Akin is a law firm focused on providing extraordinary client service, a rewarding environment for our diverse workforce and exceptional legal representation irrespective of ability to pay. The deep transactional, litigation, regulatory and policy experience we bring to client engagements helps us craft innovative, effective solutions and strategies.
Further to the Chancellor's announcement on April 3, 2020, of the introduction of the Coronavirus Large Business Interruption Loan Scheme (CLBILS), the CLBILS that is aimed at larger U.K....
Further to the Chancellor's announcement on April 3, 2020,
of the introduction of the Coronavirus Large Business Interruption
Loan Scheme (CLBILS), the CLBILS that is aimed at
larger U.K. businesses is now live and the following further
details have been provided / confirmed by the U.K.
government:
The U.K. government will provide
accredited lenders with a guarantee of 80 percent of the
outstanding balance of loans up to (i) £25m in relation to
qualifying U.K. businesses with an annual turnover of between
£45m and £500m and (ii) £50m in relation to
qualifying U.K. businesses with an annual turnover in excess of
£500m—helpfully, in the final terms of the CLBILS, the
U.K. government removed the initially announced £500m
turnover cap such that there is now no upper turnover limit and
increased the loan amount to £50m for businesses over the
£500m turnover threshold.
As expected, CLBILS will be available
through the British Business Bank's 40+ accredited lenders
(which includes all the leading banks) in a similar manner to the
Coronavirus Business Interruption Loan Scheme
(CBILS) (being the U.K. government financing
scheme aimed at U.K. small and medium-size enterprises
(SMEs) that has been operating since March 23,
2020 and, as at April 15, 2020, had provided finance of
approximately £1.1 billion via over 6,000 loans).
Again, as expected, the CLBILS will
not provide cover for the first 12 months of interest payments (and
lender fees) as like under the CBILS.
Finance is available in the form of
loans, asset finance facilities, revolving credit facilities
(including overdrafts) and invoice finance facilities with
repayment terms of between three months and three years.
Larger eligible businesses can elect
to apply for assistance via CLBILS or, if eligible and subject to
its requirements, the COVID-19 Corporate Financing Facility
(CCFF) (being the U.K. government scheme aimed at
investment-grade companies that has been operating since March 23,
2020 and, as at April 15, 2020, had provided approximately
£7.6 billion of financing)—however, firms opting to
participate in the CCFF are not eligible for CLBILS.
Overview of Key Terms of Each of CCFF, CLBILS and CBILS
A high-level overview of the key terms of each of the schemes
and details on who is eligible to participate is set out in the
Annex to this alert. As shown in that overview, and subject to the
other relevant eligibility criteria and requirements, access to
CLBILS, CCFF and CBILS based on business turnover only is now as
follows:
Business size
Turnover <£45m
Turnover >£45m
Investment grade
CBILS
X
CLBILS
X
X
CCFF
X
Calculation of Turnover Thresholds
Generally, the turnover thresholds are calculated on a group
basis (rather than an individual borrower basis) based on the
preceding 12 months. After the initial announcement of the CLBILS,
there were still a large number of potential borrowers who would
have struggled to get under the £500m turnover cap
(particularly those backed by private equity where, anecdotally,
some banks were looking up to the private equity fund to calculate
group revenue). The removal of the cap on the CLBILS (and
confirmation by the British Business Bank that private equity
portfolio companies will have their turnover assessed as a separate
business) is positive news and means that the "group"
turnover eligibility requirement is likely to be of less relevance.
It also means that many larger businesses (including publicly
listed companies) that were not investment grade pre-COVID-19 (and
therefore could not access CCFF) will be able to benefit from
government-backed financing.
If you have any questions around access to U.K. government support
finance packages or the other schemes announced to date or in the
future, Akin Gump is tracking and is available to assist.
Annex: High-level Key Terms of CLBILS, CBILS and CCFF
1. CLBILS
What companies can benefit?
UK businesses
In short, businesses that are
"UK based in [their] business activity" with an annual
turnover of over £45 million—there is no upper turnover
limit.
Sectors
Any sectors, except (i) banks and
building societies, (ii) insurers and reinsurers (but not insurance
brokers) and (iii) public-sector organizations (including U.K.
government-funded primary and secondary schools).
Borrower Viability Test and impact of COVID-19
CLBILS can be used when the borrower
has a viable business proposition assessed according to a
lender's normal commercial lending criteria.
Borrowers must have a borrowing
proposal that the lender would consider viable were it not for the
current COVID-19 pandemic, and the lender must believe that the
provision of finance will enable the business to trade out of any
short-term to medium-term difficulty.
Borrowers must self-certify that they
have been impacted by COVID-19.
