Foreign Assets Control of the US Department of Treasury or any
sanction measures imposed by the United Nations Security Council, the
European Union or Her Majesty's Treasury (a "Sanctions Target").
(b) The Borrower is in compliance with all financial record keeping, reporting
requirements and anti-money laundering laws and regulations to which it is
subject and no action, suit or proceeding by or before any court or
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governmental agency, authority or body or any arbitrator involving Bulgaria
with respect to money laundering laws is pending and, so far as it is aware, no
such actions, suits or proceedings are threatened or contemplated.
(c) Neither the Borrower nor, so far as it is aware, any person acting on behalf of
the Borrower has engaged in any activity or conduct which would violate any
applicable anti-bribery or anti-corruption law or regulation (including the US
Foreign Corrupt Practices Act of 1977), which would be material in the
context of the Finance Documents.
(d) The Borrower has instituted and maintains policies and procedures designed to
prevent violation, which would be material in the context of the Finance
Documents, of such laws, regulations and rules by the Borrower and by
persons associated with the Borrower.
17.21 Centre of main interests and establishments
(a) It has its "centre of main interests" (as that term is used in Article 3(1) of The
Council of the European Union Regulation No. 1346/2000 on Insolvency
Proceedings (the "Regulation") in the country of its incorporation.
(b) It has an "establishment" (as that term is used in Article 2(h) of the
Regulation) in the country set out in the country of its incorporation.
17.22 No adverse consequences
(a) It is not necessary under the laws of its Relevant Jurisdictions:
(i) in order to enable any Finance Party to enforce its rights under any
Finance Document; or
(ii) by reason of the execution of any Finance Document or the
performance by it of its obligations under any Finance Document,
that any Finance Party should be licensed, qualified or otherwise entitled to
carry on business in any of its Relevant Jurisdictions.
(b) No Finance Party is or will be deemed to be resident, domiciled or carrying on
business in its Relevant Jurisdictions by reason only of the execution,
performance and/or enforcement of any Finance Document.
17.23 Repetition
The Repeating Representations are deemed to be made by the Borrower (by reference
to the facts and circumstances then existing) on the date of a Utilisation Request and
the first day of each Interest Period.
18. INFORMATION UNDERTAKINGS
The undertakings in this Clause 18 remain in force from the date of this Agreement
for so long as any amount is outstanding under the Finance Documents or any
Commitment is in force.
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18.1 Financial statements
(a) The Borrower shall supply to the Agent in sufficient copies for all the
Lenders:
(i) as soon as the same become available, but in any event within 90 days
after the end of each of its financial years, its audited consolidated
financial statements for that financial year; and
(ii) as soon as the same become available, but in any event within 60 days
after the end of each half of each of its financial years, its consolidated
financial statements for that financial half year; and
(iii) as soon as the same become available, but in any event within 60 days
after the end of each quarter of each of its financial years, its
consolidated financial statements for that period.
(b) The financial statements referred to in paragraph (a) shall be deemed to have
been supplied to a Website Lender when published on the Borrower's Official
Website or other Designated Website so long as a Website Lender is able to
view the same without restriction.
18.2 Compliance Certificate
(a) The Borrower shall supply to the Agent:
(i) with each set of financial statements delivered pursuant to Clause 18.1
(Financial statements); and
(ii) otherwise, promptly on the reasonable request of the Agent,
a Compliance Certificate setting out (in reasonable detail) computations as to
compliance with Clause 19 (Financial Covenants) as at the date at which the
most recent such financial statements were drawn up and the identities of each
Material Company.
(b) Each Compliance Certificate shall be signed by two authorised signatories of
the Borrower and, if required to be delivered with the financial statements
delivered pursuant to Clause 18.1 (Financial statements), shall be reported on
by the Auditors in such form agreed by the Borrower and the Majority
Lenders from time to time.
18.3 Requirements as to financial statements
(a) Each set of financial statements delivered by the Borrower pursuant to
Clause 18.1 (Financial statements) shall be certified by a director of the
relevant company as fairly representing its financial condition as at the date at
which those financial statements were drawn up.
(b)
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(i) The Borrower shall procure that each set of financial statements
delivered pursuant to Clause 18.1 (Financial statements) is prepared in
English using IFRS and accounting practices and financial reference
periods consistent with those applied in the preparation of the Original
Financial Statements unless, in relation to any set of financial
statements, it notifies the Agent that there has been a change in IFRS
or the accounting practices or reference periods, and its auditors
deliver to the Agent:
(A) a description of any change necessary for those financial
statements to reflect the IFRS, accounting practices and
reference periods upon which the Original Financial Statements
were prepared; and
(B) sufficient information, in form and substance as may be
reasonably required by the Agent, to enable the Lenders to
determine whether Clause 19 (Financial Covenants) has been
complied with and make an accurate comparison between the
financial position indicated in those financial statements and
the Original Financial Statements.
(ii) If the Borrower notifies the Agent of a change in accordance with
paragraph (i) above then the Borrower and Agent shall enter into
negotiations in good faith with a view to agreeing:
(A) whether or not the change might result in any material
alteration in the commercial effect of any of the terms of this
Agreement; and
(B) if so, any amendments to this Agreement which may be
necessary to ensure that the change does not result in any
material alteration in the commercial effect of those terms,
and if any amendments are agreed they shall take effect and be binding
on each of the Parties in accordance with their terms.
Any reference in this Agreement to "those financial statements" shall be
construed as a reference to those financial statements as adjusted to reflect the
basis upon which the Original Financial Statements were prepared.
18.4 Information: miscellaneous
The Borrower shall supply to the Agent (in sufficient copies for all the Lenders, if the
Agent so requests):
(a) copies of all documents which it is required by law to dispatch to its
shareholders (or any class of them) or which are in fact dispatched to its
creditors generally, in each case at the same time as they are dispatched;
(b) promptly upon becoming aware of them, the details of any litigation,
arbitration or administrative proceedings which are current, threatened or
pending against it or any Material Company (or against its directors or the
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directors of any Material Company), and which might, if adversely
determined, have a Material Adverse Effect; and
(c) promptly, such further information regarding the financial condition, business
and operations of any member of the Group as any Finance Party (through the
Agent) may reasonably request.
18.5 Notification of default
(a) The Borrower shall notify the Agent of any Default (and the steps, if any,
being taken to remedy it) promptly upon becoming aware of its occurrence.
(b) Promptly upon a request by the Agent, the Borrower shall supply to the Agent
a certificate signed by two of its directors or senior officers on its behalf
certifying that no Default is continuing (or if a Default is continuing,
specifying the Default and the steps, if any, being taken to remedy it).
18.6 Borrower Noteholdings
If the SPV becomes a Lender and SPV Notes are issued, the Borrower shall, as soon
as reasonably practicable after a written request by the Agent or Note Trustee, furnish
the Agent or Note Trustee (as applicable) with a certificate signed by an authorised
signatory of the Borrower setting out the total number of SPV Notes:
(a) which, at the date of such certificate, are held by the Borrower and, to the best
of the Borrower's knowledge, any of the Borrower's Affiliates for their
account; and
(b) in respect of which, at the date of such certificate, the Borrower and, to the
best of the Borrower's knowledge, any of the Borrower's Affiliates have a
beneficial, legal or economic interest, risk or exposure.
Each of the Note Trustee, the Noteholders and any other party to an Issue Document
may rely on this Clause 18.6 subject to the terms hereof and Clause 1.4 (Third party
rights) and the provisions of the Third Parties Act.
18.7 Use of websites
(a) The Borrower may satisfy its obligation under this Agreement to deliver any
information in relation to those Lenders ( the "Website Lenders") who accept
this method of communication by posting this information onto the Borrower's
Official Website or another electronic website designated by the Borrower and
the Agent (a "Designated Website") if:
(i) the Agent expressly agrees (after consultation with each of the
Lenders) that it will accept communication of the information by this
method (which consent is hereby given in the case of information to be
provided under Clause 18.1(Financial statements));
(ii) both the Borrower, the Agent and each Lender are aware of the address
of and any relevant password specifications for the Designated
Website; and
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(iii) (other than information to be provided under Clause 18.1(Financial
statements)) the information is in a format previously agreed between
the Borrower and the Agent.
If any Lender (a "Paper Form Lender") does not agree to the delivery of
information electronically then the Agent shall notify the Borrower
accordingly and the Borrower shall supply the information to the Agent (in
sufficient copies for each Paper Form Lender) in paper form. In any event the
Borrower shall supply the Agent with at least one copy in paper form of any
information required to be provided by it.
(b) The Agent shall supply each Website Lender with the address of and any
relevant password specifications for the Designated Website following
designation of that website by the Borrower and the Agent (if not already
referred to in this Agreement).
(c) The Borrower shall promptly upon becoming aware of its occurrence notify
the Agent if:
(i) the Designated Website cannot be accessed due to technical failure;
(ii) the password specifications for the Designated Website change;
(iii) any new information which is required to be provided under this
Agreement is posted onto the Designated Website;
(iv) any existing information which has been provided under this
Agreement and posted onto the Designated Website is amended; or
(v) the Borrower becomes aware that the Designated Website or any
information posted onto the Designated Website is or has been infected
by any electronic virus or similar software.
If the Borrower notifies the Agent under paragraph (c)(i) or paragraph (c)(v)
above, all information to be provided by the Borrower under this Agreement
after the date of that notice shall be supplied in paper form unless and until the
Agent and each Website Lender is satisfied that the circumstances giving rise
to the notification are no longer continuing.
(d) Any Website Lender may request, through the Agent, one paper copy of any
information required to be provided under this Agreement which is posted
onto the Designated Website. The Borrower shall comply with any such
request within ten Business Days.
18.8 "Know your customer" checks
(a) If:
(i) the introduction of or any change in (or in the interpretation,
administration or application of) any law or regulation made after the
date of this Agreement;
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(ii) any change in the status of the Borrower or the composition of the
shareholders of the Borrower after the date of this Agreement; or
(iii) a proposed assignment or transfer by a Lender of any of its rights and
obligations under this Agreement to a party that is not a Lender prior to
such assignment or transfer,
obliges the Agent or any Lender (or, in the case of paragraph (iii) above, any
prospective new Lender) to comply with "know your customer" or similar
identification procedures in circumstances where the necessary information is
not already available to it, the Borrower shall promptly upon the request of the
Agent or any Lender supply, or procure the supply of, such documentation and
other evidence as is reasonably requested by the Agent (for itself or on behalf
of any Lender) or any Lender (for itself or, in the case of the event described
in paragraph (iii) above, on behalf of any prospective new Lender) in order for
the Agent, such Lender or, in the case of the event described in paragraph (iii)
above, any prospective new Lender to carry out and be satisfied it has
complied with all necessary "know your customer" or other similar checks
under all applicable laws and regulations pursuant to the transactions
contemplated in the Finance Documents.
(b) Each Lender shall promptly upon the request of the Agent supply, or procure
the supply of, such documentation and other evidence as is reasonably
requested by the Agent (for itself) in order for the Agent to carry out and be
satisfied it has complied with all necessary "know your customer" or other
similar checks under all applicable laws and regulations pursuant to the
transactions contemplated in the Finance Documents.
19. FINANCIAL COVENANTS
19.1 Financial definitions
In this Clause 19:
"Capital Adequacy Ratio" means at any time the ratio calculated on the basis of the
consolidated financial statements, prepared in accordance with IFRS, expressed as a
percentage, which the Borrower's capital bears to its risk weighted assets provided
that all such terms used in this definition (or equivalent concepts) are to be
interpreted in accordance with and subject to the provisions of the CRD.
"CRD" means the Capital Requirements Directives (2006/48/EC and 2006/49/EC)
(as amended or supplemented by the European Commission from time to time).
"Relevant Period" means each period of twelve months ending on the last day of the
Borrower's financial year or the last day of each quarter of the Borrower's financial
year.
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19.2 Financial condition
The Borrower shall ensure that it has a Capital Adequacy Ratio at all times during
each Relevant Period being not less than the higher of:
(a) that specified from time to time by the Central Bank plus 0.2 per cent.; and
(b) that required by applicable European law.
19.3 Financial testing
The financial covenants set out in Clause 19.2 (Financial condition) shall be tested by
reference to each of the financial statements and/or each Compliance Certificate
delivered pursuant to Clause 18.2 (Compliance Certificate).
19.4 Calculation of financial covenants
For the purposes of this Clause 19 (Financial Covenants), the Capital Adequacy Ratio
shall be interpreted according to the definition in this Agreement and shall be
calculated on the basis of consolidated figures prepared in accordance with IFRS.
20. GENERAL UNDERTAKINGS
The undertakings in this Clause 20 remain in force from the date of this Agreement
for so long as any amount is outstanding under the Finance Documents or any
Commitment is in force.
20.1 Authorisations
The Borrower shall promptly:
(a) obtain, comply with and do all that is necessary to maintain in full force and
effect; and
(b) supply certified copies to the Agent of,
any Authorisation required under any law or regulation of its jurisdiction of
incorporation to enable it to perform its obligations under the Finance Documents and
to ensure the legality, validity, enforceability or admissibility in evidence in its
Relevant Jurisdictions of any Finance Document.
20.2 Compliance with laws
(a) Without prejudice to paragraph (b), the Borrower shall comply in all respects
with all laws to which it may be subject, if failure so to comply would
materially impair its ability to perform its obligations under the Finance
Documents.
(b) The Borrower shall comply in all respects with:
(i) the Bulgarian Credit Institutions Act 2007 and all related laws
(including the laws of Bulgaria and the European Union); and
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(ii) all applicable regulations (including any prudential supervision ratios)
promulgated from time to time by the Central Bank.
20.3 Negative pledge
In this Clause 20.3, "Quasi-Security" means an arrangement or transaction described
in paragraph (b) below.
(a) The Borrower shall not create or permit to subsist any Security over any of its
assets.
