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Client Alert 08 APR. 2020
The alert is available to download HERE.
The UK government package of COVID-19 support for businesses measures, announced on 17 March 2020, initially included two financing facilities, one, CBILS, for small and medium-sized enterprises (SMEs) and the other one, CCFF, for larger companies that make a material contribution to the UK economy. Both of these financing facilities have been operational from 23 March 2020. The CBILS was amended and expanded on 3 April 2020 so that all viable SMEs affected by COVID-19, and not just those unable to secure regular commercial financing, will now be eligible for the CBILS. The revised CBILS also restricts the lenders’ ability to require personal guarantees for CBILS financing.
As a result of the mounting pressure on the UK government to make the coronavirus financing schemes more accessible to businesses by providing 100% state guarantees, the UK government announced a new loan scheme for small and medium-sized businesses, the BBLS, to be available from 4 May 2020, which will provide “micro-loans” of up to 25% of the turnover of the business up to £50,000, supported by a 100% state guarantee to the lender. However, the UK government emphasized that it remains “unconvinced” that its other coronavirus financing schemes for bigger businesses should be supported by a 100% state guarantee.
In addition to these two initial financing facilities, in response to market concerns regarding COVID-19 government financing support for firms which are bigger than SMEs but do not meet criteria for the CCFF, the UK government announced on 3 April 2020 that a further financing facility called Coronavirus Large Business Interruption Loan Scheme (CLBILS) would be launched in April 2020 for medium sized and larger businesses, aimed at helping to bridge the financing gap between the CBILS and the CCFF. On 16 April 2020 the UK government announced the launch of the CLBILS as from 20 April 2020 and unveiled further details of the CLBILS modifying and expanding its scope from that envisaged in the initial announcement of the CLBILS on 2 April 2020.
Furthermore, the UK government announced on 20 April 2020 that it would establish a new Future Fund to support UK innovative unlisted companies facing financing difficulties due to the coronavirus outbreak, which is aimed at companies unable to access other UK government business support programmes because they are either pre-revenue or pre-profit and typically rely on equity investment.
(Information on the other elements of the UK government package of COVID-19 support for businesses is available on the UK Government website COVID-19: support for businesses.)
1. Coronavirus Business Interruption Loan Scheme (CBILS) – support for SMEs
The CBILS is backed by the UK government-owned British Business Bank and is available for SMEs through more than 40 accredited lenders, including major banks, to support SMEs experiencing loss of revenues or cash flow disruptions, as a result of the COVID-19 outbreak. CBILS is designed to provide access to:
of up to £5 million and for:
The UK government will provide accredited lenders with a guarantee of 80% of the outstanding balance of each loan (subject to pre-lender cap on claims) to give lenders confidence to provide finance to SMEs. There is no guarantee fee payable by SMEs. The government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so SMEs will not have to pay any upfront costs and will benefit from lower initial repayments.
Principal private residence cannot be taken as security under the CBILS.
The borrower remains fully liable for the debt under the CBILS.
The CBILS was revised on 3 April 2020 so that: (i) no personal guarantees can be taken by lenders for any facilities below £250,000 under the CBILS; (ii) personal guarantees may still be required, at a lender’s discretion, for CBILS facilities above £250,00 but recoveries under such guarantees are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied; (iii) a principal private residence cannot be taken as security to support a personal guarantee in connection with a CBILS facility; and (iv) insufficient security for borrowing is no longer a condition to access the CBILS. These changes to the CBILS are already effective and are to be retrospectively applied by lenders for any CBILS-backed facilities offered since 23 March 2020.
Who is eligible for the CBILS?
The CBILS is open to sole traders, corporates, limited partnerships, limited liability partnerships and other legal entities which, in order to be eligible for the CBILS financing, must:
Subject to satisfying the above requirements, businesses from any sector can apply, except for: (i) banks and building societies; (ii) insurers and reinsurers (but not insurance brokers); (iii) public-sector bodies; (iv) further education establishments, if they are grant-funded; and (v) state-funded primary and secondary schools.
How to apply?
Applications should be made through an accredited commercial lender. Application forms and further information are available on websites of accredited lenders. The list of accredited lenders is available on the British Business Bank website.
Who decides whether CBILS financing will be granted?
The accredited lender to whom an SME applied has the authority to decide whether to offer CBILS-backed financing to the SME. If one accredited lender turns down an SME’s application for finance under the CBILS, the SME can approach any other accredited lender within the CBILS.
The full rules of the CBILS are available on the British Business Bank website.
