Financing support during Covid-19 disruption
Our briefing on implications under finance documents of the spread of Covid-19 considered, in early March (which seems a long time ago, given the upheaval in everyday life that has followed), the possibility of economic and legal interventions from government affecting financial markets. There have been many such interventions – with perhaps more to come.
The original schemes
On 17 March, the UK Chancellor of the Exchequer supplemented the package of support for businesses facing disruption caused by Covid-19 that he announced in the Budget only a week earlier. The bolstered package of “temporary, timely and targeted measures” provides payroll and tax reliefs, makes available grants and provides (and supports the provision of) credit.
There are two original financing support schemes – which have been supplemented, tweaked and implemented with remarkable speed following the Chancellor’s initial announcement:
1. Covid Corporate Financing Facility (CCFF)
This is to “support liquidity amongst larger firms”. The CCFF provides funding through the purchasing of commercial paper (CP).
The Bank of England is implementing the facility on behalf of HM Treasury. To do so, it has set up an entity separate from the central bank and funded by newly created central bank reserves. Whilst the Bank of England will continue to decide on the overall amount of assets financed by central bank reserves (which include government and corporate bonds, as well as CP purchased under the CCFF), it will be acting as HM Treasury’s agent in implementing the CCFF – with HM Treasury taking risk in deciding whether a business is eligible and indemnifying the Bank of England (or its separate SPV) for any losses or expenses incurred in providing credit to businesses deemed eligible.
As to which businesses are eligible for the CCFF
Whilst it will be attractive to large corporates with a track record of CP issuance, perhaps exceptionally for a central bank run scheme of this sort, issuers do not need to have previously issued CP in order to participate. The government and Bank of England have taken steps towards opening the CCFF to as many UK businesses as can feasibly benefit from a structural perspective (issuing debt securities from a programme is not realistically achievable by every business), but an overriding creditworthiness requirement will represent too high a hurdle for a significant number.
- A business must make “a material contribution to economic activity in the United Kingdom”. UK incorporated companies will normally be regarded as meeting this requirement, but so can those incorporated elsewhere but with their headquarters or significant employment, or generating significant revenues, serving a large number of customers or having a number of operating sites, in the UK. There are early suggestions that this requirement is being interpreted broadly.
- CP issued by “leveraged investment vehicles” will not be eligible – neither will CP issued by (a) companies within groups that are predominantly active in businesses subject to financial regulation (think banks, building societies, insurers and others) or (b) public bodies of various sorts. The reference to “leveraged investment vehicles” prompts pause for thought. It is not further defined and is unclear in its intent. Some have wondered whether it excludes from the CCFF private equity funded companies per se (as they will often bear a significant debt burden upon investment or acquisition), but it would appear that the classic sponsored portfolio company in receipt of non-recourse finance could qualify – its challenge will be in satisfying the creditworthiness requirement (which applies to all):
- for issuers with short-term credit ratings: minimum of A3/P3/F3/R3 from at least one of S&P/Moody’s/Fitch/DBRS Morningstar at 1 March 2020 (set prior to the possible impact of Covid-19); and
- for issuers without short-term credit ratings: the Bank of England will consider a loose hierarchy of alternative routes to confirming the necessary “sound financial health” at that time: (a) long-term public credit ratings; (b) approved “private” credit ratings (which are being made available on shorter than usual timeframes); or (c) a bank-led assessment of whether a business can be “deemed equivalent to having a public investment grade rating”, which will “draw on a range of information, including the range of banks’ internal ratings across all of a firm’s commercial bank counterparties” (to be checked by the Bank of England against information made available by Credit Benchmark).