(b) The Borrower shall not:
(i) sell, transfer or otherwise dispose of any of its assets on terms whereby
they are or may be leased to or re-acquired by it;
(ii) sell, transfer or otherwise dispose of any of its receivables on recourse
terms;
(iii) enter into any arrangement under which money or the benefit of a bank
or other account may be applied, set-off or made subject to a
combination of accounts; or
(iv) enter into any other preferential arrangement having a similar effect,
in circumstances where the arrangement or transaction is entered into
primarily as a method of raising Financial Indebtedness or of financing the
acquisition of an asset.
(c) Paragraphs (a) and (b) above do not apply to:
(i) any liens or rights of set-off arising by operation of law and in the
ordinary course of its banking or financial activities and transactions,
including any rights of set-off with respect to demand or time deposits
maintained with financial institutions and bankers' liens with respect to
property of the Borrower held by financial institutions;
(ii) any Security arising in the ordinary course of the banking or financial
activities and transactions of the Borrower and (a) which is necessary
in order to enable the Borrower to comply with any mandatory or
customary requirement imposed on it by a banking or other regulatory
authority in connection with the business of the Borrower or (b)
limited to deposits made in the name of the Borrower to secure
obligations of customers of the Borrower;
(iii) any Security arising pursuant to any agreement (or other applicable
terms and conditions) which is standard or customary in the relevant
market relating to the business undertaken by the Borrower (and not
for the purpose of raising credit or funds for the operation of the
Borrower other than on a short-term basis as part of the Borrower's
liquidity management activities) in connection with (a) contracts
entered into substantially simultaneously for sales and purchases of
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securities at market prices, (b) the establishment of margin deposits
and similar securities in connection with interest rate and foreign
currency hedging operations and trading in securities or (c) the
Borrower's foreign exchange dealings or other proprietary trading
activities including repos, total return swaps and similar banking
structures;
(iv) any Security in favour of international financial and security exchanges
and clearing houses or any clearing or settlement system or card
processing systems in which the Borrower participates or in favour of
any central banks or other financial supervisory or regulatory
authorities, which Security is a condition of participation in any such
financial or security exchange or clearing house or any such clearing or
settlement system;
(v) any Security or Quasi-Security arising under any retention of title, hire
purchase or conditional sale arrangement or arrangements having
similar effect in respect of goods supplied to a member of the
Borrower in the ordinary course of trading and on the supplier's
standard or usual terms and not arising as a result of any default or
omission by the Borrower;
(vi) any Security or Quasi-Security arising as a result of treasury
transactions (including any repurchase (Repo) transactions) in the
ordinary course of banking or financial activities and transactions of
the Borrower;
(vii) any Security or Quasi-Security granted over government bonds or
treasury bills arising from or in connection with any borrowing or
financial indebtedness of any member of the Group from multilateral
or supra-national financial institutions (including the European
Investment Bank) in favour of any such multilateral or supra-national
financing institution (including the European Investment Bank);
(viii) any Security or Quasi-Security arising due to any reserve and liquidity
maintenance requirements of any member of the Group as required by
a central bank and/or the Banking Regulation and Supervision Agency
or any other relevant regulatory authorities (as applicable) including,
for the avoidance of doubt, the blocking arrangement under paragraph
23 of the Transitional and Final Provisions of the Law on the State
Budget of the Republic of Bulgaria for 2011, implemented in favour of
the Central Bank and pertaining to the Borrower acting as a servicing
bank for Bulgarian national or municipal budgets;
(ix) any netting or set-off arrangement entered into by the Borrower in the
ordinary course of its banking arrangements for the purpose of netting
debit and credit balances of members of the Group provided that such
arrangements do not permit credit balances of the Borrower to be
netted or set off against debit balances of the relevant members of the
Group;
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(x) any payment or close out netting or set-off arrangement pursuant to
any hedging transaction entered into by the Borrower for the purpose
of:
(A) hedging any risk to which the Borrower is exposed in its
ordinary course of banking; or
(B) its interest rate or currency management operations which are
carried out in the ordinary course of banking and for non-
speculative purposes only;
excluding, in each case, any Security or Quasi-Security under a credit
support arrangement in relation to a hedging transaction;
(xi) any Security or Quasi-Security over or affecting any asset acquired by
the Borrower after the date of this Agreement if:
(A) the Security or Quasi-Security was not created in contemplation
of the acquisition of that asset by the Borrower;
(B) the principal amount secured has not been increased in
contemplation of, or since the acquisition of that asset by the
Borrower; and
(C) the Security or Quasi-Security is removed or discharged within
three months of the date of acquisition of such asset;
(xii) any Security created or permitted to subsist with the prior written
consent of the Agent; or
(xiii) any Security created or subsisting in favour of the Agent of any of its
Affiliates.
20.4 Merger
(a) The Borrower shall not enter into any amalgamation, demerger, merger,
consolidation or corporate reconstruction (which for the avoidance of doubt
would include a transformation of its corporate structure or legal entity) (a
"Reorganisation") without the prior written consent of the Agent.
(b) Paragraph (a) above does not apply to any Reorganisation in which the
following conditions are met:
(i) the Borrower will be the surviving legal entity of any such
Reorganisation on a solvent basis;
(ii) the Finance Documents shall at all times remain legal, valid,
binding and enforceable (and are confirmed in writing as such by
the Borrower and is supported by a legal opinion of counsel in
form and substance reasonably satisfactory to the Agent) including
prior to, and following any such Reorganisation; and
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(iii) to the extent any such Reorganisation involves any other legal
entity or person, the value of the consolidated tangible net worth of
each other legal entity or person at the time of the Reorganisation
is equal to not more than 5 per cent. of the consolidated tangible
net worth of the Borrower based on the most recent financial
statements of the Borrower delivered pursuant to Clause 18.1
(Financial statements).
20.5 Insurance
The Borrower shall maintain insurances on and in relation to its business and assets
with reputable underwriters or insurance companies against those risks and to the
extent as is usual for companies carrying on the same or substantially similar
business.
20.6 Taxation
The Borrower shall duly and punctually pay and discharge all Taxes imposed upon it
or its assets within the time period allowed without incurring penalties (except to the
extent that (a) such payment is being contested in good faith, (b) adequate reserves are
being maintained for those Taxes and (c) such payment can be lawfully withheld).
20.7 Arm's length basis
(a) The Borrower shall not enter into any transaction with any person (including
any Affiliates of the Borrower) except on arm's length terms.
(b) Paragraph (a) does not apply to any transaction where the total amount of
consideration is equal to or less than USD3,500,000 (or its equivalent in
another currency or currencies) in aggregate in any financial year of the
Borrower.
20.8 Acquisitions and investments
The Borrower shall not without the prior written consent of the Agent:
(a) establish or acquire any further Subsidiaries;
(b) acquire all or part of the business, assets or undertaking of any other person; or
(c) invest in any other person,
where the amounts payable (including associated costs and expenses) for the
establishment, acquisition or investment and any Financial Indebtedness or other
assumed actual or contingent liability, in each case remaining in the acquired or
"investee" person (or any such business) at the date of acquisition or investment
(when aggregated with the amounts payable (including associated costs and expenses)
for any other establishment, acquisition or investment and any Financial Indebtedness
or other assumed actual or contingent liability, in each case remaining in any such
acquired or "investee" persons or businesses at the time of acquisition or investment
in any financial year of the Borrower exceed USD60,000,000 (or its equivalent in
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another currency or currencies) or which has or is reasonably likely to have a Material
Adverse Effect.
20.9 Dividends
The Borrower shall not pay, make or declare any dividend or other equivalent
distribution in respect of any of its financial years.
20.10 Indebtedness
(a) The Borrower shall not incur, create or permit to subsist or have outstanding
any Financial Indebtedness or enter into any agreement or arrangement
whereby it is entitled to incur, create or permit to subsist any Financial
Indebtedness.
(b) Paragraph (a) above does not apply to any Financial Indebtedness:
(i) arising under or permitted by the Finance Documents; and/or
(ii) with any scheduled maturity date falling on a date on or before the
Maturity Date provided that the total amount of all such Financial
Indebtedness in aggregate does not exceed the Total Equity at any
time; or
(iii) with a scheduled maturity date falling on a date after the Maturity
Date.
For the purpose of this paragraph, Financial Indebtedness will be treated as
having a scheduled maturity date falling before the Maturity Date if (A) the
contract under which it is created or evidenced so provides; or (B) (whether or
not the relevant contract so provides) such Financial Indebtedness is
voluntarily or involuntarily demanded or amortised ahead of its scheduled
maturity and such demand or amortisation falls before the Maturity Date.
20.11 Pari passu ranking
The Borrower shall ensure that at all times any unsecured and unsubordinated claims
of a Finance Party against it under the Finance Documents rank at least pari passu
with the claims of all its other unsecured and unsubordinated creditors except those
creditors whose claims are mandatorily preferred by laws of general application to
companies.
20.12 Auditors
The Borrower shall maintain as its auditors the Auditors.
20.13 Financial year end
The Borrower shall not change its financial year end from 31 December without the
prior consent of the Agent.
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20.14 Restrictive measures
(a) The Borrower shall not lend, invest, contribute or otherwise make available
the proceeds of the offering of a Loan to or for the benefit of any then current
Sanctions Target.
(b) The Borrower shall comply with all financial record keeping, reporting
requirements and anti-money laundering laws and regulations to which it is
subject.
(c) The Borrower shall not engage in any activity or conduct which would violate
any applicable anti-bribery or anti-corruption law or regulation (including the
US Foreign Corrupt Practices Act of 1977), which would be material in the
context of the Finance Documents.
20.15 SPV Notes issuance
The Borrower will assist VTB Capital plc or any of its Affiliates acting as bookrunner
in respect of the issuance of any SPV Notes (the "Bookrunner") with the issuance
and placement of the SPV Notes as soon as possible and in any event within 90 days
of the date of this Agreement. Such assistance will include, inter alia:
(a) the provision of all information relating to the Borrower as may be necessary
in order to ensure that the Prospectus complies with the requirements of
Directive 2003/71/EC, as amended and the requirements of the relevant stock
exchange and competent authority by which the SPV Notes are to be admitted
to listing and trading;
(b) drafting of the Prospectus (and any other Issue Document specified by the
Bookrunner) by the Borrower's counsel and ensuring that: (i) the Prospectus
contains all information which is (in the context of the issue, offering and sale
of the SPV Notes) material; (ii) such information is true and accurate in all
material respects and is not misleading in any material respect; (iii) any
opinions, predictions or intentions expressed in the Prospectus are honestly
held or made and are not misleading in any material respect; (iv) the
Prospectus does not omit to state any material fact necessary to make such
information, opinions, predictions or intentions (in the context of the issue,
offering and sale of the SPV Notes) not misleading in any material respect; (v)
all proper enquiries are made to ascertain or verify the foregoing; (vi) the
Prospectus does not contain any untrue statement of a material fact nor does it
omit to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and
(vii) the Prospectus contains all such information as investors and their
professional advisers would reasonably require, and reasonably expect to find
there, for the purpose of making an informed assessment of the assets and
liabilities, financial position, profits and losses and prospects of the Borrower
and the Group and of the rights attaching to the SPV Notes;
(c) retaining Moody's (or S&P, Fitch or such other rating agency as determined by
the Bookrunner) for the purposes of receiving a rating for the SPV Notes
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wherein the Agent determines, acting reasonably, that the assistance of the
Borrower is necessary or desirable;
(d) making senior management available for the purpose of: (i) making
presentations to, or meeting, potential Noteholders; and (ii) all due diligence
meetings and calls with the senior management of the company in accordance
with the standard international capital markets practice;
(e) complying with any request by the Bookrunner to include the SPV Notes in an
appropriate European high yield debt securities index;
(f) using all reasonable endeavours to procure that the SPV Notes are admitted to
the official list of the Irish Stock Exchange and to trading on its regulated
market and to maintain such admission until none of the SPV Notes is
outstanding provided that if it is impracticable or unduly burdensome to
obtain or maintain such admission, the Borrower shall use all reasonable
endeavours to procure and maintain as aforesaid the admission to listing,
trading and/or quotation for the SPV Notes by such other competent
authorities, stock exchanges and/or quotation systems as it may (with the
approval of the Bookrunner) decide;
(g) entering into and delivering all such documentation as may be required by the
Bookrunner in connection with the issue, rating, offering and listing of the
SPV Notes, including, without limitation, a subscription agreement containing
representations, warranties and indemnities from the Borrower relating to,
inter alia, the Prospectus in favour of the Bookrunner, fee letters, listing forms
and declarations and all ancillary documents; and
(h) arranging for the delivery to the Bookrunner of comfort letters addressed to
the Bookrunner from the Auditors in a form acceptable to the Bookrunner and
such other documentary conditions precedent in connection with the issue,
offering and listing of the SPV Notes as the Bookrunner may request.
21. EVENTS OF DEFAULT
Each of the events or circumstances set out in this Clause 21 is an Event of Default
(save as for Clause 21.21 (Acceleration)).
21.1 Non-payment
The Borrower does not pay on the due date any amount payable pursuant to a Finance
Document at the place at and in the currency in which it is expressed to be payable
unless:
(a) its failure to pay is caused by:
(i) administrative or technical error; or
(ii) a Disruption Event; and
(b) payment is made within three Business Days of its due date.
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21.2 Financial covenants
Any requirement of Clause 19 (Financial Covenants) is not satisfied.
21.3 Notes issuance obligation
(a) The Borrower does not comply with, or the Agent determines in good faith
that the Borrower has not complied, with any provision of Clause 20.15 (SPV
Notes issuance) or request made pursuant thereto.
(b) No Event of Default under paragraph (a) above will occur if the Issue
Documents (including the Prospectus) are executed or completed (as
applicable) within 90 days of the date of this Agreement but the SPV Notes
are not issued within such period solely due to adverse market conditions (as
determined in the good faith opinion of the Agent).
