From prototype to production: Financing Europe’s rearmament in Bulgaria

Europe is in the midst of its largest expansion in defence spending in decades. EU Member States spent EUR 418 billion on defence in 2025, an increase of 20% year on year, and spending is projected to reach EUR 454 billion in 2026. Bulgaria’s share of this effort includes a EUR 3.26 billion loan under the Security Action for Europe (SAFE) instrument, ratified by the National Assembly in July 2026. Yet while public funding has expanded at remarkable speed, most of it is designed to buy capability rather than to build it, and the financing of new production capacity rests increasingly with commercial banks and private investors.

Security Action for Europe (SAFE)

Council Regulation (EU) 2025/1106 establishes SAFE as a loan facility of up to EUR 150 billion for Member States. The loans are financed by the Commission on the capital markets and are generally deployed through common procurement involving at least two participating states. Priority capabilities include ammunition and missiles, air and missile defence, drones, cyber and military mobility.

Bulgaria’s loan agreement provides for a grace period on principal of up to 10 years and a maturity of up to 45 years. The Commission pays 15% of the loan, about EUR 489 million, as pre-financing. The funds are allocated to nine priority projects in the development plan of the armed forces, including a joint acquisition of 155mm artillery ammunition led by Bulgaria.

For the industry, SAFE is first and foremost a source of demand rather than of capital. Companies benefit through procurement contracts awarded under the programme, and the Minister of Economy has stated that only about 10–15% of the allocation could be used for the construction of production facilities. Long-term procurement contracts funded under SAFE may nevertheless underpin the bankability of new capacity, as they provide sovereign-backed revenue against which lenders can finance.

EU industrial programmes

European Defence Industry Programme

Regulation (EU) 2025/2643 establishing the European Defence Industry Programme (EDIP) entered into force in December 2025. On 30 March 2026, the Commission adopted a work programme of EUR 1.5 billion for 2026–2027, of which more than EUR 700 million is dedicated to strengthening production capacity. On 14 October 2026, it allocated EUR 168.2 million to the first eight industrial reinforcement projects, focused on energetic materials for missiles, drones and ammunition.

Defence Readiness Omnibus

The Council gave its final approval to the Defence Readiness Omnibus on 9 October 2026. The package consists of two regulations and one directive, which facilitate defence investment, accelerate the permitting of Defence Readiness Projects and streamline defence procurement and intra-EU transfers of defence-related products. Permitting for Defence Readiness Projects will be limited to a maximum of 102 working days, with tacit approval under certain conditions. The acts will enter into force on the twentieth day following their publication in the Official Journal, and the directive will require transposition into Bulgarian law.

For new production sites in Bulgaria, the accelerated permitting regime may remove one of the practical obstacles to construction. Its effect will, however, depend on how the competent Bulgarian authorities apply the new deadlines in practice.

Development and institutional financing

EIB Group

The EIB Group’s 2026 operational plan sets a target of EUR 4.5 billion for security and defence financing. The EIF committed EUR 376 million to security and defence investments in 2025, and its successor Defence Equity Facility targets an initial EUR 1 billion, to be deployed through 25–30 venture capital, private equity, private credit and infrastructure funds. Under the approach approved in April 2026 for intermediated equity, at least two-thirds of a dedicated fund’s capital must be invested in companies with no activity in weapons and ammunition, while up to one-third may be invested in companies that may be involved in such activities, provided that they are established in the EU or EFTA. Direct financing of weapons and ammunition remains excluded.

The Group is also increasingly sharing risk with commercial banks. In October 2026, the EIB and Santander signed a guarantee agreement expected to mobilise about EUR 300 million in new lending to SMEs and mid-caps in the defence supply chain, covering productive investment, working capital linked to new contracts and dual-use technology. Similar structures with Bulgarian banks would offer a natural route for channelling institutional support to local suppliers.

Bulgarian Development Bank

The Bulgarian Development Bank operates a dedicated programme for working capital and investment loans to Bulgarian manufacturers of weapons, ammunition, explosives and dual-use goods, and to companies servicing defence equipment. Eligible borrowers must hold the necessary licences and have no outstanding public liabilities.