- Related to this, to be eligible for purchase under the CCFF, CP must not have “non-standard features”. The examples given are extendibility and subordination. As regards the latter, it appears that the CP would need to rank at least pari passu with senior unsecured and unsubordinated financial indebtedness of the group, and thus benefit from any guarantees of subsidiary and sister companies of the issuer which are necessary to achieve this. This caters to groups with a more complex capital structure than the usual issuers of CP on an unsecured basis and which may well have taken route (c) to satisfying the creditworthiness requirement (outlined above) – where existing lending banks have required a package of guarantees to support their conclusion that the issuer is investment grade. Separate, and more common to traditional CP issuance, is the guarantee required from the ultimate parent company if the issuer is a subsidiary.
Additional noteworthy features of the CCFF
- The separate fund set up to implement the CCFF will purchase both newly issued CP in the primary market (via dealers) and prior issued – but still eligible – CP in the secondary markets (via eligible counterparties). Intermediary banks have a significant role to play.
- The names of issuers and details of securities purchased will, from 4 June, be disclosed publicly by the Bank of England. This reflects a change to the scheme made on 19 May, as the original policy had been to keep this information confidential. It seems that the wider public interest in knowing where government-backed financing is being directed has trumped the interests of issuers seeking to access it discretely. Although, some issuers have already been happy to publicise their accessing the CCFF as demonstrating their investment grade standing and ready access to liquidity.
- The Bank of England intends to operate the CCFF for an initial period of 12 months and will give six months’ notice of its withdrawal. Securities can have a maturity of one week to 12 months, with rollovers possible whilst the CCFF operates.
- The quantum of debt purchased from an eligible issuer in the primary market may be capped (which cap would only be disclosed, on request, to the issuer). The minimum offer size is £1m and minimum increments are £0.1m.
- Businesses selling CP that matures beyond 19 May 2021, or which are given access to financing in a larger amount than is suggested by their credit rating, will be expected to “provide a letter addressed to HM Treasury that commits to showing restraint on the payment of dividends and other capital distributions and on senior pay during the period in which their commercial paper is outstanding” (as announced on, and with application from, 19 May).
- Also announced on 19 May to incentivise earlier redemption and a business’s return to fully private financing was the waiver of the usual early redemption fee if an issuer transacts to redeem CP before 30 June 2020.
- CP will be purchased at a discount (rather than bearing interest), with its price to a primary market issuer calculated from a spread above a reference rate based on the Overnight Indexed Swap (OIS) curve. Spreads are to be set close to market spreads prevailing prior to the impact of Covid-19 (varied according to the creditworthiness of the issuer). These are favourable terms, which have understandably prompted significant interest from potential new entrants to the market.
- Securities are to be issued directly into the clearing systems (Euroclear and/or Clearstream), for trading purposes. Another role for an agent bank.
Potential issuers of CP under the CCFF are encouraged to contact a bank to assist them and to liaise through their bank (or directly, if required) with the Bank of England to discuss their eligibility and to provide the necessary documentation. Contact details and other relevant information (including template transaction documents) are available from the Bank of England’s webpage: Covid Corporate Financing Facility (CCFF): information for those seeking to participate in the scheme.
2. Coronavirus Business Interruption Loan Scheme (CBILS)
This is to “support lending to small and medium sized businesses”.
- Delivered by the British Business Bank (BBB).
- To support businesses in accessing term loans and asset finance (for terms of up to six years) and overdrafts and invoice finance (for terms of up to three years).
- Financing of up to £5m per business is available, with the government to cover the first 12 months of interest payments and any lender-levied charges.
- Replaces the Enterprise Finance Guarantee (EFG) scheme, at least temporarily – the CBILS will run for an initial six months and may be extended. Under the EFG scheme more than 40 lenders (including the big four banks – Barclays, HSBC, Lloyds and RBS) have already been providing this type of financing – but on a much smaller scale than is being demanded under the CBILS.
- Government will provide accredited lenders with a guarantee of 80% in respect of a borrower’s liabilities to give them confidence in continuing to provide finance to SMEs. The borrower remains fully and primarily liable for the debt.
- Government will not charge businesses for this guarantee (waiving the 2% per annum it charged businesses for an EFG). Lenders pay a fee to access the scheme.
