Problematic changes to the UK's Covid Corporate Financing Facility for non-'investment grade' issuers

As the long-feared 'second wave' of the coronavirus (COVID-19) looms, with much of the UK already subject to local lockdowns, the impact on the financial markets and the global economy is again under discussion. 

In our 24 March 2020 blog, we discussed the Covid Corporate Financing Facility (CCFF), the support package HM Treasury and the Bank of England (BoE) put in place for the largest corporates.

This blog provides a brief overview of the key changes announced by the BoE on 9 October 2020. The changes go towards the timing of issuance, eligibility and the drawing limit, but will only have a limited impact on issuers with an 'investment grade' credit rating (that is, a credit rating at or above a short-term rating of A3/P3/F3/R3 or equivalent, or a long term rating of BBB-/Baa3/BBB-/BBB (low) or equivalent).

The implications for non-'investment grade' issuers are more problematic.

Issuers that do not currently have an 'investment grade' credit rating

Eligibility for the CCFF 

After 9 October, non-'investment grade' issuers looking to issue commercial paper (whether through an initial issuance or roll-overs of maturing commercial paper) into the CCFF will be required to undergo a review by HM Treasury to determine whether the issuer’s use of the CCFF is within the purpose of the facility.

The BoE says that this credit quality review should be expected to take at least four weeks to complete and HM Treasury would request supporting information from issuers as part of the review.

There is very limited detail as to what will enable an issuer to 'pass' this review, though the stated purpose of the CCFF is to provide 'short term liquidity support to fundamentally strong businesses'.

Drawing limits

Any issuer with a long term credit rating falling to or below BBB-/Baa3/BBB (low) or equivalent after 1 March 2020 will have their aggregate drawing limit capped at a maximum of £300m. Note that this will not affect outstanding drawings if in excess of £300m. Also, it appears that the drawing limit is only tested against the issuer’s long term credit rating and not the short term credit rating which forms part of the general definition of 'investment grade' used by the BoE, as set out above.

Issuers that believe they have an 'investment grade' credit rating

'Investment grade' issuers will need to notify the BoE that they intend to sell new commercial paper into the CCFF no later than 11am five business days prior to their requested sale date. Such notice will need to include evidence to establish an investment grade credit rating that is comparable to the evidence originally provided when eligibility for the CCFF was first sought. Where a ‘point in time’ rating is obtained from a credit rating agency, evidence of current investment grade status must date from no longer than eight weeks before the proposed date of issuance.

Our view

The changes for 'investment grade' issuers should be minor, albeit that the five business days’ lead time should be considered (especially when rolling over an existing issuance), as well as the need to provide further evidence of the credit rating. Issuers that believe they have an 'investment grade' rating and know they intend to issue further commercial paper may wish to periodically update the BoE with their evidence of 'investment grade' credit rating, to minimise the risk of a dispute over that status with the BoE as and when funds are needed.

The changes for non-'investment grade' issuers are more problematic. When originally established, the criteria were clear that if the 'investment grade' rating had been lost as a result of the impact of COVID-19, CCFF eligibility could still be granted. In keeping with the Government’s position in other areas of COVID-19 support, the CCFF’s focus now seems to have shifted from all companies impacted by COVID-19, to only those that are considered to have a 'fundamentally strong business'.

In the absence of criteria to determine what is a fundamentally strong business (including for example the time horizon that is taken into account), it seems issuers that have lost their investment grade credit rating as a result of COVID-19 can no longer take for granted access to the CCFF and may need to consider other sources of finance to replace such access.