On 3 April 2020, the UK government announced a financial support package for larger sub-investment grade companies – the “squeezed middle” of British businesses which are not eligible for the Covid Corporate Financing Facility for investment grade corporates (the CCFF), and which are too large to benefit from the support the government has introduced for SMEs.
The Coronavirus Large Business Interruption Loan Scheme (CLBILS) will launch later this month. Headline terms have been released but they leave many questions unanswered for companies and their stakeholders.
The CLBILS – what we know so far
- The CLBILS will enable a group of accredited commercial banks to provide various types of financing arrangements of up to £25m to eligible borrowers. 80 per cent of that financing will be guaranteed by the British government.
- The CLBILS is available to UK-based businesses (except banks and building societies, insurers and reinsurers (but not insurance brokers) and public-sector organisations (including state-funded primary and secondary schools)) which:
- have annual turnover of £45m to £500m;
- are unable to secure regular commercial financing; and
- have a borrowing proposal which the lender: (i) would consider viable, were it not for the COVID-19 pandemic; and (ii) believes will enable the business to trade out of any short-term to medium-term difficulty.
- In terms of process, the government suggests that borrowers apply via the lenders’ websites (once the scheme launches) and notes that it expects that demand will be high.
The open questions
The government has already launched its Coronavirus Business Interruption Loan Scheme for small and medium-sized businesses with turnover of up to £45m (the SME Scheme). As this also offers an 80 per cent government guarantee, it may offer some insight into the government’s potential approach for the CLBILS – though this is not yet confirmed. As things stand, the brief details of the CLBILS published so far raise many important questions, particularly for larger corporate groups with cross-border operations and more complex existing capital structures.
- Why the limits on size? For many businesses towards the higher end of the turnover range above, £25m will contribute relatively little to cashflow needs at a time of distress. Amongst the businesses in the “squeezed middle”, there will be many with annual turnover higher than £500m but which are still not eligible for the CCFF.
- What does ‘UK-based’ mean? Will the government introduce other criteria to clarify this, such as location of employees or assets, or origin of revenue? Will UK-headquartered businesses with operations in different geographies be eligible? If so, will loan proceeds be ringfenced solely for the UK operations? Can UK-based operating subsidiaries of businesses headquartered in another country apply?
- How is annual turnover calculated? Though there is no detail on this for the CLBILS as yet, in the SME Scheme turnover is calculated by reference to the last 12 months prior to application and, for businesses which are part of a group, using consolidated turnover of the group. Linked to the point above, if a UK company is part of an international group, will this mean referencing global consolidated turnover? If this approach is followed, it will have the effect of limiting access to the scheme for larger UK businesses.
- Will existing creditors facilitate effective access to the scheme? This goes to the heart of the ability of the scheme to deliver for UK businesses. The CLBILS aims to buy businesses some time to weather the economic impact of COVID-19. But valuable breathing space will be lost if a borrower has to spend too much time negotiating with its existing creditors to be able to borrow the funds. As a matter of public policy, will the government ask existing lenders – both banks and credit funds – to be flexible in consenting to incurrence of debt under the scheme?
- Will lenders require additional credit support? Will lenders under the CLBILS expect asset security, rather than to lend unsecured, especially if the capital structure already includes secured creditors? While more complex financings may be pre-wired to accommodate this, many existing financing arrangements will not and will require amendment.
- What will the financing terms be? The government has noted that lenders will still conduct usual credit checks, but will lenders be free to set their own terms? These could include controls on use of proceeds, restrictions on dividends, share or debt buy-backs or making loans, restrictions on debt incurrence and a negative pledge.
- What will maturity date and prepayment requirements be? Will the government specify a maximum term for CLBILS loans? For eg, the SME Scheme caps tenor at 6 years (term loans/asset finance) and 3 years (overdrafts/invoice finance). Will lenders under the scheme expect to be ‘last in, first out’ ahead of existing lenders when it comes to prepayments and sharing?
The government is to publish further detail on eligibility later this month. We hope in doing so it will clarify many of these uncertainties. If you would like to discuss any of these issues, please get in touch with us, or your usual Freshfields contact.
Please visit our Coronavirus Alert Hub for all of our resources relating to COVID-19.