Alon Domb Head of Corporate
COVID-19: government backed debt finance options
This Q&A considers the government’s newest stream of measures introduced to provide financial support to business struggling with the impact of Covid-19. Our focus in this article is on two new government backed funding schemes: the Covid Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loan Scheme (CBILS).
These schemes were made available to businesses as of 23 March 2020.
What is the CBILS?
The CBILS scheme can provide facilities of up to £5 million on repayment terms of up to six years for term loans and asset finance for small and medium sized businesses (SMEs) who are experiencing lost or deferred revenues leading to cashflow disruption. As well as term loans and asset finance, CBILS also supports a wide range of business finance products, including overdrafts and invoice finance. The scheme provides the lender with a government-backed guarantee (80%) potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’.
The CBILS is provided directly by lenders who are accredited partners of the British Business Bank (these range from high street lenders to challenger banks to specialist lenders and details of those participating can be found on the British Business Bank's website).
Are you eligible?
To be eligible for a facility under CBILS, your business must:
- Be UK based in your business activity with annual turnover of no more than £45m;
- Have a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable your business to trade out of any short-to-medium term difficulty;
- If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.
The British Business Bank has produced guidance on those businesses not eligible to apply for the scheme which include:
- Banks, Building Societies, Insurers and Reinsurers (but not insurance brokers);
- The public sector including state funded primary and secondary schools;
- Employer, professional, religious or political membership organisation or trade unions.
What is the CCFF?
The CCFF, which is provided by the Bank of England is designed to cushion the blow of the potentially detrimental impact of Covid – 19 on business cash flows, inevitably linked to the significant disruptions in supply chains and wider general weaker economic activity.
The CCFF will provide funding to businesses across a range of sectors by purchasing commercial paper of up to one-year maturity, which has been issued by those corporates making "a material contribution to the UK economy" or by financing subsidiaries of such corporates.
The facility will offer terms that were prevailing in the market prior to the Covid-19 crisis.
The Bank of England’s Market Notice confirms that the fund will purchase sterling-denominated commercial paper which has the following characteristics (with non-standard features such as subordination unlikely to be acceptable):
- A maturity of one week to 12 months if issued to the BoE at issue via a dealer (an eligible institution acting as principal);
- Where available, 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;
- Where a short-term credit rating is not available the Bank of England will consider whether a long-term credit rating can be used to assess eligibility and pricing, or whether the BoE can assess that the issuer is of equivalent financial strength;
- Issued directly into Euroclear and/or Clearstream.
According to the Bank of England, if an issuer is downgraded after 1 March 2020 below the minimum credit ratings set out above, the issuer will remain eligible for primary and secondary market purchase in the CCFF, subject to HM Treasury approval.
Securities issued by a finance subsidiary should be guaranteed by their parent company in a form acceptable to the Bank.
Are you eligible?
Ultimately, determinations of eligibility will be made by the Bank of England's risk management staff. The Bank of England has indicated initial eligibility as follows:
- UK incorporated companies, including those with foreign-incorporated parents and with a genuine business in the UK;
- Companies with significant employment in the UK;
- Firms with their headquarters in the UK.
The minimum size of an individual security that the Fund will purchase from an individual participant is £1 million.
Are the schemes a good option?
Subject to distressed companies meeting the eligibility criteria for the relevant schemes, the short answer is that debt financing to address the short to medium term financial stress caused by Covid-19 is potentially a good option but it needs to be carefully considered.
These schemes are designed to assist businesses cushion the short to medium term economic shock of this unprecedented economic crisis. This is not an unqualified praise of the schemes however, as businesses must be prudent to consider their existing financial covenants and longer term expected cash flow position. It goes without saying, both schemes are providing debt funding which will require repayment in due course and lenders may require security where it is available. As such, directors of financially distressed companies will need to carefully consider whether it is appropriate to access these schemes in light of potential wrongful trading liabilities and their duties to creditors. Please see our update, which sets out these relevant considerations in greater detail.
Both the Bank of England and British Business Bank have also made clear that the schemes are always subject to review, therefore it is advisable for businesses to keep abreast of the relevant information via their websites.
The above does not constitute legal advice nor does it consider a complete list of issues to consider when applying for one of these schemes. Should you have any queries, or you would like our assistance in applying for one of these schemes then please do not hesitate to contact the authors of this article or your usual contact at Ince. Our team stands ready to assist.