Must not be a "business in difficulty" as at
December 31, 2019
Unless a business is less than three
years old, if a business has accumulated losses greater than half
of its subscribed share capital as at December 31, 2019, it will
not be eligible for CLBILS. In practice, this means that certain
fast-growth businesses may not be eligible for CLBILS—this is
linked to EU state aid rules.
Other
Borrowers must not have used the
CCFF.
As previously announced, a criterion
that borrowers must be "unable to secure regular commercial
financing" does not apply.
What financing is potentially available?
Amount
Facilities of up to £25 million
for businesses with a turnover in excess of £45
million.
Facilities of up to £50 million
for businesses with a turnover in excess of £250
million.
The amount borrowed should not exceed
an amount equal to the higher of (i) double the borrower's
annual wage bill for the most recent year available and (ii) 25
percent of the borrower's total turnover for the most recent
year available—however, subject to appropriate justification
and based on self-certification of the borrower, this amount may be
increased to cover a borrower's liquidity needs for the next 12
months.
Government partial guarantee
U.K. government will provide the
lender with a guarantee of 80 percent of the outstanding balance
(plus, we assume, any lender fees).
No 12-month interest and lender levied fees payment
Unlike the CBILS, this will not be
covered by CLBILS.
Term/type of facilities
Similar to CBILS, a wide range of
finance products, including short term loans, overdrafts, invoice
finance and asset finance—however, also specifically includes
revolving credit facilities.
Repayment terms from three months to
up to three years (noting that CBILS was potentially available for
up to six years for certain term and asset finance
facilities).
Interest rate, security/guarantees and underlying principles
of lending
The U.K. government has specifically
referenced that facilities made available under CLBILS will be
offered at "commercial rates of interest," i.e., interest
proposed to be charged to borrowers for facilities offered under
CLBILS should be reasonable and based on the lender's normal
pricing framework.
Security
British Business Bank expects lenders
to follow their normal credit policy when assessing security
generally.
Timing
Launched April 20, 2020.
Will run for an initial period of six
months through to October 20, 2020.
Process
CLBILS will be available through the
British Business Bank's 40+ accredited lenders (these include
all the leading banks) in the same manner as the CBILS.
2. CBILS
What companies can benefit?
UK businesses
In short, businesses that are
"UK based in [their] business activity" with an annual
turnover of £45 million or less.
Sectors
Most sectors are covered (save for
certain exclusions, in whole or in part, in the financial services,
insurance, education and care sectors).
Borrowing proposal and impact of COVID-19
Borrowers are required to have a
borrowing proposal that the eligible lender would consider viable
if it were not for the current COVID-19 issues.
Borrowers must self-certify that they
have been adversely impacted by COVID-19.
Must not be a "business in
difficulty" as at December 31, 2019.
Must not be a "business in difficulty" as at
December 31, 2019
Unless a business is less than three
years old, if a business has accumulated losses greater than half
of its subscribed share capital as at December 31, 2019, it will
not be eligible for CBILS.
What financing is potentially available?
Amount
Maximum value of facilities is
£5 million.
Government partial guarantee
Government will provide the lender
with a guarantee of 80 percent of the outstanding balance (plus any
lender fees).
Term/type of facilities
Term and asset finance facilities
with terms of up to six years.
Overdraft and invoice facilities with
terms of up to three years.
Security
Insufficiency of security is no
longer a condition.
Interest / Pricing
U.K. government will make a
"Business Interruption Payment" to cover the first 12
months of interest payments and any lender-levied charges.
Pricing is as negotiated with the
relevant lender. However, the Chancellor and Bank of England have
requested banks "to support small and medium-sized enterprises
in any way they can. This included ensuring interest rates offered
to struggling businesses are reasonable and to pass on the benefit
of the [UK government] guarantee to those borrowing under the
[CBILS]"—this is in response to anecdotal evidence/media
reports suggesting that some banks in certain instances may have
been seeking to charge relatively high rates of interest on loans
backed by CBILS.
Underlying principle
The Chancellor has announced that, to
maximize the support available, CBILS should be available to SMEs
affected by COVID-19 and not just those unable to secure regular
commercial financing, i.e., CBILS is now less of a "last
resort" option after seeking to access commercial financing
has been exhausted, i.e., CBILS is now open to businesses who
previously would not have been eligible for CBILS because they met
the requirements for a standard commercial financing.
Timing
CBILS went live on March 23, 2020 and
will initially run for six months.
Process
CBILS is available through the
British Business Bank's 40+ accredited lenders—these
include all the leading banks, and many alternative finance lenders
are, or are becoming, accredited under the scheme.
3. CCFF
What companies can benefit?
UK businesses
U.K.-incorporated companies
(including those with foreign-incorporated parents) and with a
"genuine business in the UK" will normally be regarded as
making a "material contribution to economic activity in the
UK."