- Businesses interested in the CBILS should approach accredited lenders directly – the lenders will decide who is eligible and whether, and on what terms, to make credit available.
- Lenders will exercise this discretion taking into account the scheme terms they have agreed with government. In relation to the often contentious matter of personal guarantees (PG), these terms now provide that no PG may be required for financing facilities of up to £250,000 and, if required for facilities above that amount, recoveries under the PG will be capped at 20% of the liabilities of the borrower remaining after the proceeds of business assets have been applied.
- Where available, lenders may require other guarantees and proprietary security to support CBILS financing. This raises the same question as in relation to the CCFF: how will government-backed facilities interact with existing (and, indeed, future) financing arrangements? In relation to the CBILS it is harder to answer in the abstract, as the circumstances and strategy of individual lenders and borrowers, and the financial product involved, can vary dramatically across the spectrum of those eligible for the scheme.
As to which businesses are eligible for the CBILS
The criteria applied by the BBB to the EFG scheme have been quite significantly modified – such that, to be eligible for the CBILS, a business must:
- have a borrowing proposal which the lender would consider viable were it not for the current Covid-19 pandemic (with the borrower required to self-certify that it has been adversely impacted by Covid-19); and
- be a UK based SME, with turnover of no more than £45 million per annum (of which more than 50% must be generated from trading activity). CBILS-backed financing is to be used primarily to support a business’s trading in the UK. As with the CCFF, businesses subject to financial regulation and public bodies are generally excluded.
To establish “viability” lenders have been required to carry out a case-by-case assessment which, in line with usually rigorous standards, can lead to requests of borrowers to produce quite a lot in the way of supporting documentation. To speed up the processing of applications and increase the likelihood of approval, the government recently stated that lenders need only assess whether a business was viable pre Covid-19 disruption. This lessening of the ‘look forward’ aspect of the test is supported from a regulatory standpoint by a statement from the Prudential Regulation Authority (PRA) at the Bank of England, which recognises the challenges in providing forecast financial information in the current extraordinary circumstances and encourages lenders to use their judgement. The FCA has also made a supporting statement in relation to specifically regulated lending.
Related to “viability” – and not open to modification by the UK government and regulators – is the condition forming part of the EU state aid clearances of the government’s financing support for businesses disrupted by Covid-19 that excludes any potential borrower which was an “undertaking in difficulty” on 31 December 2019 (to pre-date Covid-19 disruption Europe-wide). This has not been well publicised in relation to the UK schemes. Applying the definition can be complicated, with limbs addressing accumulated losses and collective insolvency proceedings (which include company voluntary arrangements) proving especially troublesome to some businesses.
The BBB has made available dedicated CBILS webpages, where some limited further information can be found.
A missing middle?
Almost immediately following the announcement of the CCFF and the CBILS, questions were being asked as to whether these schemes left stranded a “missing middle” of businesses too large to access the CBILS and too small (or, more precisely, of insufficient credit) to access the CCFF.
Increased flexibility on the part of the Bank of England in applying the creditworthiness test of eligibility for the CCFF followed (which resulted in the position outlined above). Then, without the fanfare of an “in person” announcement (which perhaps reflected the urgency of the situation and lobbyists' requests for early reassurance, even if details are to follow), the Chancellor announced late on 2 April a third financing support scheme.
The details were hurriedly worked out among the government, the BBB and accredited lenders – with market participants making important representations as to how the scheme should be designed for maximum impact, which led to the outline terms being revised ahead of launch. The scheme launched on 20 April.
3. Coronavirus Large Business Interruption Loan Scheme (CLBILS)
The CLBILS is structured, implemented and administered in much the same way as the CBILS. Our focus here is on the key differences.
- The scheme is open to businesses with annual turnover above £45m.
- Financing of up to £25m (for businesses with annual turnover up to £250m) or £50m (for businesses with annual turnover above £250m) is available.
