The rapid onset of COVID-19 in the UK and its financial implications has led to a plethora of policy commitments by the Government to support business. The package of measures is evolving rapidly, and will continue to do so as more measures to control movement are implemented, but currently includes:
- a Coronavirus Job Retention Scheme (see our note on this scheme here)
- deferring VAT and Income Tax payments
- a Statutory Sick Pay relief package for small and medium sized businesses (SMEs)
- a 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England
- small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief
- grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000
- the HMRC Time To Pay Scheme
- the Coronavirus Business Interruption Loan Scheme offering Government guaranteed loans of up to £5 million for SMEs through the British Business Bank (“CBILS”)
- a new lending facility from the Bank of England under its Covid Corporate Financing Facility to help support liquidity among larger firms (“CCFF”)
In this alert we focus on the latter two initiatives, CBILS and CCFF.
The Coronavirus Business Interruption Loan Scheme (“CBILS”)
CBILS “went live” on 23 March 2020. It can provide facilities of up to £5 million for smaller businesses across the UK who are experiencing lost or deferred revenues, leading to disruptions to their cash flow. It supports a wide range of business finance products, including term loans, overdrafts, invoice finance and asset finance. The scheme provides a lender with a Government-backed guarantee. A borrower always remains 100% liable for the debt.
- Up to £5 million facility: The maximum value of a facility provided under the scheme will be £5 million, available on repayment terms of up to six years.
- 80% guarantee: The scheme provides the lender with a government-backed, partial guarantee (80%) against the outstanding facility balance, subject to an overall cap per lender.
- No guarantee fee for SMEs to access the scheme: Lenders will pay a fee to access the scheme.
- Interest and fees paid by Government for 12 months: The Government will make a “Business Interruption Payment” to cover the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments. It appears (subject to reviewing the underlying documents) that this payment is intended to be a grant rather than a loan, and some lenders have already indicated that they will not charge fees.
- Finance terms: Finance terms are up to six years for term loans and asset finance facilities. For overdrafts and invoice finance facilities, terms will be up to three years.
- Security: At the discretion of the lender, the scheme may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, the lender must establish a lack or absence of security prior to businesses using CBILS. If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.
To be eligible for a facility under CBILS, an SME must:
- Be UK-based in its business activity, with annual turnover of no more than £45 million.
- Have a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty.
- Fishery, aquaculture and agriculture businesses may not qualify for the full interest and fee payment.
- The following trades and organisations are not eligible to apply: banks, building societies, insurers and reinsurers (insurance brokers are eligible); the public sector including state funded primary and secondary schools; and employer, professional, religious or political membership organisations or trade unions.
CBILS is available through the British Business Bank’s 40+ accredited lenders, which are listed on the British Business Bank website (www.british-business-bank.co.uk). The British Business Bank is a Government-owned, independently-run development bank.
In the first instance, businesses should approach their existing lender. They may also consider approaching other lenders if they are unable to access the finance they need.
Decision-making on eligibility is fully delegated to the 40+ accredited CBILS lenders. These lenders range from high street banks, to challenger banks, asset-based lenders and smaller specialist local lenders.
Covid Corporate Financing Facility (“CCFF”)
The CCFF is a joint HM Treasury and Bank of England lending facility (the “Facility”). It is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper (“CP”).
The scheme is open to firms that can demonstrate that they were in sound financial health prior to the impact of COVID-19. Companies who wish to use the scheme do not need to have issued CP before.
- Bank involvement: Companies will need to liaise with an arranging bank in order for CP to be issued. Not all banks arrange the issuance of CP.
- CP: CP is an unsecured, short-term debt instrument.
- CP eligibility: Sterling-denominated CP with the following characteristics can be purchased through the Facility:
o Maturity of one week to twelve months.
o Where available, a credit rating of A-3 / P-3 / F-3 / R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020.
o Issued directly into clearing houses (Euroclear and/or Clearstream).
- Covid Corporate Financing Facility Limited (the “Fund”): The Fund will purchase the CP during a defined period each business day. It will purchase, at a minimum spread over reference rates, (i) newly issued CP in the primary market via dealers and (ii) after issuance from eligible counterparties in the secondary market.
- Duration: The Bank of England’s intention is for CCFF to operate for an initial period of 12 months, to help businesses bridge through COVID-19-related disruption to their cash flows. The Bank of England will provide six months’ notice of the withdrawal of the Facility.
- Material contribution to the UK economy: Companies that make a material contribution to the UK economy are able to participate in the Facility. Firms that meet this requirement would normally be: 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. Other matters such as whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK, will also be considered.
- Sound financial health: The facility is open to firms that can demonstrate they were in “sound financial health” prior to the COVID-19 shock. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent. Alternative arrangements for unrated companies are being developed.
- Sectors: CP issued by banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the Financial Conduct Authority will not be eligible. CP will also not be eligible if issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation.
Applications to participate as counterparties in the CCFF can be made from Monday 23 March 2020. The application form is available on the Bank’s website at https://www.bankofengland.co.uk/news/2020/march/the-covid-corporate-financing-facility.
Points to note
Though these initiatives are likely to come as a relief to some businesses, we note the following:
- Overall, both CBILS and CCFF are means of borrowing money, rather than grants. Not all businesses will be able to afford to repay additional debt.
- A chasm seems to be opening up between those eligible for support under CBILS and those who have the means to access CCFF, particularly in view of the CCFF’s requirement for investment grade or investment grade equivalent status.
- Initial indications in respect of CBILS are that some lenders are requiring security and personal guarantees, which makes these loans a daunting prospect for many SMEs.
- Arranger fees for issuing CP may be prohibitive for some.
- However, CCFF is likely to provide reassurance to a CP market that has been significantly disrupted by recent events.
The information in this note consolidates information that is available on publicly available websites for the Bank of England, gov.uk and the British Business Bank.