21.4 Other obligations
(a) The Borrower does not comply with any provision of the Finance Documents
(other than those referred to in Clause 21.1 (Non-payment), Clause 19
(Financial Covenants) and Clause 21.3 (Notes issuance obligation)).
(b) No Event of Default under paragraph (a) above will occur if the failure to
comply is capable of remedy and is remedied within ten Business Days of the
earlier of (A) the Agent giving notice to the Borrower and (B) the Borrower
becoming aware of the failure to comply.
(c) Paragraph (b) does not apply to any failure to comply for which a cure period
or compliance period is already provided elsewhere in the Finance
Documents.
21.5 Misrepresentation
Any representation or statement made or deemed to be made by the Borrower in the
Finance Documents or any other document delivered by or on behalf of the Borrower
under or in connection with any Finance Document is or proves to have been incorrect
or misleading in any material respect when made or deemed to be made unless:
(i) the misrepresentation is classified in law as innocently made; and
(ii) the circumstances giving rise to the misrepresentation:
(A) are of a technical nature;
(B) are capable of remedy; and
(C) are remedied to the satisfaction of the Agent within ten (10) Business
Day of the earlier of the Agent giving written notice to the Borrower or
the Borrower becoming aware of the failure to comply.
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21.6 Cross default
(a) Any Financial Indebtedness of the Borrower or any Material Company is not
paid when due nor within any originally applicable grace period.
(b) Any Financial Indebtedness of the Borrower or any Material Company is
declared to be or otherwise becomes due and payable prior to its specified
maturity as a result of an event of default (however described).
(c) Any commitment for any Financial Indebtedness of the Borrower or any
Material Company is cancelled or suspended by a creditor of the Borrower or
that Material Company as a result of an event of default (however described).
(d) Any creditor of the Borrower or any Material Company becomes entitled to
declare any Financial Indebtedness of the Borrower or that Material Company
due and payable prior to its specified maturity as a result of an event of default
(however described).
(e) No Event of Default will occur under this Clause 21.6 if the aggregate amount
of Financial Indebtedness or commitment for Financial Indebtedness falling
within paragraphs (a) to (d) above is less than USD1,000,000 (or its equivalent
in any other currency or currencies).
21.7 Insolvency
(a) The Borrower or any Material Company which is a bank (credit institution) is
or becomes insolvent within the meaning of article 608 of the Bulgarian
Commerce Act 1991 (the "Commerce Act") or is or becomes over-indebted
within the meaning of Article 742, paragraph 1 of the Commerce Act or for
the purposes of the Banking Insolvency Act 2002 (as applicable).
(b) Any Material Company that is not a bank (credit institution) is or becomes
insolvent within the meaning of article of article 608 of the Commerce Act or
is or becomes over-indebted within the meaning of Article 742, paragraph 1 of
the Commerce Act.
(c) The Borrower or any Material Company is unable or admits inability to pay its
debts as they fall due, suspends making payments on any of its debts or, by
reason of actual or anticipated financial difficulties, commences negotiations
with one or more of its creditors with a view to rescheduling any of its
indebtedness.
(d) The value of the assets of the Borrower or any Material Company is less than
its liabilities (taking into account contingent and prospective liabilities).
(e) A moratorium is declared in respect of any indebtedness of the Borrower or
any Material Company.
21.8 Insolvency proceedings
Any corporate action, legal proceedings or other procedure or step is taken in relation
to:
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(a) the suspension of payments, a moratorium of any indebtedness, winding-up,
dissolution, administration, restructuring or reorganisation (by way of
voluntary arrangement, scheme of arrangement or otherwise) of the Borrower
or any Material Company other than a solvent liquidation or reorganisation of
the Borrower;
(b) a composition, compromise, assignment or arrangement with any creditor of
the Borrower or any Material Company;
(c) the appointment of a liquidator (other than in respect of a solvent liquidation
of the Borrower), receiver, administrative receiver, administrator, compulsory
manager or other similar officer in respect of the Borrower or any Material
Company or any of its assets; or
(d) enforcement of any Security over any assets of the Borrower or any Material
Company,
or any analogous procedure or step is taken in any jurisdiction.
This Clause 21.8 shall not apply to any winding-up petition which is frivolous or
vexatious and is discharged, stayed or dismissed within fourteen days of
commencement.
21.9 Creditors' process
Any expropriation, attachment, sequestration, distress or execution affects any asset
or assets of the Borrower or any Material Company having an aggregate value of
USD5,000,000 (or its equivalent in any other currency or currencies) and is not
discharged within 90 days.
21.10 Final Judgment
Any judgment, award or similar process (an "order") in an amount exceeding
USD5,000,000 (or its equivalent in any other currency or currencies) is made, issued
or levied against the Borrower or any part of its assets and:
(a) there is no right of appeal or any right of appeal has lapsed in relation to such
order; or
(b) such order is not fully satisfied, discharged or released within 30 days after its
making, issue or levy unless such order is being duly appealed by the
Borrower and the Agent considers in good faith that (i) such appeal has a
significant probability of success for the Borrower within a reasonable period
of time; and (ii) such appeal is being prosecuted expeditiously with all
necessary means by the Borrower.
21.11 Unlawfulness
It is or becomes unlawful for the Borrower to perform any of its obligations under the
Finance Documents.
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21.12 Repudiation
The Borrower repudiates a Finance Document or evidences an intention to repudiate a
Finance Document.
21.13 Litigation
Any litigation, arbitration, administrative, governmental, regulatory or other
investigations, proceedings or disputes are commenced or threatened in relation to the
Finance Documents or the transactions contemplated in the Finance Documents or
against the Borrower or its assets which has or is reasonably likely to have a Material
Adverse Effect.
21.14 Cessation of business
The Borrower suspends or ceases to carry on (or threatens to suspend or cease to carry
on) all or a material part of its business.
21.15 Consents
Any Authorisation relating to the Borrower or its assets or activities is repudiated,
revoked, cancelled, suspended, forfeited, surrendered or terminated (whether in whole
or in part thereof):
(a) is varied, amended, supplemented or restricted;
(b) is not, or ceases to be, in full force and effect; or
(c) is subject to any arbitration or other material legal proceedings,
which, in any such case, has or might reasonably be expected to have a Material
Adverse Effect.
21.16 Banking Licence
The Banking Licence of the Borrower:
(a) expires or is withdrawn, suspended, revoked or terminated, or, prior to any
such event, the Central Bank formally declares that it is considering such
action;
(b) is made subject to any restrictions or conditions; or
(c) is amended or modified,
unless the Borrower can establish to the continuing satisfaction of the Agent (acting
reasonably) that this could not reasonably be expected to have a Material Adverse
Effect.
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21.17 Convertibility/transferability
Any currency or exchange law is enacted or introduced that has the effect of
prohibiting, restricting or materially delaying any payment that the Borrower is
required to make pursuant to the terms of any Finance Document.
21.18 Rating
The long term unsecured unsubordinated debt obligations of the Borrower are rated
less than B1 by Moody's or cease to be rated by Moody's unless the Borrower is able
to demonstrate to the satisfaction of the Agent that the Borrower's long term
unsecured unsubordinated debt obligations are rated at least at an equivalent level to
B1 by a rating agency approved beforehand by the Agent.
21.19 De-listing Event
A De-Listing Event occurs.
21.20 Material adverse change
Any event or circumstance occurs which the Majority Lenders believe in good faith
has or might reasonably be expected to have a Material Adverse Effect.
21.21 Acceleration
On and at any time after the occurrence of an Event of Default which is continuing the
Agent may, and shall if so directed by the Majority Lenders, by notice to the
Borrower:
(a) cancel the Total Commitments, at which time they shall immediately be
cancelled;
(b) declare that all or part of the Loans, together with accrued interest, and all
other amounts accrued or outstanding under the Finance Documents be
immediately due and payable, at which time they shall become immediately
due and payable; and/or
(c) declare that all or part of the Loans be payable on demand, at which time they
shall immediately become payable on demand by the Agent on the instructions
of the Majority Lenders.
SECTION 8
CHANGES TO PARTIES
22. CHANGES TO THE LENDERS
22.1 Assignments and transfers by the Lenders
Subject to this Clause 22 and to Clause 22.10 (Prohibition on Debt Purchase
Transactions by the Group), a Lender (the "Existing Lender") may:
(a) assign any of its rights; or
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(b) transfer by novation any of its rights and obligations,
to another person (including the SPV) provided that if such person (including the
SPV) is established or incorporated in The Netherlands, it qualifies as a professional
market party (professionele marktpartij) within the meaning of the Dutch Financial
Markets Supervions Act (Wet op het financieel toezicht) (the "New Lender").
22.2 Conditions of assignment or transfer
(a) An assignment will only be effective on:
(i) receipt by the Agent (whether in the Assignment Agreement or
otherwise) of written confirmation from the New Lender (in form and
substance satisfactory to the Agent) that the New Lender will assume
the same obligations to the other Finance Parties as it would have been
under if it was an Original Lender; and
(ii) performance by the Agent of all necessary "know your customer" or
other similar checks under all applicable laws and regulations in
relation to such assignment to a New Lender, the completion of which
the Agent shall promptly notify to the Existing Lender and the New
Lender.
(b) A transfer will only be effective if the procedure set out in Clause 22.4
(Procedure for transfer) is complied with.
(c) If:
(i) a Lender assigns or transfers any of its rights or obligations under the
Finance Documents or changes its Facility Office; and
(ii) as a result of circumstances existing at the date the assignment, transfer
or change occurs, the Borrower would be obliged to make a payment
to the New Lender or Lender acting through its new Facility Office
under Clause 12 (Tax gross-up and indemnities) or Clause 13
(Increased costs),
then the New Lender or Lender acting through its new Facility Office is only
entitled to receive payment under those Clauses to the same extent as the
Existing Lender or Lender acting through its previous Facility Office would
have been if the assignment, transfer or change had not occurred. This
paragraph (c) shall not apply in respect of an assignment or transfer made to
the SPV.
(d) Each New Lender, by executing the relevant Transfer Certificate or
Assignment Agreement, confirms, for the avoidance of doubt, that the Agent
has authority to execute on its behalf any amendment or waiver that has been
approved by or on behalf of the requisite Lender or Lenders in accordance
with this Agreement on or prior to the date on which the transfer or
assignment becomes effective in accordance with this Agreement and that it is
bound by that decision to the same extent as the Existing Lender would have
been had it remained a Lender.
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22.3 Limitation of responsibility of Existing Lenders
(a) Unless expressly agreed to the contrary, an Existing Lender makes no
representation or warranty and assumes no responsibility to a New Lender for:
(i) the legality, validity, effectiveness, adequacy or enforceability of the
Finance Documents or any other documents;
(ii) the financial condition of the Borrower;
(iii) the performance and observance by the Borrower of its obligations
under the Finance Documents or any other documents; or
(iv) the accuracy of any statements (whether written or oral) made in or in
connection with any Finance Document or any other document,
and any representations or warranties implied by law are excluded.
(b) Each New Lender confirms to the Existing Lender and the other Finance
Parties that it:
(i) has made (and shall continue to make) its own independent
investigation and assessment of the financial condition and affairs of
the Borrower and its related entities in connection with its participation
in this Agreement and has not relied exclusively on any information
provided to it by the Existing Lender in connection with any Finance
Document; and
(ii) will continue to make its own independent appraisal of the
creditworthiness of the Borrower and its related entities whilst any
amount is or may be outstanding under the Finance Documents or any
Commitment is in force.
(c) Nothing in any Finance Document obliges an Existing Lender to:
(i) accept a re-transfer or re-assignment from a New Lender of any of the
rights and obligations assigned or transferred under this Clause 22; or
(ii) support any losses directly or indirectly incurred by the New Lender by
reason of the non-performance by the Borrower of its obligations under
the Finance Documents or otherwise.
22.4 Procedure for transfer
(a) Subject to the conditions set out in Clause 22.2 (Conditions of assignment or
transfer) a transfer is effected in accordance with paragraph (c) below when
the Agent executes an otherwise duly completed Transfer Certificate delivered
to it by the Existing Lender and the New Lender. The Agent shall, subject to
paragraph (b) below, as soon as reasonably practicable after receipt by it of a
duly completed Transfer Certificate appearing on its face to comply with the
terms of this Agreement and delivered in accordance with the terms of this
Agreement, execute that Transfer Certificate.
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(b) The Agent shall only be obliged to execute a Transfer Certificate delivered to
it by the Existing Lender and the New Lender once it is satisfied it has
complied with all necessary "know your customer" or other similar checks
under all applicable laws and regulations in relation to the transfer to such
New Lender.
(c) Subject to Clause 22.8 (Pro rata interest settlement), on the Transfer Date:
(i) to the extent that in the Transfer Certificate the Existing Lender seeks
to transfer by novation its rights and obligations under the Finance
Documents the Borrower and the Existing Lender shall be released
from further obligations towards one another under the Finance
Documents and their respective rights against one another under the
Finance Documents shall be cancelled (being the "Discharged Rights
and Obligations");
(ii) the Borrower and the New Lender shall assume obligations towards
one another and/or acquire rights against one another which differ from
the Discharged Rights and Obligations only insofar as the Borrower
and the New Lender have assumed and/or acquired the same in place
of the Borrower and the Existing Lender;
(iii) the Agent, the Arranger, the New Lender and the other Lenders shall
acquire the same rights and assume the same obligations between
themselves as they would have acquired and assumed had the New
Lender been an Original Lender with the rights and/or obligations
acquired or assumed by it as a result of the transfer and to that extent
the Agent, the Arranger and the Existing Lender shall each be released
from further obligations to each other under the Finance Documents;
and
(iv) the New Lender shall become a Party as a "Lender".
