Holders of dollar-denominated bonds at Bulgaria's Corporate Commercial Bank (Corpbank) are gearing up for legal action against the government if the bond defaults and the bank is tipped into insolvency, two sources told Reuters on Thursday.
A default has looked increasingly likely after a run on deposits at Corpbank in June, which prompted the central bank to seize control of Bulgaria's fourth-largest lender, shut down its operations and block depositors from taking out money.
There is still no solution in sight for a rescue of the bank, whose closure sparked the Balkan country's worst banking crisis since the 1990s, especially after lawmakers rejected a proposed rescue package earlier in July.
The maturity of the bond, which had an original issue of $150 million, falls on Aug 8.
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A group of bondholders, which includes hedge funds and institutions in the United States and Europe, have formed a committee and hired legal representation in Bulgaria in the event the government tips Corpbank into insolvency, the sources said.
One source, a manager at a London-based hedge fund, said the government and the central bank had reassured the bondholders at a government investor road show in June that they would be protected and their money paid back in full.
Failure to do so would send a poor signal about Bulgaria's investment climate and raise the cost of the country issuing sovereign debt in the future, the manager said, speaking on condition of anonymity.
"What these guys don't realize, is that they run the risk of turning Bulgaria into the Argentina of Europe," the manager said, referring to news this week of Argentina's second default in 12 years.