Mattew Youkee, Editorial manager for Bulgaria, Oxford Business Group

The recent strong appetite for initial public offerings (IPO) in Bulgaria has forced authorities to create new legislation to quell over-exuberant investors.

The popularity of the late October IPO for the local construction firm Trace led to a change in the rules regarding offerings in Bulgaria. Following the offering, the Financial Supervision Commission, Bulgaria's financial regulator, announced that bids in subsequent IPOs must not exceed the bidder's bank deposit, equity or mutual fund holdings.

Few doubted the Trace IPO would be heavily oversubscribed. The fact that bidders were not required to make a full or partial upfront payment meant many investors placed bids well in excess of their available income to ensure they would get shares. Consequently, to buy a single share in Trace with a nominal value of one lev ($0.76) and an issue price of 110.5 leva ($84), it would have been necessary to bid at 164 000 leva ($124 550), meaning the IPO was oversubscribed by more than 1480 times.

Krassimir Tachiev, head of research at First Financial Brokerage House, told OBG, "The Trace IPO was a self-fulfilling prophecy. The brokerage community is small here and when people discovered the IPO would be oversubscribed they bid heavily in excess... This had an exponential effect."

Soon after the Trace IPO came the Enemona issue, a local engineering company focussing on the energy sector, on November 26. The offering exceeded a billion leva ($760 million), almost 30 times greater than the 33.6 million leva ($25.5 million) the IPO was predicted to raise.

Given the strong bidding for Enemona shares, the ruling seemed to have only partly quelled the strong demand for shares on the Bulgarian Stock Exchange (BSE), particularly as it took place in the wake of a difficult period for the market.

November saw 20 per cent wiped off the face value of shares listed on the BSE, the largest sell off in the history of the exchange. On the single biggest day of loss, November 20, the BSE's Sofix index, which follows the 16 most liquid stocks on the BSE, fell by 3.89 per cent and the BG40 index dropped by 4.8 per cent.

This slide was driven by weak performance by  the stocks of, for example, local battery manufacturer Monbat, the Central Cooperative Bank and Industrial Holding Bulgaria.

Prior to the November 20 correction, a letter circulated by the Bulgarian Association of Liquid Investment Intermediaries raised caution among investors when it recommended that local mutual funds restructure their portfolios to reduce their equity holdings and therefore protect themselves from overexposure to the market. This gave further credence to the belief expressed by many analysts that a stock bubble had emerged and a correction was likely.

Tachiev told OBG, "In the past year the BG40 has risen by 160 per cent. In September and October the price of the BG40 started to fluctuate significantly. This was an indication the BSE was due a correction."

Heavy sell offs in November were made in anticipation of a large number of IPOs of Bulgarian companies in the coming months. In mid-December the locally based Agria Group Holding, which has subsidiaries in agriculture, renewable energy and food processing will look to raise 22 million leva ($16.7 million) from its IPO and Billboard, a local printing and advertising company, will become the first advertising firm listed on the BSE with its IPO expected to raise between 41.25 million ($31.3 million) and 56.25 million leva ($42.7 million).

Tachiev said these IPOs, which are for smaller companies in sectors less represented in the market, offered a welcome addition to the secondary market. "These IPOs are coming at the right time. The current situation, which involves significant speculation on the prices of major stocks, has led to serious over evaluations."

Although Tachiev said he feared a modest correction could continue to the end of the year, other analysts felt that prices have bottomed out. Either way the next few months could offer interesting opportunities on the BSE.