OREANDA-NEWS. Fitch Ratings has affirmed Bulgarian Development Bank's (BDB) Long-term Issuer Default Rating (IDR) and Support Rating Floor at 'BBB-', Short-term IDR at 'F3' and Support Rating at '2'. The Outlook on the Long-term IDR is Stable.

Fitch does not assign a Viability Rating to BDB as its business model is solely dependent on support from the state.

The rating action follows a peer review of European development banks.

KEY RATING DRIVERS
BDB's IDRs and Support Rating Floor are equalised with those of the Bulgarian sovereign (BBB-/Stable). These ratings, as well as the Support Rating, reflect Fitch's opinion that there is a high probability of support for the bank from the Bulgarian sovereign, if required, due to the bank's policy role, its 99.99% state ownership, its funding structure, and its small size. Fitch views both the state's propensity and ability to support the bank as strong, which mitigates the lack of explicit state guarantee on BDB's liabilities.

Fitch's view of the sovereign's strong ability to support BDB reflects both the small size of any potential contingency liability, as well as Bulgaria's significant financial flexibility. At end-2014, liabilities due to non-state-related parties represented 45.4% of the bank's total liabilities and a small 0.7% of the country's GDP. The general government debt of Bulgaria rose to an estimated 28% of GDP at end-2014, but significantly below the 'BBB' median ratio (40%).

BDB was established under a dedicated law (the BDB Act) to support the implementation of the government's economic policy. Its primary task is to stimulate domestic economic growth, in particular by facilitating access to finance for SMEs, but also by providing investment banking for projects of national importance. In addition to its commissioned tasks, the bank is allowed to perform most of the activities of commercial banks, including customer deposit collection. BDB provides financing in the form of direct loans to final beneficiaries, loans to commercial banks earmarked for on-lending as well as guarantees and counter-guarantees. Its activities have tended to be linked to government or EU-led development programmes.

The BDB Act does not provide an explicit state guarantee on BDB's liabilities, although it does give the state the ability to do this on a case-by-case basis for bonds and loans with maturities over one year. The BDB Act also allows for an increase in the bank's capital (through a capital injection or bond conversion), while requiring the Bulgarian state always to maintain a minimum 51% stake in the bank. At present, none of the bank's debt is covered by a state guarantee. However, in 2015 BDB plans to issue a government-guaranteed bond of up to EUR500m (a significant 79% of the bank's total liabilities at end-2014), which will finance the government's energy efficiency programme. Under the programme, repayment of the loans provided to households will be coming directly from the state, so BDB will effectively act as an administrator of the programme.

In 2014, BDB was funded mainly from equity and state-related resources. Equity covered a high 38% of total balance sheet. Non-equity funding was to a large extent (about 55%) linked to the state, including funds held on deposit at BDB by a state agency (serving as cash collateral against guarantees issued) and deposits of state-owned companies. The remainder included loans from international financial institutions and foreign development banks, customer deposits, bank deposits and issued bonds.

RATING SENSITIVITIES
BDB has not been excluded from the scope of the Bank Recovery and Resolution Directive (BRRD). This means that, in view of the lack of a clear separation between the bank's pure policy and commercial activities, the state could be prevented from supporting the bank's senior creditors due to potential distortion of market competition.

However, Fitch views such a scenario unlikely at present due to BDB's small size (1.9% of the banking sector total customer loans end-3Q14). We also believe that the state has significant flexibility to act pre-emptively. This underpins our Stable Outlook on the bank's Long-term IDR.

BDB's ratings are sensitive to changes in the sovereign's ability and/or propensity to support the bank, the former being reflected in Bulgaria's ratings. If the sovereign is downgraded, this would trigger a similar action on BDB. However, given the lack of an explicit guarantee on all the obligations of the bank and the fact that it has been excluded from the scope of BRRD, a sovereign upgrade would not necessarily lead to an upgrade of the bank.

Fitch's view on the sovereign's propensity to support the bank could weaken if Fitch decides that BDB's size and/or mix of commercial and policy banking means an increased risk that the state will be prevented from supporting the bank's senior creditors in full. This might especially be the case if the bank's potential expansion is concentrated on commercial area and financed primary from unsecured wholesale funding.