30.04.2024 Todor Todorov: Guarantee fund brings viability to businesses – a condition for innovation

How the National Guarantee Fund has helped businesses over the years, is there a need to change the tools used to evaluate companies' projects, and are companies able to make their projects innovative with more investment? – we talk to the Fund's Executive Officer, Todor Todorov.

- Mr. Todorov, should there be a change in the tools used to evaluate companies' projects?

- The evaluation of any investment project comes down to answering three specific questions: what is given, what is received and within what timeframe the first two are considered. In this respect, the evaluation approach is straightforward.

In the case of an investment in a deposit or government security, for example, these terms are contractually clear, and with that the measure of the investment, which we call yield. The only risk you take is that the counterparty does not honour the commitment. With an investment in a production line, you cannot predict with precision, for example, what proportion of what is produced the market would take. In corporate transactions, there are even more unknowns. In any case, however, it is imperative to have an answer that follows rational analysis.

In this sense, to assume that a change in valuation tools is necessary is to assume that we will be compromising with either the rational or the mathematical.

- Aren't new key performance indicators and standards required to report on the results of these projects?

- Any owner of a resource who has decided to lend it, whether as a lender or an investor, has the right to determine the purpose and conditions of its spending, and with that – how the results will be reported. This also applies to the allocation of funds under operational programmes, which are the most active in setting requirements and imposing new reporting standards. However, these standards are regulatory prescriptions designed to assess the performance of a specific project against specifically agreed terms and conditions, and should not be taken as a systematic change in the approach to evaluating investment projects.

- How have the guarantee programmes of the National Guarantee Fund changed over the years?

- The Fund assists banks to lend to small businesses where the necessary collateral or down payment is lacking. In these cases, the NGF makes lending possible by sharing 50% of the credit risk with the financing institution.

Businesses have received a total of over BGN 3.5 billion in resources as a result of our guarantees. These have been issued under 9 guarantee schemes implemented over nearly 15 years of operation.

The fact that the company operates on a strictly market-based basis, with each guarantee scheme supported by the fees paid by the banks, has played a significant role in its success. We manage our own funds and this only helps us set the terms of the programmes.

Therefore, there is no substantive change, in terms of scope and conditions, in the company's guarantee schemes. Any SME, irrespective of the sector in which it operates and the purpose of the resources it seeks, can avail of a guarantee from us at the discretion of the financing institution.

What changes are only the commercial terms of the guarantee agreements with each institution, namely the maximum volume of loans we guarantee and the guarantee fees that the financing institutions owe.

- Does this make it easier for SMEs to access banks?

- From the point of view of a leading guarantor of small businesses, absolutely yes. Our guarantee agreements with commercial banks are as broad as possible in terms of the ultimate beneficiaries and have virtually no additional requirements to commercial banks in terms of credit risk management.

Our new guarantee programme is a record in the history of the National Guarantee Fund in terms of volumes requested by banks. Utilisation under the programme has been accelerated and requests are coming in for increases to limits that have already been reached.

Every quarter, our guarantees are used to grant loans to small businesses in a total of almost BGN 200 million. That is nearly a thousand loans to 600-700 businesses.

In the next two years, we expect to help around 5,000 businesses to obtain a total of nearly BGN 1.5 billion through our network of counterparties.

- Is the risk for funding increasing due to the economic environment and requirements aligned with ESG policies?

- As to the economic environment, a slowdown in growth or a general deterioration also increases uncertainty, and uncertainty is also known as risk.

So - yes, the risk is increasing. However, it would be good to "size up" this risk.

Judging from our experience, including pandemic years and geopolitical shocks, we do not see these shocks materially manifesting in the bottom line. NPL rates remain stable. Specifically, for our last two guarantee schemes, which have been in the actual stress test for the past four years, they have been almost constant. This leads me to conclude that SMEs are quite resilient to market shocks.

As regards the sustainability and corporate governance requirements, I believe that unless they are substantially eased, there is a huge risk of asymmetric distribution of the administrative burden on small businesses. They will be forced to borrow to cover the costs associated with the new standards. On this issue, there needs to be a conscious and reasoned position on the possible benefits of following this direction. Undoubtedly, if changes are to be made for the sake of a fairer world of human relations and the wise allocation of finite natural resources, and thus for the sake of the future of the planet, this requires a coordinated collective effort. I would define action in this direction not as an investment in sustainable growth, but as a rescue action.

- Are businesses succeeding in making their projects innovative with more investment?

- That is the objective. Investment implies something new and, in that sense, it is an innovative project. We have come to unconsciously associate innovation in business with breakthrough system solutions, but "new" is also "different" in relation to what you yourself have done before. We can't expect every company to pioneer robotics or conquer outer space. Sustainability is primarily the result of ingenuity in a particular market environment. And beyond resilience is Nassim Taleb's Antifragility, a result of the ingenuity not only to withstand a shock but also to reap the benefits of its occurrence. And this brings reasoning back into the field of risk with the conclusion that risk is in fact necessary. In our micro-world, our guiding objective is to ensure the viability of small businesses. It is indispensable for innovation to happen.

Todor Todorov is Vice Chairman of the Board and Executive Officer of the National Guarantee Fund.

He is a financial expert with many years of experience in leading financial institutions and advising companies. He began his professional career as an investment banker in the New York office of JPMorgan. Upon his return to Bulgaria, he established and managed the consumer finance unit at Hebros Bank before the bank became part of the UniCredit group.

He continued his career at the international consulting company Deloitte as head of corporate finance for Bulgaria, and in 2017 was accepted as a partner in the company's CEE division. During his professional career, he led and participated in the implementation of more than one hundred projects and corporate transactions with a total value of more than EUR 6 billion. Under his leadership, Deloitte's international team assisted the Bulgarian National Bank in the implementation of the largest asset quality assessment project of the Bulgarian banking system.

Todor Todorov has a Master's degree in International Management and Finance from Thunderbird University in Arizona, USA, and a Bachelor's degree in Business Administration from the American University in Bulgaria.