22.5 Procedure for assignment
(a) Subject to the conditions set out in Clause 22.2 (Conditions of assignment or
transfer) an assignment may be effected in accordance with paragraph (c)
below when the Agent executes an otherwise duly completed Assignment
Agreement delivered to it by the Existing Lender and the New Lender. The
Agent shall, subject to paragraph (b) below, as soon as reasonably practicable
after receipt by it of a duly completed Assignment Agreement appearing on its
face to comply with the terms of this Agreement and delivered in accordance
with the terms of this Agreement, execute that Assignment Agreement.
(b) The Agent shall only be obliged to execute an Assignment Agreement
delivered to it by the Existing Lender and the New Lender once it is satisfied it
has complied with all necessary "know your customer" or other similar checks
under all applicable laws and regulations in relation to the assignment to such
New Lender.
(c) Subject to Clause 22.8 (Pro rata interest settlement), on the Transfer Date:
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(i) the Existing Lender will assign absolutely to the New Lender the rights
under the Finance Documents expressed to be the subject of the
assignment in the Assignment Agreement;
(ii) the Existing Lender will be released by the Borrower and the other
Finance Parties from the obligations owed by it (the "Relevant
Obligations") and expressed to be the subject of the release in the
Assignment Agreement; and
(iii) the New Lender shall become a Party as a "Lender" and will be bound
by obligations equivalent to the Relevant Obligations.
(d) Lenders may utilise procedures other than those set out in this Clause 22.5 to
assign their rights under the Finance Documents (but not, without the consent
of the Borrower or unless in accordance with Clause 22.4 (Procedure for
transfer), to obtain a release by the Borrower from the obligations owed to the
Borrower by the Lenders nor the assumption of equivalent obligations by a
New Lender) provided that they comply with the conditions set out in
Clause 22.2 (Conditions of assignment or transfer).
22.6 Copy of Transfer Certificate or Assignment Agreement to Borrower
The Agent shall, as soon as reasonably practicable after it has executed a Transfer
Certificate or an Assignment Agreement, send to the Borrower a copy of that Transfer
Certificate or Assignment Agreement.
22.7 Security over Lenders' rights
In addition to the other rights provided to Lenders under this Clause 22.7, each Lender
may without consulting with or obtaining consent from the Borrower at any time
charge, assign or otherwise create Security in or over (whether by way of collateral or
otherwise) all or any of its rights under any Finance Document to secure obligations
of that Lender including:
(a) any charge, assignment or other Security to secure obligations to a federal
reserve or central bank;
(b) in the case of any Lender which is a fund, any charge, assignment or other
Security granted to any holders (or trustee or representatives of holders) of
obligations owed, or securities issued, by that Lender as Security for those
obligations or securities; and
(c) in the case of any Lender which is the SPV, any charge, assignment or other
Security granted to any Note Trustee (or Noteholders or representatives of
Noteholders) to secure obligations under the SPV Notes,
except that no such charge, assignment or Security shall:
(i) release a Lender from any of its obligations under the Finance
Documents or substitute the beneficiary of the relevant charge,
assignment or Security for the Lender as a party to any of the Finance
Documents; or
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(ii) require any payments to be made by the Borrower or grant to any
person any more extensive rights than those required to be made or
granted to the relevant Lender under the Finance Documents.
22.8 Pro rata interest settlement
If the Agent has notified the Lenders that it is able to distribute interest payments on a
"pro rata basis" to Existing Lenders and New Lenders then (in respect of any transfer
pursuant to Clause 22.4 (Procedure for transfer) or any assignment pursuant to
Clause 22.5 (Procedure for assignment) the Transfer Date of which, in each case, is
after the date of such notification and is not on the last day of an Interest Period):
(a) any interest or fees in respect of the relevant participation which are expressed
to accrue by reference to the lapse of time shall continue to accrue in favour of
the Existing Lender up to but excluding the Transfer Date ("Accrued
Amounts") and shall become due and payable to the Existing Lender (without
further interest accruing on them) on the last day of the current Interest Period
(or, if the Interest Period is longer than six Months, on the next of the dates
which falls at six Monthly intervals after the first day of that Interest Period);
and
(b) the rights assigned or transferred by the Existing Lender will not include the
right to the Accrued Amounts, so that, for the avoidance of doubt:
(i) when the Accrued Amounts become payable, those Accrued Amounts
will be payable to the Existing Lender; and
(ii) the amount payable to the New Lender on that date will be the amount
which would, but for the application of this Clause 22.7, have been
payable to it on that date, but after deduction of the Accrued Amounts.
22.9 Exercise of discretions and rights by the SPV
If the SPV is a Lender, any references in this Agreement to the exercises of rights or
discretions by that Lender shall be construed as references to the exercise of such
right or discretion by the SPV or Note Trustee in accordance with the Trust Deed (or
any supplement thereto).
22.10 Prohibition on Debt Purchase Transactions by the Group
The Borrower shall not, and shall procure that each other member of the Group shall
not, enter into any Debt Purchase Transaction or beneficially own all or any part of
the share capital of a company (or be able (directly or indirectly) to (a) appoint or
remove a majority of the directors or equivalent officers of that company or
(b) otherwise direct the operating or financial policies of that company) that is a
Lender or a party to a Debt Purchase Transaction of the type referred to in
paragraphs (b) or (c) of the definition of Debt Purchase Transaction.
23. CHANGES TO THE BORROWER
The Borrower may not assign any of its rights or transfer any of its rights or
obligations under the Finance Documents.
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SECTION 9
THE FINANCE PARTIES
24. ROLE OF THE AGENT AND THE ARRANGER
24.1 Appointment of the Agent
(a) Each other Finance Party appoints the Agent to act as its agent under and in
connection with the Finance Documents.
(b) Each other Finance Party authorises the Agent to exercise the rights, powers,
authorities and discretions specifically given to the Agent under or in
connection with the Finance Documents together with any other incidental
rights, powers, authorities and discretions.
24.2 Duties of the Agent
(a) Subject to paragraph (b) below, the Agent shall promptly forward to a Party
the original or a copy of any document which is delivered to the Agent for that
Party by any other Party.
(b) Without prejudice to Clause 22.6 (Copy of Transfer Certificate or Assignment
Agreement to Borrower), paragraph (a) above shall not apply to any Transfer
Certificate or to any Assignment Agreement.
(c) Except where a Finance Document specifically provides otherwise, the Agent
is not obliged to review or check the adequacy, accuracy or completeness of
any document it forwards to another Party.
(d) If the Agent receives notice from a Party referring to this Agreement,
describing a Default and stating that the circumstance described is a Default, it
shall promptly notify the other Finance Parties.
(e) If the Agent is aware of the non-payment of any principal, interest or fee
payable to a Finance Party (other than the Agent or the Arranger) under this
Agreement it shall promptly notify the other Finance Parties.
(f) The Agent's duties under the Finance Documents are solely mechanical and
administrative in nature.
24.3 Role of the Arranger
Except as specifically provided in the Finance Documents, the Arranger has no
obligations of any kind to any other Party under or in connection with any Finance
Document.
24.4 No fiduciary duties
(a) Nothing in this Agreement constitutes the Agent or the Arranger as a trustee or
fiduciary of any other person.
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(b) Neither the Agent nor the Arranger shall be bound to account to any Lender
for any sum or the profit element of any sum received by it for its own
account.
24.5 Business with the Group
The Agent and the Arranger may accept deposits from, lend money to and generally
engage in any kind of banking or other business with any member of the Group.
24.6 Rights and discretions of the Agent
(a) The Agent may rely on:
(i) any representation, notice or document believed by it to be genuine,
correct and appropriately authorised; and
(ii) any statement made by a director, authorised signatory or employee of
any person regarding any matters which may reasonably be assumed to
be within his knowledge or within his power to verify.
(b) The Agent may assume (unless it has received notice to the contrary in its
capacity as agent for the Lenders) that:
(i) no Default has occurred (unless it has actual knowledge of a Default
arising under Clause 21.1 (Non-payment)); and
(ii) any right, power, authority or discretion vested in any Party or the
Majority Lenders has not been exercised.
(c) The Agent may engage, pay for and rely on the advice or services of any
lawyers, accountants, surveyors or other experts.
(d) The Agent may act in relation to the Finance Documents through its personnel
and agents.
(e) The Agent may disclose to any other Party any information it reasonably
believes it has received as Agent under this Agreement.
(f) Notwithstanding any other provision of any Finance Document to the
contrary, neither the Agent nor the Arranger is obliged to do or omit to do
anything if it would or might in its reasonable opinion constitute a breach of
any law or regulation or a breach of a fiduciary duty or duty of confidentiality.
24.7 Majority Lenders' instructions
(a) Unless a contrary indication appears in a Finance Document, the Agent shall
(i) exercise any right, power, authority or discretion vested in it as Agent in
accordance with any instructions given to it by the Majority Lenders (or, if so
instructed by the Majority Lenders, refrain from exercising any right, power,
authority or discretion vested in it as Agent) and (ii) not be liable for any act
(or omission) if it acts (or refrains from taking any action) in accordance with
an instruction of the Majority Lenders.
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(b) Unless a contrary indication appears in a Finance Document, any instructions
given by the Majority Lenders will be binding on all the Finance Parties.
(c) The Agent may refrain from acting in accordance with the instructions of the
Majority Lenders (or, if appropriate, the Lenders) until it has received such
security as it may require for any cost, loss or liability (together with any
associated VAT) which it may incur in complying with the instructions.
(d) In the absence of instructions from the Majority Lenders, (or, if appropriate,
the Lenders) the Agent may act (or refrain from taking action) as it considers
to be in the best interest of the Lenders.
(e) The Agent is not authorised to act on behalf of a Lender (without first
obtaining that Lender's consent) in any legal or arbitration proceedings
relating to any Finance Document.
24.8 Responsibility for documentation
Neither the Agent nor the Arranger is responsible for:
(a) the adequacy, accuracy and/or completeness of any information (whether oral
or written) provided by the Agent, the Arranger, the Borrower or any other
person given in or in connection with any Finance Document or the
transactions contemplated by the Finance Documents;
(b) the legality, validity, effectiveness, adequacy or enforceability of any Finance
Document or any other agreement, arrangement or document entered into,
made or executed in anticipation of or in connection with any Finance
Document; or
(c) any determination as to whether any information provided or to be provided to
any Finance Party is non-public information the use of which may be
regulated or prohibited by applicable law or regulation relating to insider
dealing or otherwise.
24.9 Exclusion of liability
(a) Without limiting paragraph (b) below (and without prejudice to the provisions
of paragraph (e) of Clause 27.10 (Disruption to Payment Systems etc.), the
Agent will not be liable (including for negligence or any other category of
liability whatsoever) for any action taken by it under or in connection with any
Finance Document, unless directly caused by its gross negligence or wilful
misconduct.
(b) No Party (other than the Agent) may take any proceedings against any officer,
employee or agent of the Agent in respect of any claim it might have against
the Agent or in respect of any act or omission of any kind by that officer,
employee or agent in relation to any Finance Document and any officer,
employee or agent of the Agent may rely on this Clause subject to Clause 1.4
(Third party rights) and the provisions of the Third Parties Act.
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(c) The Agent will not be liable for any delay (or any related consequences) in
crediting an account with an amount required under the Finance Documents to
be paid by the Agent if the Agent has taken all necessary steps as soon as
reasonably practicable to comply with the regulations or operating procedures
of any recognised clearing or settlement system used by the Agent for that
purpose.
(d) Nothing in this Agreement shall oblige the Agent or the Arranger to carry out
any "know your customer" or other checks in relation to any person on behalf
of any Lender and each Lender confirms to the Agent and the Arranger that it
is solely responsible for any such checks it is required to carry out and that it
may not rely on any statement in relation to such checks made by the Agent or
the Arranger.
24.10 Lenders' indemnity to the Agent
Each Lender shall (in proportion to its share of the Total Commitments or, if the Total
Commitments are then zero, to its share of the Total Commitments immediately prior
to their reduction to zero) indemnify the Agent, within three Business Days of
demand, against any cost, loss or liability (including for negligence or any other
category of liability whatsoever) incurred by the Agent (otherwise than by reason of
the Agent's gross negligence or wilful misconduct) (or, in the case of any cost, loss or
liability pursuant to Clause 27.10 (Disruption to Payment Systems etc.)
notwithstanding the Agent's negligence, gross negligence or any other category of
liability whatsoever but not including any claim based on the fraud of the Agent) in
acting as Agent under the Finance Documents (unless the Agent has been reimbursed
by the Borrower pursuant to a Finance Document).
24.11 Resignation of the Agent
(a) The Agent may resign and appoint one of its Affiliates acting through an
office in the United Kingdom as successor by giving notice to the other
Finance Parties and the Borrower.
(b) Alternatively the Agent may resign by giving 10 days' notice to the other
Finance Parties and the Borrower, and shall resign immediately if it ceases to
meet the requirements of paragraph (a) of the definition of Acceptable Bank,
in which case the Majority Lenders (after consultation with the Borrower) may
appoint a successor Agent.
(c) If the Majority Lenders have not appointed a successor Agent in accordance
with paragraph (b) above within 20 days after notice of resignation was given,
the retiring Agent (after consultation with the Borrower) may appoint a
successor Agent (acting through an office in the United Kingdom).
(d) If the Agent wishes to resign because (acting reasonably) it has concluded that
it is no longer appropriate for it to remain as agent and the Agent is entitled to
appoint a successor Agent under paragraph (c) above, the Agent may (if it
concludes (acting reasonably) that it is necessary to do so in order to persuade
the proposed successor Agent to become a party to this Agreement as Agent)
agree with the proposed successor Agent amendments to this Clause 24 and
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any other term of this Agreement dealing with the rights or obligations of the
Agent consistent with the current market practice for the appointment and
protection of corporate trustees together with any reasonable amendments to
the agency fee payable under this Agreement which are consistent with the
successor Agent's normal fee rates and those amendments will bind the
Parties.
(e) The retiring Agent shall, at its own cost, make available to the successor
Agent such documents and records and provide such assistance as the
successor Agent may reasonably request for the purposes of performing its
functions as Agent under the Finance Documents.
