The financial crisis that is rocking neighbouring Turkey has had little impact on the general economic environment in Bulgaria. However, at certain points where Turkish and Bulgarian businesses meet, the result has been nearly devastating. Celhart, a leading manufacturer of paper products in Bulgaria, owned by the Istanbul-based Isiklar Holding, is a striking example of this phenomenon.

Celhart AD was privatised in 1996 through the mass privatisation program. In 1997 and 1998, Isiklar Holding, a leading Turkish industrial group with a dominant position in craft sack manufacturing, acquired a majority stake in the company. The 82 per cent share was obtained through the stock market and a cash deal with the government.

The acquisition of Celhart was part of Isiklar Holding's growth strategy. The Bulgarian plant was envisaged to become the holding's principal source of sack paper for the wider European and Middle Eastern market. In order to achieve this more quickly, Isiklar approached and soon after secured financing from two major financial institutions - the European Bank for Reconstruction and Development (EBRD) and the International Financial Corporation (IFC).

With a total of $45 million in hand, Isiklar proceeded with a large-scale investment program for Celhart. The production facilities of the plant, a significant portion of which was over 30-years-old at the time of acquisition, were upgraded and capacity was expanded.

After the completion of the investment program in the second half of 2000, however, Isiklar's growth strategy received a serious blow. The Turkish financial crisis hit the organisation severely. Isiklar's major creditors blocked some of its assets, including Isiklar Ambalaj, the paper arm of the organisation. As a result, the link between the holding and its Bulgarian subsidiary, itself badly in need of financing, was cut.

Celhart faced a serious problem - lack of working capital. Due to the extensive construction works related to the upgrade of the production facilities, the plant was virtually shut down over the greater portion of 2000. Thus, burdened with some $30 million in debt and generating loss, the company quickly melted its financial and material resources. Not surprisingly, last February, Celhart announced that it has stopped production of craft paper.

Two weeks ago, the company shed some light on the scale of its troubles. It reported a six per cent drop in 2000 revenues to $9.37 million, and a net loss of $18.18 million that erased the stockholders' equity. The balance sheet showed that the cash account was down 40 per cent and the Current Ratio stood at 0.37 - signifying a liquidity crisis.

"Celhart's revenue stream was seriously disrupted by the construction works in the plant, which ended late in the second half of 2000, Cem Suyur, managing director of Celhart told The Echo. "The financial crisis in Turkey added to this by hurting the finances of our Turkish clients, who responded by cutting purchasing volumes."

The company's financial statements, which showed a large quantity of finished goods, offered support to Suyur's claims. As of December 31, 2000, some $3.4 million in finished good have accumulated, compared to $125,000 at the same time the previous year.

When Celhart's link with Turkey was cut the company was not prepared to walk on its own. It lacked the established reputation and diversified customer base to soften the impact of a weakening market.

Left on its own, Celhart's management resorted to aggressive tactics. "We have opened to the world," said Suyur. "Celhart is currently trying to establish its presence in North Africa, the Middle East, the Balkans and Europe."

In order to do this effectively, management sought out specific personnel. "Our new sales director is a Swedish gentleman from Assi Domain, one of the largest paper manufacturing businesses in the world. He is now redirecting his client base towards Celhart," said Suyur.

Whether or not Celhart's tactics will succeed remains to be seen. For now the company has not managed to strike a major deal. But, according to Suyur, the company has recently made several trial shipments to Egypt, Saudi Arabia, Algier, and Kuwait, and optimistically awaits a response.