The Bank of England will take into
account the following factors when determining if a company has
"genuine business in the UK": (i) significant employment
in the U.K., (ii) headquartered in the U.K., (iii) significant
revenues in the U.K., (iv) serves a large number of customers in
the U.K. and (v) a number of operating sites in the U.K.
Leveraged investment vehicles and
companies within groups that are predominantly banks, investment
banks, building societies or are regulated by the Bank of England
or Financial Conduct Authority are excluded.
Sound financial health pre-COVID-19
Existing credit rating: The CCFF is
aimed at investment-grade companies, so accepted ways of proving
this is if a company has (i) a minimum short-term credit rating of
A-3/P-3/F-3 /R-3 or above or (ii) a long-term rating of
BBB-/Baa3/BBB- or above from at least one of Standard &
Poor's, Moody's, Fitch or DBRS Morningstar as at March 1,
2020 (i.e., assessing the pre-COVID 19 position)
(Note: If a company has a split rating and one is
below the above minimums, the company will not be
eligible).
No existing credit rating: Two main
options: (1) companies request confirmation of whether their bank
internally would consider the company to be equivalent to
investment grade (and this information is then passed on to the
Bank of England for consideration) or (2) companies seek a credit
rating from one of the major credit rating agencies in a form that
can be shared with the Bank of England, i.e., including private
indicative ratings or credit assessments (typically, this takes
four to six weeks, but the Bank of England is in discussions with
the major credit rating agencies to significantly reduce this time
when companies are seeking one for the purposes of utilizing the
CCFF).
What financing is potentially available?
Type of instrument
GBP denominated commercial paper
(CP) (being a type of short-term unsecured
promissory note) issued by the relevant company to the Bank of
England via a dealer (or purchased by the Bank of England in the
secondary market).
Issued directly into Euroclear and/or
Clearstream, so a paying agent will be required.
Amount
£1 million minimum (subject to
limits per issue that will only be advised by the Bank of England
direct to the company upon request).
Maturity date
One week to 12 months.
Security/guarantee and ranking
If CP is issued by a finance
subsidiary, a guarantee will be required from the primary entity in
the group.
CP to rank at least pari
passu with unsecured and unsubordinated indebtedness of the
group—however, the "Eligibility Form" contemplates
that the CP will benefit from any guarantee or similar arrangements
that have been provided by the group for the benefit of the
issuer's other creditors. This will potentially impact the
utility of the CCFF for already-leveraged borrowers or issuers
(subject to a detailed review of relevant existing financing
arrangements).
Terms
Bank of England may not approve
commercial paper with certain non-standard features—two
specific examples given are: (i) subordination and (ii)
extendibility.
The "Eligibility Form" also
requires confirmation that (i) there are no financial covenant
breaches or defaults under existing facility agreements (and none
likely to occur as a result of issuing the CP) and (ii) the CP will
not result in any breach of borrowing limits.
The terms of the CP requires various
representations and warranties to the Bank of England (in some
instances with qualifications due to the COVID-19 shock).
Pricing
Comparable pricing to those
prevailing in the markets pre-COVID-19.
Primary market purchases: Bank of
England will acquire CP at a spread above a reference rate based on
the current GBP overnight index swap (OIS)
rate—credit ratings will impact the amount of the relevant
spread.
Secondary market purchasers: Bank of
England will acquire CP at the lower of (i) amortized cost from the
issue price and (ii) the equivalent price using the primary market
purchase methodology. The Bank of England will apply an additional
small fee (currently set at 5bps and subject to review) for use of
the secondary facility, payable separately.
Timing
CCFF went live on or about March 23,
2020, and will close to new issuers on December 31, 2020 (and
secondary purchases on March 23, 2021).
In terms of accessing the CCFF, it
will be easier for those companies that already have existing CP
programs in place as (i) it is more likely that they contemplate
the issuance of CP as part of their existing capital structure,
(ii) they will have an existing credit rating and (iii) they are
more familiar with the documentation/process.
While the CCFF is available to
companies who have not previously issued CP, additional work will
be required by them including: (i) in many instances, obtaining a
credit rating; (ii) more detailed analysis of their existing
financing arrangements (and potentially existing lender consents);
and (iii) potential preparation of an information memorandum
(although this requirement is currently unclear).
Process
CCFF is being run by the Bank of
England.
Relevant documentation has been
published by the Bank of England and the Bank of England has
indicated that it (i) will accept CP issuing International Capital
Market Association standard documentation and (ii) may accept
simplified versions of such documentation.
Companies wanting to use the CCFF
should speak with relevant banks (who would act as dealers) in the
first instance.
Originally Published 23 April, 2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