(f) The Agent's resignation notice shall only take effect upon the appointment of a
successor.
(g) Upon the appointment of a successor, the retiring Agent shall be discharged
from any further obligation in respect of the Finance Documents but shall
remain entitled to the benefit of this Clause 24. Any successor and each of the
other Parties shall have the same rights and obligations amongst themselves as
they would have had if such successor had been an original Party.
(h) After consultation with the Borrower, the Majority Lenders may, by notice to
the Agent, require it to resign in accordance with paragraph (b) above. In this
event, the Agent shall resign in accordance with paragraph (b) above.
24.12 Confidentiality
(a) In acting as agent for the Finance Parties, the Agent shall be regarded as acting
through its agency division which shall be treated as a separate entity from any
other of its divisions or departments.
(b) If information is received by another division or department of the Agent, it
may be treated as confidential to that division or department and the Agent
shall not be deemed to have notice of it.
24.13 Relationship with the Lenders
(a) Subject to Clause 22.8 (Pro rata interest settlement), the Agent may treat the
person shown in its records as Lender at the opening of business (in the place
of the Agent's principal office as notified to the Finance Parties from time to
time) as the Lender acting through its Facility Office:
(i) entitled to or liable for any payment due under any Finance Document
on that day; and
(ii) entitled to receive and act upon any notice, request, document or
communication or make any decision or determination under any
Finance Document made or delivered on that day,
unless it has received not less than five Business Days' prior notice from that
Lender to the contrary in accordance with the terms of this Agreement.
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(b) Each Lender shall supply the Agent with any information required by the
Agent in order to calculate the Mandatory Cost in accordance with Schedule 3
(Mandatory Cost Formulae).
(c) Any Lender may by notice to the Agent appoint a person to receive on its
behalf all notices, communications, information and documents to be made or
despatched to that Lender under the Finance Documents. Such notice shall
contain the address, fax number and (where communication by electronic mail
or other electronic means is permitted under Clause 29.5 (Electronic
communication)) electronic mail address and/or any other information
required to enable the sending and receipt of information by that means (and,
in each case, the department or officer, if any, for whose attention
communication is to be made) and be treated as a notification of a substitute
address, fax number, electronic mail address, department and officer by that
Lender for the purposes of Clause 29.2 (Addresses) and paragraph (a)(iii) of
Clause 29.5 (Electronic communication) and the Agent shall be entitled to
treat such person as the person entitled to receive all such notices,
communications, information and documents as though that person were that
Lender.
24.14 Credit appraisal by the Lenders
Without affecting the responsibility of the Borrower for information supplied by it or
on its behalf in connection with any Finance Document, each Lender confirms to the
Agent and the Arranger that it has been, and will continue to be, solely responsible for
making its own independent appraisal and investigation of all risks arising under or in
connection with any Finance Document including:
(a) the financial condition, creditworthiness, condition, affairs, status and nature
of each member of the Group;
(b) the legality, validity, effectiveness, adequacy or enforceability of any Finance
Document and any other agreement, arrangement or document entered into,
made or executed in anticipation of, under or in connection with any Finance
Document;
(c) whether that Lender has recourse, and the nature and extent of that recourse,
against any Party or any of its respective assets under or in connection with
any Finance Document, the transactions contemplated by the Finance
Documents or any other agreement, arrangement or document entered into,
made or executed in anticipation of, under or in connection with any Finance
Document; and
(d) the adequacy, accuracy and/or completeness of the Information Memorandum
and any other information provided by the Agent, any Party or by any other
person under or in connection with any Finance Document, the transactions
contemplated by the Finance Documents or any other agreement, arrangement
or document entered into, made or executed in anticipation of, under or in
connection with any Finance Document,
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and each Lender warrants to the Agent and the Arranger that it has not relied on and
will not at any time rely on the Agent or the Arranger in respect of any of these
matters.
24.15 Agent's management time
Any amount payable to the Agent under Clause 14.3 (Indemnity to the Agent),
Clause 16 (Costs and Expenses) and Clause 24.10 (Lenders' indemnity to the Agent)
shall include the cost of utilising the Agent's management time or other resources and
will be calculated on the basis of such reasonable daily or hourly rates as the Agent
may notify to the Borrower and the Lenders, and is in addition to any fee paid or
payable to the Agent under Clause 11 (Fees).
24.16 Deduction from amounts payable by the Agent
If any Party owes an amount to the Agent under the Finance Documents the Agent
may, after giving notice to that Party, deduct an amount not exceeding that amount
from any payment to that Party which the Agent would otherwise be obliged to make
under the Finance Documents and apply the amount deducted in or towards
satisfaction of the amount owed. For the purposes of the Finance Documents that
Party shall be regarded as having received any amount so deducted.
25. CONDUCT OF BUSINESS BY THE FINANCE PARTIES
No provision of this Agreement will:
(a) interfere with the right of any Finance Party to arrange its affairs (tax or
otherwise) in whatever manner it thinks fit;
(b) oblige any Finance Party to investigate or claim any credit, relief, remission or
repayment available to it or the extent, order and manner of any claim; or
(c) oblige any Finance Party to disclose any information relating to its affairs (tax
or otherwise) or any computations in respect of Tax.
26. SHARING AMONG THE LENDERS
26.1 Payments to Lenders
If a Lender (a "Recovering Lender") receives or recovers any amount from the
Borrower other than in accordance with Clause 27 (Payment mechanics) (a
"Recovered Amount") and applies that amount to a payment due under the Finance
Documents then:
(a) the Recovering Lender shall, within three Business Days, notify details of the
receipt or recovery to the Agent;
(b) the Agent shall determine whether the receipt or recovery is in excess of the
amount the Recovering Lender would have been paid had the receipt or
recovery been received or made by the Agent and distributed in accordance
with Clause 27 (Payment mechanics), without taking account of any Tax
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which would be imposed on the Agent in relation to the receipt, recovery or
distribution; and
(c) the Recovering Lender shall, within three Business Days of demand by the
Agent, pay to the Agent an amount (the "Sharing Payment") equal to such
receipt or recovery less any amount which the Agent determines may be
retained by the Recovering Lender as its share of any payment to be made, in
accordance with Clause 27.5 (Partial payments).
26.2 Redistribution of payments
The Agent shall treat the Sharing Payment as if it had been paid by the Borrower and
distribute it between the Finance Parties (other than the Recovering Lender) (the
"Sharing Lenders") in accordance with Clause 27.5 (Partial payments) towards the
obligations of the Borrower to the Sharing Lenders.
26.3 Recovering Lender's rights
On a distribution by the Agent under Clause 26.2 (Redistribution of payments) of a
payment received by a Recovering Lender from the Borrower as between the
Borrower and the Recovering Lender, an amount of the Recovered Amount equal to
the Sharing Payment will be treated as not having been paid by the Borrower.
26.4 Reversal of redistribution
If any part of the Sharing Payment received or recovered by a Recovering Lender
becomes repayable and is repaid by that Recovering Lender, then:
(a) each Sharing Lender shall, upon request of the Agent, pay to the Agent for the
account of that Recovering Lender an amount equal to the appropriate part of
its share of the Sharing Payment (together with an amount as is necessary to
reimburse that Recovering Lender for its proportion of any interest on the
Sharing Payment which that Recovering Lender is required to pay) (the
"Redistributed Amount"); and
(b) as between the Borrower and each relevant Sharing Lender, an amount equal
to the relevant Redistributed Amount will be treated as not having been paid
by the Borrower.
26.5 Exceptions
(a) This Clause 26 shall not apply to the extent that the Recovering Lender would
not, after making any payment pursuant to this Clause, have a valid and
enforceable claim against the Borrower.
(b) A Recovering Lender is not obliged to share with any other Lender any
amount which the Recovering Lender has received or recovered as a result of
taking legal or arbitration proceedings, if:
(i) it notified that other Lender of the legal or arbitration proceedings; and
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(ii) that other Lender had an opportunity to participate in those legal or
arbitration proceedings but did not do so as soon as reasonably
practicable having received notice and did not take separate legal or
arbitration proceedings.
SECTION 10
ADMINISTRATION
27. PAYMENT MECHANICS
27.1 Payments to the Agent or the Account Bank
(a) Subject to paragraphs (b) and (c) below, on each date on which the Borrower
or a Lender is required to make a payment under a Finance Document, the
Borrower or Lender shall make the same available to the Agent (unless a
contrary indication appears in a Finance Document) for value on the due date
at the time and in such funds specified by the Agent as being customary at the
time for settlement of transactions in the relevant currency in the place of
payment.
(b) Payment to the Borrower shall be made to the following account (or such
other account as the Agent specifies to the Borrower from time to time):
BANK NAME: Raiffeisenbank International AG
SWIFT: RZBAATWW
A/C #: 070-55.058.622
ENTITY NAME: Corporate Commercial Bank AD
IBAN: AT773100007055058622
(c) Payment by the Borrower shall be made to the following accounts:
(i) in the case of any payment to a Finance Party (other than a Lender
which is the SPV) to the following account of the Agent (or such other
account as the Agent specifies to the Borrower from time to time):
BANK NAME: Deutsche Bank Trust Company Americas
60 Wall Street
New York
NY 10005
USA
SWIFT: BKTRUS33
A/C #: 04 011 233
ENTITY NAME: VTB Capital plc, London
REFERENCE: LAD/
(ii) in the case of any payment to a Lender which is the SPV to the account
of the Account Bank designated in the Transfer Certificate or
Assignment Agreement (as the case may be) to which the SPV is a
party or such other account as the SPV may specify in accordance with
the Issue Documents.
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(d) The Borrower shall ensure that any payment made pursuant to paragraph (c) (i)
above is simultaneously notified to the Agent.
(e) Without prejudice to any obligation of the Borrower under this Agreement, the
Agent will, to the extent it has such information, provide the Borrower, in
relation to each payment of principal or interest or other amounts owing to a
Lender which is the SPV, 5 Business Days prior notice of the amount due to
the SPV under this Agreement in relation thereto.
(f) Nothing in paragraph (c) (ii) authorises or allows the Borrower to make
payments other than on a pari passu and pro rata basis with other payments it
is required to make to the Lenders, which are not the SPV, under this
Agreement. Any payment made in breach of this provision shall be subject to
Clause 26.1 (Payments to the Lenders).
(g) A determination by the Agent as to whether a payment, and which amount, is
attributable to the SPV or not shall in the absence of manifest error being
conclusive and binding on the Parties.
27.2 Distributions by the Agent
Each payment received by the Agent under the Finance Documents for another Party
shall, subject to Clause 27.3 (Distributions to the Borrower), Clause 27.4 (Clawback)
and Clause 24.16 (Deduction from amounts payable by the Agent) be made available
by the Agent as soon as practicable after receipt to the Party entitled to receive
payment in accordance with this Agreement (in the case of a Lender, for the account
of its Facility Office), to such account as that Party may notify to the Agent by not
less than five Business Days' notice.
27.3 Distributions to the Borrower
The Agent may (with the consent of the Borrower or in accordance with Clause 28
(Set-off)) apply any amount received by it for the Borrower in or towards payment (on
the date and in the currency and funds of receipt) of any amount due from the
Borrower under the Finance Documents or in or towards purchase of any amount of
any currency to be so applied.
27.4 Clawback
(a) Where a sum is to be paid to the Agent under the Finance Documents for
another Party, the Agent is not obliged to pay that sum to that other Party (or
to enter into or perform any related exchange contract) until it has been able to
establish to its satisfaction that it has actually received that sum.
(b) If the Agent pays an amount to another Party and it proves to be the case that
the Agent had not actually received that amount, then the Party to whom that
amount (or the proceeds of any related exchange contract) was paid by the
Agent shall on demand refund the same to the Agent together with interest on
that amount from the date of payment to the date of receipt by the Agent,
calculated by the Agent to reflect its cost of funds.
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27.5 Partial payments
(a) If the Agent receives a payment that is insufficient to discharge all the
amounts then due and payable by the Borrower under the Finance Documents,
the Agent shall apply that payment towards the obligations of the Borrower
under the Finance Documents in the following order:
(i) first, in or towards payment pro rata of any unpaid fees, costs and
expenses of the Agent and the Arranger under the Finance Documents;
(ii) secondly, in or towards payment pro rata of any accrued interest, fee or
commission due but unpaid under this Agreement;
(iii) thirdly, in or towards payment pro rata of any principal due but unpaid
under this Agreement; and
(iv) fourthly, in or towards payment pro rata of any other sum due but
unpaid under the Finance Documents.
(b) The Agent shall, if so directed by the Majority Lenders, vary the order set out
in paragraphs (a)(ii) to (iv) above.
(c) Paragraphs (a) and (b) above will override any appropriation made by the
Borrower.
(d) A payment will not be treated as a partial payment for these purposes merely
because of payment being effected to the Account Bank in due compliance
with paragraph (c) (ii) of Clause 27.1 (Payments to the Agent or the Account
Bank) (but shall do if that relevant sum, when aggregated with a relevant
payment to the Agent, is insufficient to discharge all the amounts then due and
payable by the Borrower under the Finance Documents).
27.6 No set-off by the Borrower
All payments to be made by the Borrower under the Finance Documents shall be
calculated and be made without (and free and clear of any deduction for) set-off or
counterclaim.
27.7 Business Days
(a) Any payment which is due to be made on a day that is not a Business Day
shall be made on the next Business Day in the same calendar month (if there is
one) or the preceding Business Day (if there is not).
(b) During any extension of the due date for payment of any principal or Unpaid
Sum under this Agreement interest is payable on the principal or Unpaid Sum
at the rate payable on the original due date.
27.8 Currency of account
(a) Subject to paragraphs (b) and (c) below, dollars is the currency of account and
payment for any sum from the Borrower under any Finance Document.
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(b) Each payment in respect of costs, expenses or Taxes shall be made in the
currency in which the costs, expenses or Taxes are incurred.