- It was announced on 19 May that, to bridge more of the gap to the CCFF, financing of up to £200m can be made available under the CLBILS from 26 May, subject to “further accreditation checks” of lenders wishing to do so with the benefit of the 80% government guarantee. There will also be strings attached for borrowers of facilities above £50m: bans on dividends and share buybacks (which suggests a tightening of existing restrictions under the scheme) and restrictions on senior management pay (with a similar materiality qualifier to that which currently applies to dividends and share buybacks).
- Similar to the CBILS, term loans, revolving credit facilities (including overdrafts), invoice finance and asset finance are available (though not every lender offers every product), but differentiating it from the CBILS is the term limit of three years for all facilities.
- Government will not cover interest or charges.
- The SME criterion obviously does not apply to the CLBILS, but another CBILS eligibility criterion – that the business have a borrowing proposal which the lender would consider viable were it not for the current Covid-19 pandemic – does apply, prompting similar considerations as to what is a “viable” business, and whether it was an “undertaking in difficulty” at the relevant time, as were flagged above. It is not yet clear whether a stricter test of “viability” will continue to be applied by lenders under the CLBILS.
Similar to the other schemes, the interaction with businesses’ existing financing arrangements will be key, and is particularly interesting to ponder in context of the leveraged finance structures that many mid-market borrowers have in place. It is also worth noting that a business cannot access both the CCFF and the CLBILS. The BBB has made available dedicated CLBILS webpages, where some limited further information can be found.
The loosening of the eligibility criteria for the CBILS and the addition of the CLBILS were generally welcomed by potential borrowers. A few banks and other financiers have joined the BBB’s roster of accredited lenders, and we are aware of others considering or in process of doing so, but concerns remain as to whether increases in supply can match the enormous demand for financing across an economy suffering so dramatically from a deterioration in cashflow.
Quicker access to finance
With the ensuing bottleneck – felt especially by SMEs attempting to access the CBILS – lenders’ compliance with regulatory obligations and approach to commercial risk management have come under intense scrutiny. After some debate, government’s desire to ‘get money out the door’ persuaded the Chancellor of the merits of fully guaranteeing smaller loans to expedite the funding of needy businesses. Extending down from the CBILS (rather than up in the case of the CLBILS), another financing scheme was announced in late April and quickly launched on 4 May:
4. Bounce Back Loan Scheme (BBLS)
The BBLS makes available term loans of between £2,000 and £50,000, with a 100% government guarantee to lenders. The scheme otherwise aligns with the CBILS in many respects.
It appears that the BBLS’s success will depend on a streamlined online application process delivering funding to borrowers more quickly than has often been the case under the CBILS. The theory is that, without having to assess credit risk, lenders will be able to lend against the minimal information borrowers are required to provide “within days”.
Also beneficial to borrowers, and to the speed and efficiency of the scheme more generally, are:
- a standardised interest rate of 2.5% per annum (regardless of the identity of the lender);
- government’s coverage of the first 12 months of interest payments (no lender-levied charges are permitted); and
- a 12 month principal repayment holiday.
As well as the commercial freedom which comes with a 100% government guarantee, lenders under the BBLS (current and potential) have been provided with greater regulatory freedom to make the scheme work as intended, particularly in relation to consumer finance protections that would otherwise apply to some small business lending (with a concomitant lessening of relevant borrowers’ rights). We briefly cover the legislation required to effect this in: Covid-19: legislation bringing into force BBLS exemption published.
Although positioned for “high street staples like hairdressers, coffee shops and florists”, the BBLS is accessible to businesses of all sizes. However, a recipient of a Bounce Back Loan is prevented from later accessing other government-backed financing schemes related to Covid-19, which will likely dissuade many from taking this comparatively easier route to receiving a small amount of finance.
The BBB has made available dedicated BBLS webpages, where some limited further information can be found.
