HM Treasury, the Chancellor and the Bank of England have announced various measures that form the back bone of the support package being put in place to support British businesses in their attempts to withstand the effects of the Coronavirus outbreak.

The details of these measures are still evolving. This alert sets out what we know so far about two key measures:

  • the COVID Corporate Financing Facility (CCFF); and 
  • the Coronavirus Business Interruption Loan Scheme.    

 

Larger Companies: COVID Corporate Financing Facility (CCFF)

The CCFF is led and operated by the Bank of England and backed by HM Treasury. It is intended for larger UK incorporated companies (including those with foreign incorporated parent companies) that meet the criteria set out below.

How does it work?

The CCFF uses the central bank balance sheet to lend it directly to large companies that are looking for bridge financing. The Bank of England will buy commercial paper issued by those companies (i.e. an unsecured short term debt instrument/bond with maturities of between one week and one year).

Who is eligible?

The CCFF will be available to UK incorporated companies provided they: 

  • make a material contribution to economic activity in the UK; and 
  • can demonstrate they were in sound financial health prior to the onset of the crisis.

Companies that do not currently issue commercial paper but are capable of doing so are ‘in principle’ eligible provided they meet the above criteria.

The CCFF will not be available to: 

  • Banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the Financial Conduct Authority; 
  • Leveraged investment vehicle; or 
  • companies within groups that are predominantly active in businesses that are subject to financial sector regulation.

Eligible companies will also need to evaluate utilisation of the CCFF alongside any other debt facilities they may have in place. For example, how would the CCFF impact existing financial covenant packages or debt incurrence restrictions?  

Material contribution to UK economic activity?

Current guidance from the Bank of England states that UK incorporated businesses that have a genuine business in the UK will generally be considered as meeting the requirement. Risk management staff will make decisions taking into account various factors such as: 

  • whether a company has its HQ in the UK; 
  • the extent to which the company has employees in the UK; 
  • whether the company generates significant revenues in the UK; 
  • the extent of the company's UK customer base; and 
  • the number of operating sites that the company has in the UK.

What constitutes “sound financial health prior to the onset of the crisis”?

Guidance states that "where available" this would be demonstrated by a company having: 

  • a minimum short term credit rating of A-3/ P-3/ F-3 from at least one of Standard & Poor's, Moody's and Fitch as at 1 March 2020; or 
  • a long term credit rating of above BBB-/Baa3/BBB-. on the same basis.

If a company has split ratings and one or more of its ratings is below the prescribed minimum it will not be eligible. A company at the lowest rating that was on negative watch or negative outlook as at 1 March will be considered.

If a short term credit rating is not available, the Bank of England will consider whether a long-term rating can be used to assess eligibility and pricing and whether other methods can be used to assess if a company has appropriate financial stability.

If a company has been downgraded since 1 March and is below the minimum ratings stated above, that company may still be eligible subject to HM Treasury approval.

The following ratings agency assessments are currently envisaged as being acceptable evidence of credit quality:

Moody's 

  • Long and short term public corporate credit ratings 
  • If approaching CRAs for first time, private recent "indicative ratings"

Standard & Poor's Ratings Services 

  • Long and short term public corporate credit ratings 
  • If approaching CRAs for first time, recent "Credit Assessments"

Fitch 

  • Long and short term public corporate credit ratings 
  • Form of Fitch credit opinion incorporating rating rationale preferred

Who is missing out?

On Thursday (19 March), the British Retail Consortium expressed concern that many of its members would be too large to access those facilities intended for small companies, but would not have strong enough credit ratings to access the CCFF. They highlighted that the absence of a credit rating doesn't indicate a business is not performing well.

The Bank of England guidance suggests that a company without the requisite credit ratings may request that one of the major ratings agencies assess its credit quality. It can then share that assessment with the BofE and HMT for the purpose of assessing eligibility to access the CCFF.

What about pricing?