Sustainable finance rules and bank policies

The Commission has clarified that the Sustainable Finance Disclosure Regulation (SFDR) and related sustainable finance rules do not in themselves prevent the financing of the defence sector. Defence investments may therefore be held by funds classified under Article 8 SFDR. It remains unclear, however, in what circumstances they may qualify as sustainable investments under Article 9 SFDR.

In practice, the remaining obstacles lie less in regulation than in the internal policies of financial institutions, including exclusion lists, reputational risk frameworks and onboarding procedures. Lenders and investors intending to enter the sector should revisit these policies, as well as the standard sanctions, “restricted activities” and ESG undertakings in their documentation, which may unintentionally capture defence-related business.

Structuring bank financing for defence production

Defence production is in many respects better suited to bank financing than early-stage research and development. It is asset-based, may be supported by long-term contracts with sovereign buyers, and is increasingly eligible for risk-sharing with the EIB Group and national development banks. The instruments that have underpinned the growth of Bulgarian project finance in recent years can be adapted for this purpose, including:

• pledges of receivables under procurement contracts and pledges of bank accounts under the Registered Pledges Act;
• project finance structures for new facilities, secured by an enterprise pledge, a mortgage and a pledge over the shares of the project company; and
• working capital and guarantee facilities, including the advance payment and performance guarantees typically required in defence procurement.

Several features of the sector nonetheless require particular attention. Procurement contracts may restrict the assignment or pledge of receivables or make it subject to the consent of the contracting authority. Access to information may be limited under the Classified Information Protection Act, which affects both due diligence and ongoing reporting to lenders. Where the counterparty is a state-owned company, additional corporate and state approvals may be required. Most importantly, the production of and trade in defence-related products is subject to licensing, and licences do not transfer automatically. A purchaser of a pledged enterprise or shares upon enforcement may therefore need its own licences and, where applicable, foreign investment clearance, which may affect both the timing of enforcement and the value that can be realised.

Foreign direct investment screening

The amendments to the Investment Promotion Act adopted on 22 February 2024 introduced a foreign direct investment screening mechanism in Bulgaria. Prior approval by the Inter-ministerial Council for Screening of Foreign Direct Investments is required for investments by investors under direct or indirect control from outside the EU, where the target operates in a sensitive sector, including defence, dual-use items and critical technologies, and the investment either:

• involves the acquisition of at least 10% of the capital of an undertaking operating in Bulgaria; or
• exceeds EUR 2 million, including greenfield investments.

The Council must issue a decision within 45 days, which may be extended by 30 days. An investment made without the required approval remains valid but is subject to an administrative fine of 5% of its value, but not less than BGN 50,000 (the equivalent of EUR 25,565), and possible corrective measures.

At EU level, Regulation (EU) 2026/1386 on the screening of foreign investments entered into force on 16 July 2026 and will apply from 17 January 2028. It requires all Member States to screen investments in a common minimum list of sectors, including military equipment and dual-use items, and covers investments made through EU entities controlled by third-country investors. Investors in Bulgarian defence projects backed by non-EU capital should build the screening procedure into the transaction timetable alongside merger control and export control analysis.

What is next

The key milestones in the coming months include:

• the publication of the Defence Readiness Omnibus in the Official Journal and the start of transposition of the directive into Bulgarian law;
• 28 October 2026, the deadline for applications under the EIC STEP Scale Up Defence call, which provides equity investments of EUR 10–30 million to defence companies;
• the expected finalisation of the Commission’s revised Merger Guidelines in Q4 2026, which recognise defence readiness and security of supply as relevant considerations;
• the launch and fundraising of the EIF’s successor Defence Equity Facility;
• the outcome of the renegotiation of the VMZ–Rheinmetall project; and
• 17 January 2028, when Regulation (EU) 2026/1386 begins to apply.

The architecture of European defence funding is now largely in place. The next stage of Europe’s rearmament will be decided less in Brussels than on the factory floor, and on whether projects in countries such as Bulgaria can secure the capital to move from prototype to production. Financial institutions that adapt their internal policies and documentation to the sector, and that structure transactions from the outset with licensing, screening and enforcement in mind, will be well placed to lead this shift. For commercial banks with experience in structured and project finance, the opportunity is considerable.

For further information and to stay up to date on forthcoming developments, contact your usual CMS contact or our local CMS Sofia experts, Anna Philcheva and Ivan Gergov.