(c) Any amount expressed to be payable in a currency other than dollars shall be
paid in that other currency.
27.9 Change of currency
(a) Unless otherwise prohibited by law, if more than one currency or currency
unit are at the same time recognised by the central bank of any country as the
lawful currency of that country, then:
(i) any reference in the Finance Documents to, and any obligations arising
under the Finance Documents in, the currency of that country shall be
translated into, or paid in, the currency or currency unit of that country
designated by the Agent (after consultation with the Borrower); and
(ii) any translation from one currency or currency unit to another shall be
at the official rate of exchange recognised by the central bank for the
conversion of that currency or currency unit into the other, rounded up
or down by the Agent (acting reasonably).
(b) If a change in any currency of a country occurs, this Agreement will, to the
extent the Agent (acting reasonably and after consultation with the Borrower)
specifies to be necessary, be amended to comply with any generally accepted
conventions and market practice in the Relevant Interbank Market and
otherwise to reflect the change in currency.
27.10 Disruption to Payment Systems etc.
If either the Agent determines that a Disruption Event has occurred or the Agent is
notified by the Borrower that a Disruption Event has occurred:
(a) the Agent may, and shall if requested to do so by the Borrower, consult with
the Borrower with a view to agreeing with the Borrower such changes to the
operation or administration of the Facility as the Agent may deem necessary in
the circumstances;
(b) the Agent may consult with the Finance Parties in relation to any changes
mentioned in paragraph (a) but shall not be obliged to do so if, in its opinion, it
is not practicable to do so in the circumstances;
(c) any such changes agreed upon by the Agent and the Borrower shall (whether
or not it is finally determined that a Disruption Event has occurred) be binding
upon the Parties as an amendment to (or, as the case may be, waiver of) the
terms of the Finance Documents notwithstanding the provisions of Clause 35
(Amendments and Waivers);
(d) the Agent shall not be liable for any damages, costs or losses whatsoever
(including for negligence, gross negligence or any other category of liability
whatsoever but not including any claim based on the fraud of the Agent)
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arising as a result of its taking, or failing to take, any actions pursuant to or in
connection with this Clause 27.10; and
(e) the Agent shall notify the Finance Parties of all changes agreed pursuant to
paragraph (d) above.
28. SET-OFF
A Finance Party may set off any matured obligation due from the Borrower under the
Finance Documents (to the extent beneficially owned by that Finance Party) against
any matured obligation owed by that Finance Party to the Borrower, regardless of the
place of payment, booking branch or currency of either obligation. If the obligations
are in different currencies, the Finance Party may convert either obligation at a market
rate of exchange in its usual course of business for the purpose of the set-off.
29. NOTICES
29.1 Communications in writing
Any communication to be made under or in connection with the Finance Documents
shall be made in writing and, unless otherwise stated, may be made by fax, letter or
email.
29.2 Addresses
The address, email address and fax number (and the department or officer, if any, for
whose attention the communication is to be made) of each Party for any
communication or document to be made or delivered under or in connection with the
Finance Documents is:
(a) in the case of the Borrower, that identified with its name below;
(b) in the case of each Lender, that notified in writing to the Agent on or prior to
the date on which it becomes a Party; and
(c) in the case of the Agent, that identified with its name below,
or any substitute address, email address or fax number or department or officer as the
Party may notify to the Agent (or the Agent may notify to the other Parties, if a
change is made by the Agent) by not less than five Business Days' notice.
29.3 Delivery
(a) Any communication or document made or delivered by one person to another
under or in connection with the Finance Documents will only be effective:
(i) if by way of fax, when received in legible form;
(ii) if by way of letter, when it has been left at the relevant address or five
Business Days after being deposited in the post postage prepaid in an
envelope addressed to it at that address; or
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(iii) if by way of email, when actually received by the intended recipient of
such email,
and, if a particular department or officer is specified as part of its address
details provided under Clause 29.2 (Addresses), if addressed to that
department or officer.
(b) Any communication or document to be made or delivered to the Agent will be
effective only when actually received by the Agent and then only if it is
expressly marked for the attention of the department or officer identified with
the Agent's signature below (or any substitute department or officer as the
Agent shall specify for this purpose).
(c) Any communication or delivery addressed to a Lender that is the SPV shall
also be copied to the Note Trustee and paying agent in respect of the SPV
Notes at the address notified to the Agent from time to time.
(d) All notices from or to the Borrower shall be sent through the Agent.
29.4 Notification of address and fax number
Promptly upon receipt of notification of an address, email address and fax number or
change of address, email address or fax number pursuant to Clause 29.2 (Addresses)
or changing its own address, email address or fax number, the Agent shall notify the
other Parties.
29.5 Electronic communication
(a) Any communication to be made between the Agent and a Lender under or in
connection with the Finance Documents may be made by electronic mail or
other electronic means, if the Agent and the relevant Lender:
(i) agree that, unless and until notified to the contrary, this is to be an
accepted form of communication;
(ii) notify each other in writing of their electronic mail address and/or any
other information required to enable the sending and receipt of
information by that means; and
(iii) notify each other of any change to their address or any other such
information supplied by them.
(b) Any electronic communication made between the Agent and a Lender will be
effective only when actually received in readable form and in the case of any
electronic communication made by a Lender to the Agent only if it is
addressed in such a manner as the Agent shall specify for this purpose.
29.6 English language
(a) Any notice given under or in connection with any Finance Document must be
in English.
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(b) All other documents provided under or in connection with any Finance
Document must be:
(i) in English; or
(ii) if not in English, and if so required by the Agent, accompanied by a
certified English translation and, in this case, the English translation
will prevail unless the document is a constitutional, statutory or other
official document.
30. CALCULATIONS AND CERTIFICATES
30.1 Accounts
In any litigation or arbitration proceedings arising out of or in connection with a
Finance Document, the entries made in the accounts maintained by a Finance Party
are prima facie evidence of the matters to which they relate.
30.2 Certificates and determinations
Any certification or determination by a Finance Party of a rate or amount under any
Finance Document is, in the absence of manifest error, conclusive evidence of the
matters to which it relates.
30.3 Day count convention
Any interest, commission or fee accruing under a Finance Document will accrue from
day to day and is calculated on the basis of the actual number of days elapsed and a
year of 360 days or, in any case where the practice in the Relevant Interbank Market
differs, in accordance with that market practice.
31. PARTIAL INVALIDITY
If, at any time, any provision of the Finance Documents is or becomes illegal, invalid
or unenforceable in any respect under any law of any jurisdiction, neither the legality,
validity or enforceability of the remaining provisions nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction will in any
way be affected or impaired.
32. REMEDIES AND WAIVERS
No failure to exercise, nor any delay in exercising, on the part of any Finance Party,
any right or remedy under the Finance Documents shall operate as a waiver of any
such right or remedy or constitute an election to affirm any of the Finance
Documents. No election to affirm any of the Finance Documents on the part of any
Finance Party shall be effective unless it is in writing. No single or partial exercise of
any right or remedy shall prevent any further or other exercise or the exercise of any
other right or remedy. The rights and remedies provided in this Agreement are
cumulative and not exclusive of any rights or remedies provided by law.
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33. NON-PETITION
Notwithstanding the other provisions of this Agreement and solely where the SPV is a
Lender, each Party (other than the SPV) agrees that it will not, nor will it entice any
other third party to do so, take or join in taking any corporate action or other steps or
legal proceedings for the winding-up, dissolution, bankruptcy or reorganisation or for
the appointment of a receiver, examiner, administrator, administrative receiver,
trustee, liquidator or similar officer of the SPV or of any or all of the SPV's revenues
and assets.
34. LIMITED RECOURSE
Notwithstanding the other provisions of this Agreement and solely where the SPV is a
Lender, a Party's recourse (if any) to that Lender under this Agreement (including,
inter alia¸ with respect to any costs and expenses incurred by them hereunder) shall
(save in the event of gross negligence, wilful default or fraud of the SPV) be limited
to the proceeds of the SPV Notes and any assets securing them and to the extent such
SPV Note and security proceeds are insufficient, the claims of any Party (if any) in
excess of such proceeds shall be extinguished. The Agent's recourse (if any) may be
further limited by agreement by it outside the terms of this Agreement and any such
agreement shall not constitute an amendment or waiver for the purposes of this
Clause 34.
35. AMENDMENTS AND WAIVERS
35.1 Required consents
(a) Subject to Clause 35.2 (Exceptions) any term of the Finance Documents may
be amended or waived only with the consent of the Majority Lenders and the
Borrower and any such amendment or waiver will be binding on all Parties.
(b) The Agent may effect, on behalf of any Finance Party, any amendment or
waiver permitted by this Clause.
35.2 Exceptions
(a) An amendment or waiver that has the effect of changing or which relates to:
(i) the definition of "Majority Lenders" in Clause 1.1 (Definitions);
(ii) an extension to the date of payment of any amount under the Finance
Documents;
(iii) a reduction in the Margin or, after the Issue Date, the Fixed Rate or a
reduction in the amount of any payment of principal, interest, fees or
commission payable;
(iv) an increase in or an extension of any Commitment (other than any
change resulting from the application of Clause 2.2 (Facility
Increase));
(v) a change to the Borrower;
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(vi) any provision which expressly requires the consent of all the Lenders;
or
(vii) Clause 2.2 (Finance Parties' rights and obligations), Clause 22
(Changes to the Lenders), this Clause 35, Clause 38 (Governing law)
or Clause 39.1 (Jurisdiction),
shall not be made without the prior consent of all the Lenders.
(b) If the SPV is a Lender at the relevant time, then an amendment or waiver
which expressly relates to the SPV, any Noteholder, the Note Trustee or the
Issue Documents may not be effected without the consent of the SPV.
(c) An amendment or waiver which relates to the rights or obligations of the
Agent or the Arranger (each in their capacity as such) may not be effected
without the consent of the Agent or the Arranger as the case may be.
36. CONFIDENTIALITY
36.1 Confidential Information
Each Finance Party agrees to keep all Confidential Information confidential and not to
disclose it to anyone, save to the extent permitted by Clause 36.2 (Disclosure of
Confidential Information) and Clause 36.3 (Disclosure to numbering service
providers), and to ensure that all Confidential Information is protected with security
measures and a degree of care that would apply to its own confidential information.
36.2 Disclosure of Confidential Information
Any Finance Party may disclose:
(a) to any of its Affiliates and Related Funds and any of its or their officers,
directors, employees, professional advisers, auditors, partners and
Representatives such Confidential Information as that Finance Party shall
consider appropriate if any person to whom the Confidential Information is to
be given pursuant to this paragraph (a) is informed in writing of its
confidential nature and that some or all of such Confidential Information may
be price-sensitive information except that there shall be no such requirement
to so inform if the recipient is subject to professional obligations to maintain
the confidentiality of the information or is otherwise bound by requirements of
confidentiality in relation to the Confidential Information;
(b) to any person:
(i) to (or through) whom it assigns or transfers (or may potentially assign
or transfer) all or any of its rights and/or obligations under one or more
Finance Documents and to any of that person's Affiliates, Related
Funds, Representatives and professional advisers;
(ii) with (or through) whom it enters into (or may potentially enter into),
whether directly or indirectly, any sub-participation in relation to, or
any other transaction under which payments are to be made or may be
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made by reference to, one or more Finance Documents and/or the
Borrower and to any of that person's Affiliates, Related Funds,
Representatives and professional advisers;
(iii) appointed by any Finance Party or by a person to whom sub paragraph
(b)(i) or (ii) above applies to receive communications, notices,
information or documents delivered pursuant to the Finance
Documents on its behalf (including any person appointed under
paragraph (c) of Clause 24.13 (Relationship with the Lenders));
(iv) who invests in or otherwise finances (or may potentially invest in or
otherwise finance), directly or indirectly, any transaction referred to in
paragraph b(i) or (b)(ii) above (including any Noteholder and any
person that is a party under any Issue Document);
(v) to whom information is required or requested to be disclosed by any
court of competent jurisdiction or any governmental, banking, taxation
or other regulatory authority or similar body, the rules of any relevant
stock exchange or pursuant to any applicable law or regulation;
(vi) to whom or for whose benefit that Finance Party charges, assigns or
otherwise creates Security (or may do so) pursuant to Clause 22.7
(Security over Lenders' rights);
(vii) to whom information is required to be disclosed in connection with,
and for the purposes of, any litigation, arbitration, administrative or
other investigations, proceedings or disputes;
(viii) who is a Party;
(ix) that is an actual or potential SPV, Noteholder, Note Trustee, party to
an Issue Document, any clearing system through which the SPV Notes
may be held from time to time, any rating agency providing a rating in
respect of the SPV Notes or any stock exchange or trading market on
which the SPV Notes may be listed from time to time; or
(x) with the consent of the Borrower;
in each case, such Confidential Information as that Finance Party shall consider
appropriate if:
(A) in relation to paragraphs (b)(i), (b)(ii) and b(iii) above, the
person to whom the Confidential Information is to be given has
entered into a Confidentiality Undertaking except that there
shall be no requirement for a Confidentiality Undertaking if the
recipient is a professional adviser and is subject to professional
obligations to maintain the confidentiality of the Confidential
Information;
(B) in relation to paragraph (b)(iv) above, the person to whom the
Confidential Information is to be given has entered into a
Confidentiality Undertaking or is otherwise bound by
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requirements of confidentiality in relation to the Confidential
Information they receive and is informed that some or all of
such Confidential Information may be price-sensitive
information;
(C) in relation to paragraphs (b)(v), (b)(vi) and (b)(vii) above, the
person to whom the Confidential Information is to be given is
informed of its confidential nature and that some or all of such
Confidential Information may be price-sensitive information
except that there shall be no requirement to so inform if, in the
opinion of that Finance Party, it is not practicable so to do in
the circumstances;
(c) to any person appointed by that Finance Party or by a person to whom
paragraph (b)(i) or (b)(ii) above applies to provide administration or settlement
services in respect of one or more of the Finance Documents including, in
relation to the trading of participations in respect of the Finance Documents,
such Confidential Information as may be required to be disclosed to enable
such service provider to provide any of the services referred to in this
paragraph (c) if the service provider to whom the Confidential Information is
to be given has entered into a confidentiality agreement substantially in the
form of the LMA Master Confidentiality Undertaking for Use With
Administration/Settlement Service Providers or such other form of
confidentiality undertaking agreed between the Borrower and the relevant
Finance Party;
(d) to any rating agency (including its professional advisers) such Confidential
Information as may be required to be disclosed to enable such rating agency to
carry out its normal rating activities in relation to the Finance Documents
and/or the Borrower if the rating agency to whom the Confidential
Information is to be given is informed of its confidential nature and that some
or all of such Confidential Information may be price-sensitive information.
