The UK Government announced wide-sweeping measures including an assistive financial package of at least £330 billion to help businesses cope during the Coronavirus crisis period

By Joss Hargrave, Claire Barker

04-2020

Amongst other measures, two major funding schemes have been put in place, to help companies continue operating during the coronavirus crisis:

A) a new Coronavirus Business Interruption Loan Scheme ("CBILS") has been set up by HM Treasury to encourage banks to continue to lend to SMEs; and

B) the Bank of England's Covid Corporate Financing Facility ("CCFF") will be available for large firms in need of short-term liquidity through the purchase, by the Bank of England ("BoE") of short-term debt in the form of commercial paper ("CP").

Details of both the CBILS and the CCFF are set out below. Further measures are expected to be announced to: a) fine tune the existing schemes following perceived initial teething problems with banks being able to offer loans to businesses; and b) ensure larger and medium sized businesses will be able to access the credit they need, amidst concerns that these business currently fall between the gaps in the eligibility criteria for the CBILS and the CCFF. 

In addition, the BoE has cut interest rates to 0.1% and, together with the Prudential Regulation Authority, announced a number of measures aimed at alleviating operational burdens on regulated entities during the Coronavirus crisis period. These steps include:

  • cancellation of the 2020 stress tests for the eight major UK banks and building societies. This follows a similar decision by the European Banking Authority;
  • reducing the UK countercyclical buffer rate to 0% of banks’ exposures to UK borrowers; and
  • postponing the joint BoE/Financial Conduct Authority survey into open-ended funds – this has been delayed until further notice. 

In addition, the BoE is expected to release guidance to firms on the interaction of IFRS9 and Covid-19. 
Further details of the new funding schemes:

A) CBILS

 
Which institutions will be administering the loans?

The CBILS is available through participating, accredited lenders, which include Barclays, Santander, Secure Trust and Lloyds. A full list of accredited is on the British Business Bank website.

Businesses are being advised to contact their own lender in the first instance.

What are the types of finance that can be accessed?

CBILS supports a wide range of business finance products, including term loans, overdrafts, invoice finance and asset finance.

Who is eligible?

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 £45m

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.

The following trades and organisations are not eligible to apply: 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 union.
What is the cost to the borrower?

There is no guarantee fee for SMEs to access the scheme 

• Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees

• Fishery, aquaculture and agriculture businesses may not qualify for the full interest and fee payment

• We understand that some lenders indicated that they would not charge arrangement fees or early repayment charges to borrowers under the scheme

 What is the cost to the lender? Lenders will pay a fee to access CBILS
 Is there any protection for lenders? The Government will provide lenders with a partial guarantee (80%) against the outstanding facility balance, subject to an overall cap per lender.
 What are the terms of the facility? 

Maximum value of a facility provided under CBILS will be £5million

Repayment terms are up to six years for term loans and asset finance facilities; and for overdrafts and invoice finance facilities, up to three year

Security - at the discretion of the lender, CBILS 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. Primary Residential Property (PPR) cannot be taken as security under the scheme. If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.

The borrower always remains 100% liable for the debt

 Decision-making This is at the full discretion of the relevant lender. The hope is the government guarantee will ease credit decision making processes and potentially turn 'no' decisions to 'yes' decisions.
 How to become an accredited lender? Applications are to be submitted via British Business Bank, although we note the current position of the BBB that, due to urgency to get CBILS up and running, BBB's priority is to implement CBILS though existing accredited lenders.

B) CCFF

Which institutions will be administering the loans?

Bank of England with the assistance of banks (who will issue the eligible CP to the CCFF).

The scheme will be funded by central bank reserves (in line with other Bank of England market operations).

What are the types of finance that can be accessed?

The CCFF will purchase sterling-denominated CP with the following characteristics:

  • maturity of one week to twelve months;
  • where available, a 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. If firms have different ratings from different agencies, and one of those is below investment grade then the CP will not be eligible; and
  • issued directly into Euroclear and/or Clearstream.
How long will the CCFF be available for?

At least 12 months

Who is eligible?

Firms that:

can demonstrate they were in sound financial health prior to the start of the Coronavirus crisis, i.e. if they had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent

make a material contribution to the UK economy. 

In practice, the expectation is that this will mean UK incorporated companies (including those with foreign-incorporated parents) with a genuine business in the UK; companies with significant employment in the UK; and companies with their headquarters in the UK. We understand that 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.

There is no requirement for an applicant to have issued CP prior to using the CCFF

 Are there any exclusions?

CP will the following features will not be eligible for purchase by the BoE under the CCFF:

CP with non-standard features, for example extendibility or subordination; 

CP issued by 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; and

CP issued by leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation.

 What are the terms of the facility? The Government will provide lenders with a partial guarantee (80%) against the outstanding facility balance, subject to an overall cap per lender.
 What are the terms of the facility? 

The minimum size of an individual security that the CCFF will purchase from an individual participant is £1 million nominal and all offers need to be rounded to the closest £0.1 million.

General terms of the financing will be comparable to those prevailing in markets in the period before the Coronavirus crisis.

 Confidentiality issues

All companies that participate in the CCFF will be asked to sign a confidentiality agreement with the BoE.

The names of issuers and securities purchased or eligible will not be made public.

Each Thursday at 15:00 the BoE will publish (in aggregate): (i) the total amount of CP purchased that week, up until the previous day, in terms of the amount paid to the sellers; and (ii) the total amount of CP that has been purchased to date, minus the amount of CP that has matured. 

 Decision making Banks issuing CP should contact the Bank of England to discuss eligibility at [email protected]