Help for start-ups
Also following a significant lobbying effort, on 20 April the Chancellor announced a financial support package specifically for high-growth businesses suffering during Covid-19 disruption.
5. Future Fund
The Future Fund is to provide government-funded (not just guaranteed) loans to unlisted UK incorporated companies with a “substantive economic presence” in the UK that have raised at least £250,000 in aggregate from private, third party investors in prior funding rounds during the last five years.
The government loans – of between £125,000 and £5m, if matched by funding from private investors – are to be convertible to equity and are intended for early stage businesses that rely on venture capital or other equity investment. These businesses are generally unable to access the CBILS due to being loss making in their early years, thus not satisfying the “viability” criterion mentioned above.
This scheme is also delivered in partnership with the BBB, though it is different to the CBILS, the CLBILS and the BBLS in providing direct government funding rather than guarantees of commercial financing. It launched on 20 May.
Detailed information on the Future Fund, including the form of convertible loan agreement that is to be used, is available via the BBB’s dedicated Future Fund webpages. Alongside the announcement of the Future Fund (which is to have an initial government-funded capacity of £250m), it was announced that an additional £750m will be made available to the most R&D intensive SMEs through Innovate UK’s grants and loans scheme. Most of these funds will be made available to “existing customers” of Innovate UK, the UK’s innovation agency.
The government’s Financial support for businesses during coronavirus (COVID-19) hub is a starting point for those wishing to keep up to speed with developments across this whole area.
Markets (and regulators) in action
The government and financial regulators have not only been active in designing and implementing schemes providing unprecedented support for businesses in need of finance.
On 25 March a joint letter was sent from the Chancellor, the Governor of the Bank of England and the CEO of the Financial Conduct Authority (FCA) to the CEOs of UK banks on the subject of Covid-19 and bank lending. It detailed the government financing support then available, as well as a number of decisions taken by the regulators in an attempt to ensure the financial system has, across the board, the capacity for an uninterrupted supply of credit to reach the firms (and households) that need it.
The next day, the CEOs of UK banks received another letter, this time from the CEO of the PRA. As the banks’ prudential regulator, the letter from the PRA addresses accounting and capital requirements and – of significant transactional interest – the treatment of borrowers who breach covenants due to Covid-19. A key passage reads:
Where … uncertainties are of a general nature or are firm-specific but unrelated to the solvency or liquidity of the borrower, we would expect lenders to consider the need to treat them differently compared to uncertainties that arise because of borrower specific issues and in doing so consider waiving the resultant covenant breach. We would expect firms to do so in good faith and not to impose new charges or restrictions on customers following a covenant breach that are unrelated to the facts and circumstances that led to that breach.
This is clearly of some assistance to borrowers in their discussions with lenders – and is reflected in the generally collaborative approach that we have observed both before and after the letter was sent. In the SME context, it has been supported by the FCA’s most recent letter, which we cover in: Covid-19: FCA writes to CEOs in relation to SME lending practices during the pandemic.
It is, however, worth noting that all these letters – and the government’s efforts more widely – focus on the provision of credit by banks, whereas much of the financing made available in the UK over recent years has been provided by alternative lenders (institutional and smaller asset managers). Their buy-in to the government’s agenda is less assured where they have less access to direct and indirect support. The perceived lack of support for the mid-market was especially troubling alternative lenders, as that is the area in which they have come to dominate in recent times. There are, therefore, high hopes that the CLBILS will have a big impact.
For more on the material consequences of these and other regulatory interventions for ABS and speciality finance markets, please see: Covid-19: new FCA guidance on consumer credit and the implications for ABS and specialty finance.
To end: the thought that there may be longer term good to come from the current period of disruption and the decisions being taken by government, regulators and market participants alike, which we briefly consider in: Socially acceptable behaviour in the loan markets – ESG in action.
This is a further updated version of a briefing first published on 20 April 2020 and updated on 7 May 2020.