36.3 Disclosure to numbering service providers
(a) Any Finance Party may disclose to any national or international numbering
service provider appointed by that Finance Party to provide identification
numbering services in respect of this Agreement, the Facility and/or the
Borrower the following information:
(i) name of Borrower;
(ii) country of domicile of the Borrower;
(iii) place of incorporation of the Borrower;
(iv) date of this Agreement;
(v) the names of the Agent and the Arranger;
(vi) date of each amendment and restatement of this Agreement;
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(vii) amount of Total Commitments;
(viii) currency of the Facility;
(ix) type of Facility;
(x) ranking of Facility;
(xi) Maturity Date for Facility;
(xii) changes to any of the information previously supplied pursuant to
paragraphs (i) to (xi) above; and
(xiii) such other information agreed between such Finance Party and the
Borrower,
to enable such numbering service provider to provide its usual syndicated loan
numbering identification services.
(b) The Parties acknowledge and agree that each identification number assigned to
this Agreement, the Facility and/or the Borrower by a numbering service
provider and the information associated with each such number may be
disclosed to users of its services in accordance with the standard terms and
conditions of that numbering service provider.
(c) The Borrower represents that none of the information set out in paragraphs (i)
to (xiii) of paragraph (a) above is, nor will at any time be, unpublished price-
sensitive information.
(d) The Agent shall notify the Borrower and the other Finance Parties of:
(i) the name of any numbering service provider appointed by the Agent in
respect of this Agreement, the Facility and/or the Borrower; and
(ii) the number or, as the case may be, numbers assigned to this
Agreement, the Facility and/or the Borrower by such numbering
service provider.
36.4 Entire agreement
This Clause 36 (Confidentiality) constitutes the entire agreement between the Parties
in relation to the obligations of the Finance Parties under the Finance Documents
regarding Confidential Information and supersedes any previous agreement, whether
express or implied, regarding Confidential Information.
36.5 Inside information
Each of the Finance Parties acknowledges that some or all of the Confidential
Information is or may be price-sensitive information and that the use of such
information may be regulated or prohibited by applicable legislation including
securities law relating to insider dealing and market abuse and each of the Finance
Parties undertakes not to use any Confidential Information for any unlawful purpose.
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36.6 Notification of disclosure
Each of the Finance Parties agrees (to the extent permitted by law and regulation) to
inform the Borrower:
(a) of the circumstances of any disclosure of Confidential Information made
pursuant to paragraph (b)(v) of Clause 36.2 (Disclosure of Confidential
Information) except where such disclosure is made to any of the persons
referred to in that paragraph during the ordinary course of its supervisory or
regulatory function; and
(b) upon becoming aware that Confidential Information has been disclosed in
breach of this Clause 36 (Confidentiality).
36.7 Continuing obligations
The obligations in this Clause 36 (Confidentiality) are continuing and, in particular,
shall survive and remain binding on each Finance Party for a period of twelve months
from the earlier of:
(a) the date on which all amounts payable by the Borrower under or in connection
with this Agreement have been paid in full and all Commitments have been
cancelled or otherwise cease to be available; and
(b) the date on which such Finance Party otherwise ceases to be a Finance Party.
37. COUNTERPARTS
Each Finance Document may be executed in any number of counterparts, and this has
the same effect as if the signatures on the counterparts were on a single copy of the
Finance Document.
SECTION 11
GOVERNING LAW AND ENFORCEMENT
38. GOVERNING LAW
This Agreement and any non-contractual obligations arising out of or in connection
with it are governed by English law.
39. ENFORCEMENT
39.1 Jurisdiction
(a) The courts of England have exclusive jurisdiction to settle any dispute arising
out of or in connection with this Agreement (including a dispute relating to the
existence, validity or termination of this Agreement or the consequences of its
nullity or any non-contractual obligations arising out of or in connection with
this Agreement) (a "Dispute").
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(b) The Parties agree that the courts of England are the most appropriate and
convenient courts to settle Disputes and accordingly no Party will argue to the
contrary.
(c) This Clause 39.1 (Jurisdiction) is for the benefit of the Finance Parties only.
As a result, and notwithstanding paragraph (a) of Clause 39.1, any Finance
Party may take proceedings relating to a Dispute in any other courts with
jurisdiction. To the extent allowed by law, the Finance Parties may take
concurrent proceedings in any number of jurisdictions.
39.2 Service of process
Without prejudice to any other mode of service allowed under any relevant law, the
Borrower:
(a) irrevocably appoints Law Debenture Corporate Services Limited, Fifth Floor,
100 Wood Street, London EC2V 7EX as its agent for service of process in
relation to any proceedings before the English courts in connection with any
Finance Document; and
(b) agrees that failure by an agent for service of process to notify the Borrower of
the process will not invalidate the proceedings concerned.
39.3 Waiver of Immunity
The Borrower waives generally all immunity it or its assets or revenues may
otherwise have in any jurisdiction, including immunity in respect of:
(a) the giving of any relief by way of injunction or order for specific performance
or for the recovery of assets or revenues; and
(b) the issue of any process against its assets or revenues for the enforcement of a
judgment or, in an action in rem, for the arrest, detention or sale of any of its
assets and revenues.
40. POWER OF ATTORNEY
If the SPV is represented by an attorney or attorneys in connection with the signing
and/or execution and/or delivery of this Agreement or any agreement or document
referred to herein or made pursuant hereto and the relevant power or powers of
attorney is or are expressed to be governed by the laws of The Netherlands, it is
hereby expressly acknowledged and accepted by the other parties hereto that such
laws shall govern the existence and extent of such attorney's or attorneys' authority
and the effects of the exercise thereof.
This Agreement has been entered into on the date stated at the beginning of this
Agreement.
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SCHEDULE 1
CONDITIONS PRECEDENT TO UTILISATION
1. The Borrower
(a) A copy of the articles of association of the Borrower.
(b) A copy of a resolution of the management board of the Borrower:
(i) approving the terms of, and the transactions contemplated by, the
Finance Documents to which it is a party and resolving that it execute
the Finance Documents to which it is a party;
(ii) authorising a specified person or persons to execute the Finance
Documents to which it is a party on its behalf; and
(iii) authorising a specified person or persons, on its behalf, to sign and/or
despatch all documents and notices (including, if relevant, any
Utilisation Request) to be signed and/or despatched by it under or in
connection with the Finance Documents to which it is a party.
(c) Unless the Agent has received evidence from the Borrower confirming that
approval of the supervisory board is not legally required, a copy of a
resolution of the supervisory board of the Borrower approving the terms of,
and the transactions contemplated by, the Finance Documents to which it is a
party.
(d) A specimen of the signature of each person authorised by the resolution
referred to in paragraph (b) above.
(e) A certificate of the Borrower (signed by a director) confirming that borrowing
the Total Commitments would not cause any borrowing or similar limit
binding on the Borrower to be exceeded.
(f) A certificate of an authorised signatory of the Borrower certifying that each
copy document relating to it specified in this Schedule 1 is correct, complete
and in full force and effect as at a date no earlier than the date of this
Agreement.
2. Legal opinions
(a) A legal opinion of Clifford Chance LLP, legal advisers to the Arranger and the
Agent in England, substantially in the form distributed to the Original Lender
prior to signing this Agreement.
(b) A legal opinion of Spasov & Bratanov Lawyers' Partnership, legal advisers to
the Arranger and the Agent in Bulgaria, substantially in the form distributed to
the Original Lender prior to signing this Agreement.
(c) Such documents as are required by counsel referred to above for the purposes
of issuing their legal opinions including any certificates as to matters of fact
concerning any person.
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3. Other documents and evidence
(a) The executed Fee Letter(s).
(b) A certified copy of the Banking Licence.
(c) Evidence of the Filing.
(d) Evidence that any agent for service of process referred to in Clause 39.2
(Service of process), has accepted its appointment.
(e) A certified copy of the Original Financial Statements.
(f) Evidence that the fees, costs and expenses then due from the Borrower
pursuant to Clause 11 (Fees) and Clause 16 (Costs and Expenses) have been
paid or will be paid by the initial Utilisation Date.
(g) Such documentation and other evidence as is reasonably requested by the
Agent in order for the Agent or any Lender to carry out and be satisfied it has
complied with all necessary "know your customer" or other similar checks in
relation to the Borrower under all applicable laws and regulations pursuant to
the transactions contemplated in the Finance Documents.
(h) A copy of any other Authorisation or other document, opinion or assurance
which the Agent considers to be necessary or desirable (if it has notified the
Borrower accordingly) in connection with the entry into and performance of
the transactions contemplated by any Finance Document or Issue Document or
for the validity and enforceability of any Finance Document or Issue
Document.
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SCHEDULE 2
UTILISATION REQUEST
From: Corporate Commercial Bank AD
To: VTB Capital plc as Agent
Dated:
Dear Sirs
Corporate Commercial Bank AD –Up to USD150,000,000 Facility Agreement
dated [●] 2012 (the "Agreement")
1. We refer to the Agreement. This is a Utilisation Request. Terms defined in the
Agreement have the same meaning in this Utilisation Request unless given a different
meaning in this Utilisation Request.
2. We wish to borrow a Loan on the following terms:
Proposed Utilisation Date: [●] (or, if that is not a Business Day, the next
Business Day)
Currency of Loan: Dollars
Amount: [●] or, if less, the Available Facility
Interest Period: [●]
3. We confirm that each condition specified in Clause 4.2 (Further conditions
precedent) is satisfied on the date of this Utilisation Request.
4. The proceeds of this Loan should be credited to [account].
5. We confirm that we agree to the costs and expenses payable pursuant to Clause 16.1
(Transaction expenses) (together with any VAT) being deducted from the proceeds of
this Loan and we also agree to the fees payable pursuant to Clause 11 (Fees) also
being deducted from the proceeds of this Loan.
6. This Utilisation Request is irrevocable.
Yours faithfully
authorised signatory for
CORPORATE COMMERCIAL BANK AD
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SCHEDULE 3
MANDATORY COST FORMULAE
1. The Mandatory Cost is an addition to the interest rate to compensate Lenders for the
cost of compliance with (a) the requirements of the Bank of England and/or the
Financial Services Authority (or, in either case, any other authority which replaces all
or any of its functions) or (b) the requirements of the European Central Bank.
2. On the first day of each Interest Period (or as soon as possible thereafter) the Agent
shall calculate, as a percentage rate, a rate (the "Additional Cost Rate") in
accordance with the paragraphs set out below. The Mandatory Cost will be calculated
by the Agent by reference to the Agent's Additional Cost Rate and will be expressed
as a percentage rate per annum.
3. The Additional Cost Rate for any Lender lending from a Facility Office in a
Participating Member State will be the percentage determined by the Agent as the
cost of complying with the minimum reserve requirements of the European Central
Bank.
4. The Additional Cost Rate for any Lender lending from a Facility Office in the United
Kingdom will be calculated by the Agent as follows:
300
01.0×E
per cent. per annum
Where:
E is the rate of charge payable by the Agent to the Financial Services Authority
pursuant to the Fees Rules (calculated for this purpose by the Agent as being
the average of the Fee Tariffs applicable to the Agent) and expressed in
pounds per £1,000,000 of the Tariff Base of the Agent.
5. For the purposes of this Schedule:
(a) "Fees Rules" means the rules on periodic fees contained in the FSA Fees
Manual or such other law or regulation as may be in force from time to time in
respect of the payment of fees for the acceptance of deposits;
(b) "Fee Tariffs" means the fee tariffs specified in the Fees Rules under the
activity group A.1 Deposit acceptors (ignoring any minimum fee or zero rated
fee required pursuant to the Fees Rules but taking into account any applicable
discount rate); and
(c) "Tariff Base" has the meaning given to it in, and will be calculated in
accordance with, the Fees Rules.
6. The Agent shall have no liability to any person if such determination results in an
Additional Cost Rate which over or under compensates any Lender.
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7. Any determination by the Agent pursuant to this Schedule in relation to a formula, the
Mandatory Cost, an Additional Cost Rate or any amount payable to a Lender shall, in
the absence of manifest error, be conclusive and binding on all Parties.
8. The Agent may from time to time, after consultation with the Borrower and the
Lenders, determine and notify to all Parties any amendments which are required to be
made to this Schedule in order to comply with any change in law, regulation or any
requirements from time to time imposed by the Bank of England, the Financial
Services Authority or the European Central Bank (or, in any case, any other authority
which replaces all or any of its functions) and any such determination shall, in the
absence of manifest error, be conclusive and binding on all Parties.
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SCHEDULE 4
FORM OF TRANSFER CERTIFICATE
To: VTB Capital plc as Agent
From: [The Existing Lender] (the "Existing Lender") and [The New Lender] (the "New
Lender")
Dated:
Corporate Commercial Bank AD –Up to USD150,000,000 Facility Agreement
dated [●] 2012 (the "Agreement")
1. We refer to the Agreement. This is a Transfer Certificate. Terms defined in the
Agreement have the same meaning in this Transfer Certificate unless given a different
meaning in this Transfer Certificate.