2. Bounce Back Loan Scheme (BBLS) – “micro-loans” for small and medium sized businesses
The BBLS announced by the UK government on 27 April 2020 is to be available from 4 May 2020 and is to provide loans to eligible small and medium-sized businesses from £2,000 to up to 25% of the turnover of the business, up to a maximum of £50,000, for a term of up to 6 years, which will be supported by a 100% state guarantee to the lender. Based on the information so far published by the UK government, under the BBLS, there will be no fees or interest payable by the borrowers for the first 12 months and the loan repayment will not start until after the expiry of the first 12 months. The UK government is in the process of agreeing a low rate of interest for the remaining period of the loans under the BBLS (which is expected to be around 2.5% per annum). The BBLS will be open to a business which:
Businesses which meet the above criteria will be eligible to apply for loans under the BBLS except for: (i) banks, insurers and reinsurance (but not insurance brokers); (ii) public sector bodies; and (iii) state-funded primary and secondary schools.
The UK government announced that the application process for the BBLS financing will be quick and simple, by way of a standard short application form, and that loans under the BBLS will be paid out to approved borrowers within 24 hours of the approval.
A business which has already received a loan of up to £50,000 under the CBILS that wants to transfer it into the BBLS would be able to arrange this with the lender until 4 November 2020.
The BBLS is to be delivered through a network of accredited lenders. Limited information on the BBLS is available on the UK government website. More information about the BBLS is to be available soon.
3. Covid Corporate Financing Facility (CCFF) - support for larger companies
The Covid Corporate Financing Facility (CCFF) is a joint HM Treasury and Bank of England (BoE) facility operated by the BoE through The Covid Corporate Financing Facility Limited (the CCFF Fund). The CCFF is designed to support liquidity of larger companies, helping them to bridge Coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper (CP), in the primary market via dealers and/or in the secondary market from eligible counterparties, at a minimum spread over reference rates. In essence, the CCFF is a CP purchase programme. CP purchases will be financed by central bank reserves. Under the CCFF, the BoE will buy, through the CCFF Fund, CP of up to one-year maturity issued by companies making “a material contribution to the UK economy”. The CCFF will offer financing on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock, and will be open to companies that can demonstrate they were in “sound financial health” prior to the COVID-19 shock.
The minimum amount of CP from any issuer that can be purchased under the CCFF is £1 million nominal and offers must be rounded to the closest £0.1 million nominal.
The CCFF will look through temporary impacts on companies’ balance sheets and cash flows by basing eligibility on companies’ credit ratings prior to the COVID-19 shock. Companies do not need to have previously issued CP in order to participate in the CCFF.
The CCFF scheme will operate for at least 12 months and for as long as steps are needed to relieve cash flow pressures on companies that make a material contribution to the UK economy. The BoE will give at least 6 months’ prior notice of any planned withdrawal of the CCFF scheme.
The use of the CCFF is subject to the parties entering into an Undertaking and Confidentiality Agreement, which includes information relating to access and participation in the CCFF, details of any transactions, or any decisions by the parties relating to entering or terminating any such transactions. Any information may not be disclosed except in the circumstances detailed in the specific exceptions of the Undertaking and Confidentiality Agreement.
All non-financial companies that meet the requirements set out on the Bank of England’s website are eligible to participate in the CCFF.
What are the key characteristics of CP that can participate in the CCFF?
In order to participate in the CCFF, CP must:
Who can use the CCFF?
The BoE would also consider whether:
The CCFF is open to companies that can demonstrate they were in “sound financial health” prior to the Coronavirus shock, allowing the BoE to look through temporary impacts on companies’ balance sheets and cash flows from the Coronavirus shock itself – this means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent.
What does it mean to be in “sound financial health”?
The clearest way to demonstrate this test is to have, or acquire, a rating. For such companies, investment grade means a short-term rating of A3/P3/F3/R3 or above, or a long-term rating of BBB-/Baa3/BBB-/BBB low or above by at least one of the major credit ratings agencies: S&P, Moody’s, Fitch or DBRS Morningstar. If companies have different ratings from different agencies, and one of those is below investment grade then the CP will not be eligible for the CCFF.
Who is not eligible?
CP issued by any of the following entities is not eligible to participate in the CCFF:
What to do if the company without a required credit rating wants to participate in the CCFF?
If a company does not have an existing credit rating from one of the relevant credit rating agencies, the company should speak to its bank in the first instance. If the bank internally views the company as equivalent to investment grade (as at 1 March 2020), the company could be considered and assessed by the BoE for the CCFF. Another potential route is for the company to contact one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with the BoE and HM Treasury, noting that the company wishes to use the CCFF. Some standard forms of credit assessment the BoE expects to view as suitable evidence of credit status for the CCFF scheme can be found on the BoE website.
