Covid-19 has had an unprecedented effect on how we live our lives. With the nation's workforce now working at home (where possible) and the economic future of the country uncertain, these are challenging times for businesses everywhere.
Housing associations face additional pressures with a stagnant property market increasing market sales risk, construction sites becoming a political football and the potential for an increased number of voids affecting the ability to meet interest and capital payments. All of which may result in an immediate funding need. 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 businesses.
Covid Corporate Finance Facility
Larger housing associations could make use of the CCFF. Under the CCFF, the BoE will purchase commercial paper. Commercial paper is an unsecured, short-term debt instrument issued by a company. The commercial paper must have the following characteristics:
- a maturity of one week to twelve months;
- where available, 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 the following credit agencies: Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020;
- it must be issued directly into Euroclear and/or Clearstream.; and
- it must be governed by UK law and subject to the jurisdiction of the UK courts.
However, the BoE will not accept commercial paper which has any non-standard features such as extendibility or subordination, for example.
Who can use the CCFF?
Material Contribution Requirement
Companies (and/or their finance subsidiaries) that make a "material contribution" to the UK economy can use the facility.
In practice, firms that meet the "material contribution" 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; and
- firms with their headquarters in the UK.
Companies must access the CCFF via a bank and not via any other institution. The BoE website has a list of those banks providing the CCFF (at the time of writing 13 banks (traditional UK/US clearing banks) were offering the facility.
As you can see many housing associations comfortably meet these requirements.
Sound Financial Health Requirement
The CCFF is open to businesses that can demonstrate they were in "sound financial health" before Covid-19, allowing the BoE to look through the temporary impact Covid -19 may have had on the business' balance sheets and cash flows.
The best way to demonstrate the "sound financial health" requirement is to have or to acquire a short or long term investment-grade credit rating. 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. It is this requirement that will likely put the CCFF out of reach of smaller housing associations. If a company has different ratings from different credit agencies, and one of those ratings is below investment grade, then they will not be eligible for the CCFF scheme.
If you don't have a credit rating but want to access the scheme then your first port of call should be to approach your existing bank. If the bank’s advice is that your company was viewed internally as equivalent to investment grade as at 1 March 2020, then you might still be eligible even if you don't have a formal rating.
Another option for housing associations who may not have a credit rating but wish to access the CCFF is to contact (or ask your bank to contact) one of the major credit rating agencies to seek an assessment of credit quality in a form which can be shared privately with the BoE and HM Treasury. The Bank of England will then assess as to whether the housing association can be deemed as having the equivalent of a public investment-grade rating. This assessment will draw on a range of information, including the range of banks’ internal ratings across all of your commercial bank counterparties. The housing association 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.
How is the facility priced?
The CCFF scheme offers financing on terms comparable to those which were prevailing in the markets in the period before the Covid-19 economic shock. The BoE has committed to having the facility in place for 12 months.
For larger housing associations the CCFF scheme may be an easy way to obtain short term financing to cover an immediate cash flow need. We are aware of associations who have already availed themselves of the scheme. Issues to consider include that the confidentiality requirements of the scheme go beyond anything likely to be in a housing association's current financing arrangements and they need to be strictly adhered to. There is a potential here for conflict with the desire to provide information to the market for those associations with listed bonds.
Coronavirus Business Interruption Loan Scheme
An option for funding for housing associations that do not have an investment-grade rating or an equivalent credit assessment from their bank(s) is the Coronavirus Business Interruption Loan Scheme (CBILS).
CBILS is a new scheme that can provide financial support of up to £5 million for businesses across the UK which are experiencing lost or deferred revenues, leading to disruptions to their cash flow. It's intended to be a flexible product and the £5 million can be provided by the funder in the form of term loans, overdrafts, invoice finance or asset finance facilities. Of the two Bank of England schemes the CBILS scheme has captured the lions share of the headlines. It has been hugely popular with thousands of applications and the accredited funders under the scheme are struggling to keep up with demand.
The government has also announced a new scheme – CLBILS+ set to go live on 20 April. This is to deal with the so called "stranded middle" companies which under the CBILS scheme had no assistance. This "stranded middle" is 3000 businesses in the UK which have a turnover higher than £45 million (the upper threshold of the scheme) but which do not have credit ratings and so cannot access the CCFF scheme. Some housing associations may fall into this category. CLBILS+ allows businesses with a turnover of over £45 million and up to £250 million to borrow loan facilities of up to £25 million. Business with a turnover of over £250 million can borrow up to £50 million.
Who can apply?
The scheme is open to SMEs from all sectors (which would encompass housing associations), sole traders, freelancers, body corporates, limited partnerships, limited liability partnerships or other legal entities carrying out a business activity in the United Kingdom operating in all sectors. The business activity must be operated through a business account.
To be eligible for a facility under CBILS, the applicant must:
- be UK based in its business activity, with a 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).
Housing associations of all sizes would on the face of it be eligible for funding under the CBILS scheme.
CBILS operates via accredited lenders - there is a list of 40 of these at the time of writing on the British Business Bank website which is a mix of traditional and challenger banks. Decision-making on whether a borrower is eligible for CBILS is fully delegated to the 40+ accredited lenders.
CBILS is a government-backed guarantee scheme. The borrower remains 100% liable for the loan but the scheme provides the lender with a partial (80%) government-backed guarantee against the outstanding facility balance.
There is no guarantee fee payable by borrowers to access the scheme. Lenders will instead 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. Any housing association looking to access CBILS 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 borrowers under the scheme.
When launched the scheme had a requirement that only those who had insufficient security and had been turned down for a commercial loan could apply. This left many companies high and dry with an urgent cash flow need and so this element has now been removed. You can apply for a CBILS facility regardless of whether you would also be eligible for a commercial loan from another entity. This could potentially be very useful to housing associations. Lenders can, at their discretion, require security for a CBILS loan if there is sufficient security available.
Issues to consider
The CBILS scheme has been understandably popular and banks are struggling desperately to keep up with demand. If you are considering accessing the CBILS scheme for working capital purposes it is worth seeing if your current funder is one of the accredited lenders and approaching them first. We hear anecdotally that banks are prioritising existing customers and are triaging businesses based on immediate cash flow need. The challenger banks and smaller asset funds which are accredited funders under the scheme may be hungrier for new business than the traditional lenders which are trimming their books but there is a slight insolvency risk with some of these smaller organisers.
The key to accessing the scheme is to show medium-term viability. Anyone wishing to access the scheme needs to prove that they were viable before Covid-19, viable now and will be viable six months down the line. Given how robust housing associations' business plans usually are this should be an easy requirement to meet. The CBILS scheme is available for 6 months and potential applicants are encouraged to apply sooner rather than later for it (but be prepared to spend some time hanging on the phone as the traditional banks are getting thousands of calls a day).
Both the CCFF and CBILS schemes are potential funding streams which housing associations can access to assist with immediate cash flow needs. CCFF is suitable for larger associations and the highly popular CBILS scheme would work for smaller associations. Before seeking to access either scheme housing associations should look at what measures they can put into place to free up cash flow from looking at the government furlough scheme to speaking to your banks about revising payment instalments to switching term facilities to revolvers. Changes to existing facilities which do not require new monies are being sanctioned quickly by banks. However, both government schemes are an excellent source of financing which housing associations should not be shy to apply for.