As the coronavirus (COVID-19) continues to spread across the globe, so too does the impact on the financial markets and on the global economy.
The UK is already feeling the shock to the economy, and activity is likely to weaken materially over the coming months. HM Treasury and the Bank of England (BoE) have announced the launch of a Covid Corporate Financing Facility (CCFF), to help investment grade companies bridge through COVID-19 related disruption to their cash flows.
This blog provides a brief overview of the CCFF, a summary of the eligibility criteria and operational details, and some practical considerations for potential issuers to consider.
- Who? The Covid Corporate Financing Facility Limited (the Fund) will purchase commercial paper (CP) of up to 12 months maturity;
- What? The CCFF will offer financing on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock;
- How? The CCFF will provide funding to businesses by purchasing CP issued by investment grade companies making a material contribution to the UK economy; purchases under the CCFF will be financed by central bank reserves.
Which issuers will be eligible to participate?
- Contribution to UK economy: the CCFF will be open to UK incorporated companies (including non-financial corporates), as well as those with foreign-incorporated parents with a genuine business in the UK. Other potential factors that the BoE may consider as part of its eligibility decision could include the following: does the issuer make a material contribution to corporate financing in the UK? Is there significant employment in the UK? Are the headquarters based in the UK? Does the company generate significant revenues in the UK, serve a large number of customers in the UK or have a number of operating sites in the UK?
- Finance subsidiaries: the CCFF will be available to finance subsidiaries, provided other eligibility criteria is met;
- Group companies: where two or more issuers are part of the same group, an aggregate limit may be applied within which any limits applying to the individual issuers are wholly or partly fungible;
- Financial health: it will be open to firms that can demonstrate they were in sound financial health prior to the shock (the CCFF will look through temporary impacts on firms’ balance sheets and cash flows by basing eligibility on firms’ credit ratings prior to the COVID-19 shock);
- Issuance history: businesses do not need to have previously issued CP in order to participate (provided they meet the eligibility criteria and have a bank that is able to facilitate the issue of CP);
- What entities are not eligible? CP issued by leveraged investment vehicles or from companies within groups that are predominantly banks, investment banks or building societies, insurance companies and other financial sector entities will not be eligible.
What features does the commercial paper need to have?
- Currency: Sterling denominated CP only;
- Amounts: the minimum size of an individual security is £1 million nominal; offer amounts should be expressed in increments of £0.1 million nominal;
- Maturity: a maturity of one week to 12 months, if issued to the Fund at issue via a dealer;
- Credit rating: a minimum short-term credit rating of A-3 / P-3 / F-3 / R3 or above, or a long-term above BBB-/Baa3/BBB-, from at least one of Standard & Poor’s, Moody’s, Fitch or DBRS Morningstar as at 1 March 2020. Companies with split ratings where one or more rating is below the minimum will not be eligible. For companies that do not have an existing credit rating, one potential route to evidencing credit status is to seek an assessment of credit quality from one of the above credit rating agencies, in a form that can be shared with the BoE and HM Treasury (noting that this is for the purposes of accessing the CCFF);
- Clearing: the CP must be issued directly into Euroclear and/or Clearstream;
- Features: the BoE will not approve as eligible any CP which has non-standard features (for example, extendibility or subordination);
- Guarantees: CP issued by a finance subsidiary should be guaranteed by their parent company. For further detail about guarantees, see the section on Documentation below.
What are the operational details?
- Start date: the CCFF will be open for applications from 23 March 2020;
- Price: purchases will be made at a minimum spread over reference rates, based on the current sterling overnight index swap (OIS) curve;
- Conventions: money market yield conventions will be applied;
- Trade confirmation: the BoE will send a written electronic confirmation of each transaction on the day of purchase;
- Settlement: purchases of CP will normally settle on a T+2 basis;
- Primary market: newly issued CP may be purchased by the BoE via dealers;
- Secondary market: the BoE may also purchase CP in the secondary market after issuance from eligible counterparties;
- Rollover: drawings can be rolled while the CCFF is open, subject to eligibility;
- Limits: purchases of CP in the primary markets may be limited by an issuer, on request;
- Operational period: the scheme will operate for at least 12 months and for as long as steps are needed to relieve cash flow pressures on firms that make a material contribution to the UK economy;
- Discretion: The BoE, the Fund and HM Treasury reserve the right at their sole discretion to deem any security ineligible for any reason, and to deem ineligible securities previously purchased and vice versa.
Are there any practical considerations to bear in mind?
- Documentation: issuers should use the ICMA standard form commercial paper documentation (with minimal deviations). The BoE will also require the completion of an issuer eligibility form and an undertaking and confidentiality agreement. Whether or not the CP is guaranteed on market standard terms, where the CP is not the credit of the primary entity in the group, the BoE may require the delivery of an additional guarantee and (if the primary entity in the group is incorporated outside the UK) an additional legal opinion on that guarantee;
- Paying agent: A paying agent will need to be appointed, so issuers appointing a new agent should start any KYC and onboarding processes as soon as possible (some agents may require an existing institutional relationship);
- Confidentiality: from a reputational perspective, the names of issuers and securities purchased or eligible will not be disclosed publicly by the BoE; and issuers will be required to sign an undertaking and confidentiality agreement;
- Other financial arrangements: Potential issuers should consider the terms of any existing financing arrangements (including any covenants relating to permitted levels of debt) before applying for the CCFF;
- Next steps: potential issuers should contact the BoE directly, to discuss eligibility and the necessary documentation.
Further details about the CCFF are available on the BoE website.
We will continue to monitor developments related to COVID-19 and the debt capital markets and will update you as the situation evolves.
For more detail and practical tips on managing the impacts of coronavirus, please see updates in the Freshfields coronavirus alert centre.