How much can be issued under the CCFF?
For primary market purchases, the BoE will purchase (through the CCFF Fund) CP subject to individual issuer limits. These limits will reflect a range of factors, including an issuer’s credit rating. An indicative guide to the maximum limit pre-approved by HM Treasury for issuers at different ratings is set out on BoE website.
How is the CCFF priced?
The CCFF will offer financing on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock. For primary market purchases, eligible CP will be purchased by the BoE (through the CCFF Fund) at a spread above a reference rate, based on the current sterling overnight index swap (OIS) rate depending on the credit rating of the issuer. The respective reference OIS rate will be determined at 09:45 on the day of the operation. For secondary market purchases, the BoE will purchase CP (through the CCFF Fund) at the lower of amortised cost from the issue price and the price as given by the method used for primary market purchases. The BoE will apply an additional small fee (currently set at 5bps and subject to review) for use of the secondary facility, payable separately.
What CP programme documentation is eligible?
The BoE will accept CP with standard features, issued using ICMA market standard documentation which ICMA has made available to non-members on ICMA website. To support companies seeking to set up CP programmes quickly, the BoE will also accept simplified versions of the CP documentation, based on the ICMA standard, which are available via the BoE website.
What are the main practical steps to access the CCFF?
More information on the CCFF is available from the Bank of England.
4. Coronavirus Large Business Interruption Loan Scheme (CLBILS) – for medium-sized and large businesses
In response to market concerns that many firms adversely affected by the COVID-19 pandemic are too big to use the CBILS and do not have the strong enough credit ratings to access the CCFF, the UK government announced on 3 April 2020 that it would launch the CLBILS and, on 16 April 2020, unveiled further details of the CLBILS expanding the scheme and announcing that the CLBILS launch date would be 20 April 2020. Under the CLBILS the UK government will provide a guarantee of 80% of the outstanding balance of the financing facility (including interest and fees), to give banks confidence to provide financing facilities to eligible businesses.
The CLBILS is available in the form of:
in the amount of:
on repayment terms from three months to three years.
The borrowers under the CLBILS will remain responsible for the debt under any facility they take out.
Loans under the CLBILS will be offered at commercial rates of interest.
No personal guarantees are permitted for facilities under £250,000. For facilities of £250,00 and over, claims on any personal guarantee applied to the CLBILS financing facility cannot exceed 20% of losses on the CLBILS financing facility after all other recoveries have been applied.
The CLBILS is available through a range of British Business Bank accredited lenders who should be approached directly, ideally, via the relevant accredited lender’s website. Not every accredited lender can provide every type of financing available under CLBILS and if one lender turns the applicant down, the applicant can still approach other lenders accredited under the CLBILS scheme.
Who will be eligible?
The CLBILS is open to sole traders, corporates, limited partnerships, limited liability partnerships and other legal entities carrying out a business activity in the United Kingdom with a turnover of over £45 million which meet the eligibility criteria.
Businesses from any sector that meet the above requirements will be able to apply under the CLBILS except for: (i) credit institutions (falling within the remit of the Bank Recovery and Resolution Directive), insurers and reinsurers (but not insurance brokers); (ii) building societies; (iii) public sector bodies; (iv) further education establishments, if they are grant funded; and (v) state-funded primary and secondary schools.
Accredited lenders will need further information from applicants regarding their eligibility. All lending decisions under the CLBILS are fully delegated to the accredited lenders.
Further information about the CLBILS is available on: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/clbils/clbils-for-businesses-and-advisors/ and www.businesssupport.gov.uk/coronavirus-large-business-interruption-loan-scheme/.
5. Future Fund
The Future Fund, announced on 20 April 2020, is to be established by the UK government in May 2020. The UK government website mentions that the Future Fund financing will be for UK innovative companies facing financing difficulties due to the coronavirus outbreak. It will provide support for companies that have been unable to access other UK government business support programmes such as CBILS because they are either pre-revenue or pre-profit and typically rely on equity investment. The UK government has announced that the Future Fund funding scheme will provide an initial commitment of £250 million (subject to ongoing review) of new UK government funding which will be unlocked by private investment on a match funded basis.
Under the Future Fund scheme the UK government will provide matched funding, by way of issuing convertible loans, to UK eligible innovative companies. The Future Fund funding will be unsecured convertible bridge loan financing (within the minimum and maximum loan amount limits of the scheme) available only alongside matched private third party investor(s) funding of at least equal amount. The UK government’s bridge loan financing under the Future Fund scheme will constitute no more than 50% of the bridge funding being provided to the company, with the remaining amount being provided by the private third party investor(s). While there is no cap on the amount that the matched private investor(s) may provide to the company, the loan amount to be provided by the UK government under the Future Fund scheme will be between £125,000 and £5 million. Similarly to CBILS and CLBILS, the Future Fund is to be delivered in partnership with the British Business Bank.
