The Bank of England (BoE) has recently published details of two schemes or facilities to support lending to those businesses impacted by Covid-19.
The Covid Corporate Finance Facility (CCFF) is aimed at large corporates and the Coronavirus Business Interruption Loan Scheme (CBILS) is aimed at smaller SMEs.
Covid Corporate Finance Facility
Under the CCFF, the BoE will purchase commercial paper (i.e. unsecured, short-term debt instruments) which comply with the following characteristics:
- the commercial paper has a maturity of one week to twelve months;
- where available, it has a a short-term credit rating of A3/P3/F3/R3 or above, or a long-term rating credit of BBB-/Baa3/BBB-/BBB low or above from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020; and
- it is issued directly into Euroclear and/or Clearstream.
However the BoE will not accept commercial paper with non-standard features such as extendibility or subordination, for example.
Who can use the CCFF?
Companies that make a material contribution to the UK economy, or their finance subsidiaries, are able to participate in the facility. Companies must do this via a bank.
In practice, 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.
The BoE will also consider 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.
The facility is open to firms that can demonstrate they were in sound financial health prior to the Covid-19 shock, allowing the BoE to look through temporary impacts on firms’ balance sheets and cash flows from the shock itself. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent internal rating from their bank.
Commercial paper issued by banks, building societies, insurance companies and other financial sector entities regulated by the BoE or the Financial Conduct Authority will not be eligible. Neither will commercial paper if issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation. Commercial paper issued by public bodies or authorities, entities governed by public law or public undertakings will not be eligible. For these purposes, a "public undertaking" refers to an undertaking over which the State or other regional or local authorities may directly or indirectly exercise a dominant influence by virtue of their ownership of it, their financial participation therein or the rules which govern it. There is presumption of "dominant influence" when the UK or an EU Member State (or regional or local authorities of the UK or an EU Member State) either directly or indirectly:
- holds the majority of an undertaking’s subscribed capital;
- controls the majority of the votes attaching to shares issued by the undertaking; or
- can appoint more than half of the members of the undertaking’s administrative, managerial or supervisory body.
What does it mean to be in sound financial health?
The clearest way to demonstrate this test is to have, or acquire, a rating. If firms have different ratings from different agencies, and one of those is below investment grade, then they will not be eligible.
If firms do not have an existing credit rating from the major credit ratings agencies, they should speak to their bank in the first instance. If that bank’s advice is that the firm was viewed internally as equivalent to investment grade as at 1 March 2020, then they might still be eligible.
Another potential route to evidencing credit status is for a firm or its bank to get in touch with 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.
How is the facility priced?
The facility will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock.
The Bank of England will then make an assessment of whether a firm can be deemed as equivalent to having a public investment grade rating. This assessment will draw on a range of information, including the range of banks’ internal ratings across all of a firm’s commercial bank counterparties. A firm will need to be rated consistently by its banks as investment grade in order to be deemed equivalent to having a public investment grade rating.
Coronavirus Business Interruption Loan Scheme
CBILS is a new scheme that can provide facilities of up to £5 million for SMEs across the UK which are experiencing lost or deferred revenues, leading to disruptions to their cashflow.
CBILS supports a wide range of business finance products, including term loans, overdrafts, invoice finance and asset finance facilities.
The scheme went live on Monday 23 March 2020 and will initially run for six months.
CBILS guarantees facilities up to a maximum of £5 million available on repayment terms up to six years for term loans and asset finance. For overdrafts and invoice finance facilities, terms will be up to three years. The scheme provides the lender with a government-backed partial (80%) guarantee against the outstanding facility balance.
There is no guarantee fee for SMEs to access the scheme. Lenders will pay a fee to access the scheme. The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees. The SME will therefore benefit from no upfront costs and lower initial repayments. In addition to this some lenders have indicated that they will not charge arrangement fees or early repayment charges to SMEs borrowing under the scheme.
Updated scheme features
On 2 April 2020, the UK Government announced a series of retrospective changes to the CBILS scheme in order to try and ensure financial assistance is being made available to all eligible businesses which need it, quickly. The key changes include:
- Facilities of less than £250,000: lenders are not permitted to take personal guarantees of any form under the scheme for any facilities below £250,000.
- Facilities above £250,000: a personal guarantee may still be required, at the lender’s discretion, but recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied. A Principal Private Residence (PPR) cannot be taken as security to support a personal guarantee or as security for a CBIL backed facility.
- Security: for all facilities, including those over £250,000, CBILS can now support lending to smaller businesses even where a lender considers there to be sufficient security, making more smaller businesses eligible to receive the business interruption payment. Lenders can, at their discretion, require security for a CBILS loan if there is sufficient security available.
- Access: the scheme has been expanded to open-up access to those smaller businesses who would have previously met requirements for a commercial facility and would not have been eligible for CBILS.
Who can apply?
SMEs from all sectors can apply for the full amount of the facility, up to a maximum of £5 million excluding 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).
The business activity must be operated through a business account. The scheme is open to sole traders, freelancers, body corporates, limited partnerships, limited liability partnerships or other legal entity carry out a business activity in the United Kingdom operating in all sectors (but note above).
To promote access to the scheme and ensures finance is being made available quickly businesses no longer need to demonstrate that they have been turned down for a loan on normal commercial terms.
For early stage businesses in their first two years of trading, the British Business Bank’s Start Up Loans programme (loans £500 to £25,000 at 6% p.a. interest) may be more suitable.
To be eligible for a facility under CBILS, the applicant must:
- be UK based in its business activity, with turnover of no more than £45 million per year;
- have a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender; and
- be able to self-certify that it has been adversely impacted by the Coronavirus (COVID-19).
CBILS is available through the British Business Bank’s 40+ accredited lenders, which are listed on the British Business Bank's website.
Decision-making on whether a SME is eligible for CBILS is fully delegated to the 40+ accredited lenders. These lenders range from high-street banks, to challenger banks, asset-based lenders and smaller specialist local lenders.
The borrower always remains 100% liable for the debt.
Lenders
If a lender makes a claim on the CBILS guarantee it will be after the lender has completed its normal recovery procedures (including realisation of any personal guarantees). The CBILS guarantee covers 80% of the lender's post-recoveries claim. The lender will always suffer a 20% loss when claiming on the CBILS guarantee.
Conclusion
Clearly both these schemes are going some way towards supporting business through these difficult times. The missing limb is for the so called "stranded middle". Changes to the CBILS scheme which will allow businesses with a turnover of between £45 million and £500 million to borrow loans of up to £25 million are expected within the next few days to assist companies that are not currently supported by CBILS or CCFF.