2. We refer to Clause 22.4 (Procedure for transfer):
(a) The Existing Lender and the New Lender agree to the Existing Lender
transferring to the New Lender by novation all or part of the Existing Lender's
Commitment, rights and obligations referred to in the Schedule in accordance
with Clause 22.4 (Procedure for transfer).
(b) The proposed Transfer Date is [●].
(c) The Facility Office and address, fax number and attention details for notices of
the New Lender for the purposes of Clause 29.2 (Addresses) are set out in the
Schedule.
3. [The New Lender shall, on the Transfer Date, pay to the Agent (for its own account) a
fee of USD1,500.]1
4. The New Lender expressly acknowledges the limitations on the Existing Lender's
obligations set out in paragraph (c) of Clause 22.3 (Limitation of responsibility of
Existing Lenders).
5. This Transfer Certificate may be executed in any number of counterparts and this has
the same effect as if the signatures on the counterparts were on a single copy of this
Transfer Certificate.
6. This Transfer Certificate and any non-contractual obligations arising out of or in
connection with it are governed by English law.
7. This Transfer Certificate has been entered into on the date stated at the beginning of
this Transfer Certificate.
1 Not required for a New Lender which is the SPV.
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THE SCHEDULE
Commitment/rights and obligations to be transferred
[insert relevant details]
[Facility Office address, fax number and attention details for notices and account details for
payments,]
[Existing Lender] [New Lender]
By: By:
This Transfer Certificate is accepted by the Agent and the Transfer Date is confirmed
as [ ].
VTB Capital plc as Agent
By:
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SCHEDULE 5
FORM OF ASSIGNMENT AGREEMENT
To: VTB Capital plc as Agent and Corporate Commercial Bank AD as Borrower
From: [the Existing Lender] (the "Existing Lender") and [the New Lender] (the "New
Lender")
Dated:
Corporate Commercial Bank AD –Up to USD150,000,000 Facility Agreement
dated [●] 2012 (the "Agreement")
1. We refer to the Agreement. This is an Assignment Agreement. Terms defined in the
Agreement have the same meaning in this Assignment Agreement unless given a
different meaning in this Assignment Agreement.
2. We refer to Clause 22.5 (Procedure for assignment):
(a) The Existing Lender assigns absolutely to the New Lender all the rights of the
Existing Lender under the Agreement and the other Finance Documents which
relate to that portion of the Existing Lender's Commitments and participations
in a Loan under the Agreement as specified in the Schedule.
(b) The Existing Lender is released from all the obligations of the Existing Lender
which correspond to that portion of the Existing Lender's Commitments and
participations in a Loan under the Agreement specified in the Schedule.
(c) The New Lender becomes a Party as a Lender and is bound by obligations
equivalent to those from which the Existing Lender is released under
paragraph (b) above.
3. The proposed Transfer Date is [●].
4. On the Transfer Date the New Lender becomes Party to the Finance Documents as a
Lender.
5. [The New Lender shall, on the Transfer Date, pay to the Agent (for its own account) a
fee of USD1,500.]2
6. The Facility Office and address, fax number and attention details for notices of the
New Lender for the purposes of Clause 29.2 (Addresses) are set out in the Schedule.
7. The New Lender expressly acknowledges the limitations on the Existing Lender's
obligations set out in paragraph (c) of Clause 22.3 (Limitation of responsibility of
Existing Lenders).
2 Not required for a New Lender which is the SPV.
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8. This Assignment Agreement acts as notice to the Agent (on behalf of each Finance
Party) and, upon delivery in accordance with Clause 22.6 (Copy of Transfer
Certificate or Assignment Agreement to Borrower), to the Borrower of the assignment
referred to in this Assignment Agreement.
9. This Assignment Agreement may be executed in any number of counterparts and this
has the same effect as if the signatures on the counterparts were on a single copy of
this Assignment Agreement.
10. This Assignment Agreement and any non-contractual obligations arising out of or in
connection with it are governed by English law.
11. This Assignment Agreement has been entered into on the date stated at the beginning
of this Assignment Agreement.
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THE SCHEDULE
Rights to be assigned and obligations to be released and undertaken
[insert relevant details]
[Facility office address, fax number and attention details for notices and account details for
payments]
[Existing Lender] [New Lender]
By: By:
This Assignment Agreement is accepted by the Agent and the Transfer Date is confirmed as
[ ].
Signature of this Assignment Agreement by the Agent constitutes confirmation by the Agent
of receipt of notice of the assignment referred to herein, which notice the Agent receives on
behalf of each Finance Party.
VTB Capital plc as Agent
By:
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SCHEDULE 6
FORM OF COMPLIANCE CERTIFICATE
To: VTB Capital plc as Agent
From: Corporate Commercial Bank AD as Borrower
Dated: [●]
Dear Sirs
Corporate Commercial Bank AD –Up to USD150,000,000 Facility Agreement
dated [●] 2012 (the " Agreement")
1. We refer to the Agreement. This is a Compliance Certificate. Terms defined in the
Agreement have the same meaning when used in this Compliance Certificate unless
given a different meaning in this Compliance Certificate.
2. We confirm that the Capital Adequacy Ratio for the Relevant Period ending on [date
of last day of the financial half year] was [●] per cent.
3. [We confirm that no Default is continuing.]*
4. The following are Material Companies:
[●].
For an on behalf of Corporate Commercial Bank AD
Signed:
Authorised signatory Authorised signatory
[insert applicable certification language]
for and on behalf of
[name of auditors of the Borrower]
* If this statement cannot be made, the certificate should identify any Default that is
continuing and the steps, if any, being taken to remedy it.
79776-5-18-v7.0 - 95 - 70-40526173
SCHEDULE 7
ISSUE DATE NOTICE
From: VTB Capital plc as Agent
To: Corporate Commercial Bank AD
Dated: [●]
Dear Sirs
Corporate Commercial Bank AD –Up to USD150,000,000 Facility Agreement
dated [●] 2012 (the "Agreement")
1. We refer to the Agreement. The Lenders have requested that the Agent prepare this
Issue Date Notice in respect of a Facility Increase pursuant to Clause 2.2 (Facility
Increase).
2. This is the Issue Date Notice and terms used in this Issue Date Notice have the same
meaning as in the Agreement unless given a different meaning in this Issue Date
Notice.
3. The proposed Issue Date is [●].
4. [The/Each] Facility Increase Lender agrees to make the Facility Increase
Commitments available on the following terms:
Facility Increase Lender Facility Increase Commitment (USD)
[•] [•]
5. [The/Each] Facility Increase Commitment specified above will become committed on
the Facility Increase Effective Date. The Facility Increase Effective Date is the Issue
Date.
6. [The/Each] Facility Increase Lender confirms that it wishes to make the Facility
Increase Commitment specified alongside its name above.
7. [The/Each] Facility Increase Lender confirms that it wishes to lend a Loan on the
following terms:
Utilisation Date: [●]
Currency of Loan: Dollars
Amount: [●]3
Interest Rate: Fixed Rate
8. The proceeds of the Loan shall be credited to [account].
3 Amount to be inserted not to exceed USD60,000,000.
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9. This Issue Date Notice and any non-contractual obligations arising out of or in
connection with it are governed by English law.
Yours faithfully
…………………………………
authorised signatory for
VTB Capital plc as Agent
79776-5-18-v7.0 - 97 - 70-40526173
SCHEDULE 8
TIMETABLES
Delivery of a duly completed Utilisation Request
(Clause 5.1 (Delivery of a Utilisation Request)
U-3
9.30am
Agent notifies the Lenders of a Loan in accordance with
Clause 5.5 (Lenders' participation)
U-3
3.00pm
For dates falling prior to the Issue Date on which
LIBOR is to be determined, LIBOR is fixed
Quotation Day as of 11:00 a.m.
"U" = date of utilisation or, if applicable, in the case of a Loan that has already been
borrowed, the first day of the relevant Interest Period for a Loan
"U - X" = Business Days prior to date of utilisation
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SIGNATURES
THE BORROWER
CORPORATE COMMERCIAL BANK AD
By: /s/ Ilian Zafirov
Ilian Zafirov - Executive Director
By: /s/ Georgi Hristov
Georgi Hristov - Executive Director
Address: 10 Graf Ignatiev Srteet, Stedetz Area, Sofia 1000, Bulgaria
Fax: +359 2 9375 607
Attention: Ilian Zafirov - Executive Director
Email: [email protected]
THE ARRANGER
VTB CAPITAL PLC
By: /s/ Atanas Bostandjiev By: /s/ Cicely Leemhuis
Atanas Bostandjiev Cicely Leemhuis
Director Authorised Signatory
THE AGENT
VTB CAPITAL PLC
By: /s/ Atanas Bostandjiev By: /s/ Cicely Leemhuis
Atanas Bostandjiev Cicely Leemhuis
Director Authorised Signatory
Address: 14 Cornhill, London EC3V 3ND, UK
Fax: +44 20 3334 8924
Attention: Manager, Loans Administration
E-mail: [email protected]
79776-5-18-v7.0 - 99 - 70-40526173
THE ORIGINAL LENDER
VTB CAPITAL PLC
By: /s/ Atanas Bostandjiev By: /s/ Cicely Leemhuis
Atanas Bostandjiev Cicely Leemhuis
Director Authorised Signatory
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INDEX OF DEFINED TERMS
Accession Deed .......................................... 1, 31 Agency Agreement ......................................... 31 Agent .............................................................. 31 Agents............................................................. 31 Bank ........................................................... 1, 71 BNB ................................................................ 21 Borrower ..................................................... 1, 41 business day .............................................. 35, 46 Business Day .................................................. 41 Calculation Agent ........................................... 31 Central Bank ..................................................... 1 Charge ............................................................ 28 Charged Assets ............................................... 41 Clearstream, Luxembourg ................................ 1 Closing Date ..................................................... 1 Conditions ................................................ 26, 31 CRA Regulation ............................................... 1 Dealer Fee .............................................. 41, 138 Definitive Notes ............................................. 46 Directive ......................................................... 42 Dispute ........................................................... 41 Early Redemption Amount ............................. 42 Encumbrance .................................................. 42 Enforcement Notice ........................................ 36 Euroclear .......................................................... 1 Event of Default ....................................... 37, 42 Exchange Event .............................................. 46 Facility Agent ................................................. 42 Facility Agreement ..................................... 1, 42 FATCA ......................................................... 136 FATCA withholding ....................................... 36 Foundation ...................................................... 48 FSMA ........................................................... 138 Future Dealer Fees .......................................... 42 Global Note ................................................ 1, 42 Insolvency Regulation .................................... 33 Interest Payment Date .................................... 42 Investor's Currency ......................................... 15 Irish Listing Agent ........................................ 140 Irish Stock Exchange ........................................ 1 IRS ................................................................ 136 Issue Agent ..................................................... 31
Issue Date .................................................... 1, 31 Issuer ........................................................... 1, 31 Issuer Account ................................................ 42 Loan ............................................................ 1, 42 Loan Interest Payment Date ............................ 42 Management Agreement ........................... 43, 48 Noteholder ...................................................... 32 Noteholders ....................................................... 1 Notes ..................................................... 1, 26, 31 Official List ....................................................... 1 Order .................................................................. i Permanent Global Note ............................... 1, 43 Principal Paying Agent ................................... 31 Principal Trust Deed ................................... 1, 31 Priority of Payments (Pre-Enforcement) ......... 32 Proceedings ..................................................... 41 Programme .................................................. 1, 31 Programme Dealer Agreement ........................ 43 Proposals and Advice Agreement ................... 43 Prospectus Directive ......................................... 1 Prospectus Regulations ..................................... 1 Regulation S ...................................................... 1 Relevant Date ............................................ 38, 43 relevant persons ................................................. i Reserved Matter .............................................. 43 Secured Creditor ............................................. 43 Securities Act ............................................ 1, 138 Security ........................................................... 32 shortfall ........................................................... 17 Specified Office .............................................. 43 Supplemental Trust Deed ............................ 1, 31 Temporary Global Note .............................. 1, 43 TMF ................................................................ 48 Trade Documents ............................................ 43 Transaction Documents .................................. 43 Transfer Certificate ......................................... 43 Transferred Rights .......................................... 28 Trust Deed................................................... 1, 31 Trustee ........................................................ 1, 31 Underlying Assets ..................................... 29, 43 Unpaid Dealer Fees ......................................... 43 USD .......................................................... 26, 44
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REGISTERED OFFICE OF THE ISSUER
Northern Lights Bulgaria B.V. Luna Arena
Herikerbergweg 238, 1101 CM Amsterdam Zuidoost
The Netherlands
ARRANGER, DEALER AND CALCULATION AGENT
VTB Capital plc 14 Cornhill,
London EC3V 3ND United Kingdom
TRUSTEE
BNY Mellon Corporate Trustee Services Limited One Canada Square London E14 5AL United Kingdom
ISSUE AGENT, ACCOUNT BANK AND PRINCIPAL PAYING AGENT
The Bank of New York Mellon One Canada Square London E14 5AL United Kingdom
LEGAL ADVISORS TO THE ARRANGER AND DEALER
English Law
Clifford Chance LLP 10 Upper Bank Street
London E14 5JJ United Kingdom
Dutch Law
Clifford Chance LLP Droogbak 1A
1013 GE Amsterdam The Netherlands
Bulgarian Law
Spasov & Bratanov Lawyers' Partnership Slavyanska Office Centre 29A, Slavyanska Street
Sofia 1000 Bulgaria
79776-5-9 - 151 - 70-40526173
LEGAL ADVISORS TO TRUSTEE
English Law
Clifford Chance LLP 10 Upper Bank Street
London E14 5JJ United Kingdom
LEGAL ADVISORS TO CORPORATE COMMERCIAL BANK AD
Bulgarian Law
DTT Limited 17 San Stefano Str., 3rd floor
1504 Sofia, Bulgaria
IRISH LISTING AGENT
A&L Goodbody IFSC
North Wall Quay Dublin 1 Ireland