The facility will be priced on terms that are comparable to those prevailing in the market in the period prior to the COVID 19 outbreak. Currently there is no further detail on the exact meaning of this. It may be the case however that drawing under the CCFF would be economically preferable to drawing under other undrawn lines that may be available to the company.

How long will the CCFF be available for?

At least a 12 month period and for as long as it is needed to relieve cash flow pressures on eligible companies.

At least six months' notice of the withdrawal of the facility will be provided.

How do I access the CCFF?

Liaise with your own bank or another bank that issues commercial paper. If you have existing commercial paper that is eligible for the scheme, banks will assist with issuing it to the CCFF.

More information on the application process (including application forms and a pricing schedule) will be available on the Bank of England website (www.bankofengland.co.uk) from Monday 23 March 2020.

 

Smaller Companies: Coronavirus Business Interruption Loan Scheme (CBILS)

Who is it available to?

CBILS is a new scheme to provide smaller businesses who are experiencing lost or deferred revenues leading to disruptions to their cashflows.

The full eligibility criteria is yet to be published (expected week commencing 23 March), however current expectations are that a company must: 

  • be an SME that is UK based in its business activity and with turnover not exceeding GBP 45 million per year; 
  • operate within an eligible industrial sector (which excludes certain fishing and agricultural businesses, banks, building societies, insurance (but not insurance brokers), reinsurance, primary and/secondary education, trade unions and religious/political organisations); 
  • have a borrowing proposal that, if it were not for the current pandemic, would be considered viable by the lender and the lender believes that the provision of the finance will enable the business to trade out of any short to medium term difficulty.

If a lender feels that it can offer financing on normal commercial terms without using the CBILS then it will do so.

To the extent that a company has existing banking facilities, they may well incorporate restrictions on raising additional financial indebtedness and therefore the loan (and any security and guarantee) documentation should be checked for relevant provisions.

How does it work?

The CBILs are provided by the British Business Bank through participating providers. The scheme provides the lender with a government-backed guarantee for 80% of the outstanding facility amount (which supports a potentially positive credit decision) - subject to an overall cap per lender.

As well as term and revolving loans, a CBIL may also include other types of financial product such as overdrafts, invoice financing and asset financing.

The maximum facility size will be GBP 5 million.

The term of the facility can extend up to six years for term loans and asset finance and up to three years for overdrafts and invoice financing.

Lenders can provide unsecured facilities of up to GBP 250,000 at their discretion. For anything above that, the lender is required to establish a lack of existing security (that would rank ahead of their claim).

What about pricing?

There will be no guarantee fee for SMEs to access the scheme - the lenders will pay a fee.

The Government will make a Business Interruption Payment that will cover the first 12 months of interest on the facility and any lender levied fees. Early lender soundings indicated that some lenders would not be looking to charge arrangement fees or early repayment fees to SMEs borrowing under the scheme. However, fishing, agriculture and aquaculture businesses may not qualify fully for this.

How does a company apply?

A company should visit the website of the British Business Bank (www.british-business-bank.co.uk) and approach one of the listed accredited lenders with their borrowing proposal. The decision as to whether a company is eligible for CBILS rests with the individual lender.

Applications for new lenders to obtain accreditation are currently being accepted. Prospective lenders can submit an expression of interest to the British Business Bank.

 

Do the COVID Corporate Financing Facility and the Coronavirus Business Interruption Loan Scheme go far enough?

  • These schemes sit alongside some other resources that are available for businesses (such as the Term Funding Scheme for SMEs) to obtain funding in these current turbulent times. However, there are clear gaps in the support provided by these initiatives. 
  • In particular, larger companies whose credit ratings do not meet the criteria/are unrated that may be struggling with a dip in performance related to COVID19 and need additional emergency funding, are not accommodated here. 
  • Any company that is looking to utilise these types of facilities that has existing banking facilities/financing arrangements will need to check the underlying finance/facility documentation to ascertain whether consent will need to be obtained from the relevant financier or whether there are any restrictions that are relevant to setting up new facilities.
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