What can the Future Fund funding be used for?
The Future Fund loan proceeds will be permitted to be used solely for working capital purposes and not to repay any borrowings, pay dividends or bonus payments to staff, management, shareholders or consultants, or, in respect of the government loan, pay any advisory or placement fees or bonuses to external advisers.
What businesses will be eligible for the Future Fund financing?
The full eligibility criteria are yet to be published and, so far, the UK government has announced that a business will be eligible for the Future Fund financing if it:
Further eligibility criteria may be included when the UK government publishes the full details of the Future Fund scheme in the coming weeks.
Main Future Fund headline terms
While the full Future Fund headlines terms are to be published by the UK government in the coming weeks once the Future Fund scheme is fully developed, the headline terms so far published on the UK government website (www.gov.uk/guidance/future-fund) include the following main terms:
On a sale, an IPO or maturity of the loan, the Discount Rate will not apply to the most recent non-qualifying funding round if such round took place before the issuance of the Future Fund funding. In such cases, the conversion price will not include a Discount Rate.
On a conversion event, the loan will convert into the most senior class of shares in the borrowing company. If a further funding round is completed within 6 months of the relevant conversion event, the lenders shall be entitled to convert their shares into the senior class of shares of the company in issue post that round.
On conversion of the loan, only principal under the Future Fund funding, and not any accrued interest, will convert at the Discount Rate. Any accrued interest not repaid by the borrowing company will convert at the relevant price without the Discount Rate.
The Future Fund scheme is to be fully developed in partnership with the British Business Bank and are to be published in the coming weeks. The UK government announced that the Future Fund funding will be launched for applications in May 2020. It will initially be open until the end of September 2020. More details regarding the Future Fund headline terms, to the extent currently published by the UK government, can be found on www.gov.uk/guidance/future-fund.
It should be noted that the UK government has indicated that it will keep the COVID-19 related business financing schemes under review and may vary them as necessary. The CBILS (operational from 23 March 2020) was already revised on 3 April 2020 (as described in section 1 above) and the UK government has also modified and expanded the CLBILS when it revealed its further details on 16 April 2020 (as described in section 4 above) beyond the scope envisaged in the UK government’s initial CLBILS announcement on 3 April 2020.
While the UK government has responded to market concerns regarding the financing gap for firms which are too big to use the CBILS and do not have strong enough credit ratings to access the CCFF, by announcing the CLBILS on 3 April 2020 and launching it on 20 April 2020, it will not be known to what extent the CLBILS will, in fact, bridge the financing gap between the CBILS and the CCFF until it is seen how it works in practice.
It should also be noted that the CBILS, the CCFF and CLBILS (which are already operational) are all quite new financing schemes, and hence some of their aspects, including their use in practice and the procedures involved, will or may still need to be clarified and further developed. Further details of the BBLS announced by the UK government on 27 April 2020 which is to open for applications as from 4 May 2020 will be published by the UK government shortly. The new Future Fund scheme announced by the UK government on 20 April 2020 is to be launched in May 2020 and its further details are yet to be fully developed and published by the UK government in the coming weeks.
For the above reasons, the UK government COVID-19 related business financing schemes may change and evolve over time, depending on how the COVID-19 situation and the resulting business needs develop in the UK.
Apart from the above mentioned UK government financing schemes, the UK Chancellor, the BoE and the FCA, in their joint letter to the CEOs of the UK’s biggest banks on 25 March 2020, appealed to the banks to support firms to ensure that firms whose business models were viable before the COVID-19 crisis remain viable once it is over, mentioning that the BoE and the FCA will monitor the situation closely. It is anticipated by the BoE that its postponement of the annual stress testing for banks and the reduction of the BoE’s countercyclical capital buffer should free up to an extra £190 billion, which will help banks to provide lending volumes that could be used to help companies in the UK.
Due to the large volume of enquiries, the length of time that accessing the CBILS, the CCFF and the CLBILS financing currently takes is of concern to many firms. However, it is hoped that accessing the CBILS, the CCFF and the CLBILS financing will become more streamlined and quicker in time as more applications are processed and procedures become more developed.
There are also concerns in the market that the existing number of lenders participating in the CBILS, the CCFF and the CLBILS may not be sufficient to cope with the demand. It is hoped that more lenders will participate in these schemes.
Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.
Marjena Elizabeth Anderson
+44 20 7710 9800
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