On 17 March 2020, the Chancellor of the Exchequer, Rishi Sunak, through the Bank of England (“BoE”) and HM Treasury, announced an “unprecedented” package of Government- backed temporary financial measures and schemes to support businesses during the COVID-19 situation. The lending will be available under two schemes, both will be operational from 23 March 2020:
- The COVID-19 Corporate Financing Facility (“CCFF”); and
- The Coronavirus Business Interruption Loan Scheme (“CBILS”)
These two schemes are in addition to the BoE’s Term Funding Scheme with added incentives for SMEs (“TFSME”) which we also cover in this note and which is designed to provide additional liquidity to banks in order to provide additional capacity to lend to UK businesses.
The intention behind these schemes is that businesses which were viable prior to the COVID-19 situation would be able to access funding. Businesses which were already having trouble may find it more difficult to do this, especially if they cannot show that they were previously financially sound. This note will provide further details of the above schemes as well as information on eligibility and how to apply.
The funding situation is evolving since the Chancellor’s announcement outlining the support for UK businesses. There is already quite clear feedback as to whether these schemes meet the demands and needs of UK companies and whether the banks supporting these schemes have the capacity to deal with the interest in these schemes from their customers. For example, guidance this morning from Stephen Jones, the CEO of UK Finance, on CBILS is to approach other providers if your existing bank is not able to offer terms.
Given the terms of the schemes may have to be changed by the Government, we will update our guide to reflect any such changes. This article is a summary of the schemes as at 26 March 2020.
We and our other clients would welcome your feedback if you have applied for funding under any of the schemes. Please contact us.
1. The COVID-19 Corporate Financing Facility - Overview
- The CCFF will provide funding to larger businesses and corporates  (“companies”) in order to support their liquidity and working capital issues by helping them to, for example, pay wages and suppliers due to the disruption caused by COVID-19 to their cash flows.
- All lending extended by the BoE under the CCFF will be guaranteed by HM Treasury.
- The CCFF will operate for an initial period of at least 12 months and will last for as long as steps are needed to relieve cash flow pressures on companies.
- The BoE will give at least 6 months’ notice of any planned withdrawal of the Scheme.
- The funding will be provided through the purchase by the BoE (through a Government company) of commercial paper (“CP”).
What is CP?
- CP has the same characteristics as a bond but is short-term debt with a maturity of 12 months or less.
- The terms tend to be simple with either limited or no default provisions.
- CP is usually issued pursuant to a programme and cleared through Euroclear and Clearstream (the main international clearing systems) but not usually listed on a stock exchange. The CP under the CCFF will be issued and purchased in this manner.
- A bank (typically an investment bank) will become a CP dealer and will be involved in setting up the CP programme. The dealer is also the liaison between the issuer and purchaser of the CP.
- Many companies who are looking at taking funding from the CCFF will have issued CP before, but the scheme is also open to those which have not. Companies wishing to take funding from the CCFF that do not have a CP programme in place, should liaise with their relationship banks.
- As not all banks issue CP, UK finance has helpfully provided list of the following banks that are taking part in the CCFF Scheme and able to help:
- Lloyds Banking Group
- Bank of America (BAML)
- Goldman Sachs
- JP Morgan Chase
- Morgan Stanley
- Standard Chartered
Eligibility – who can use the CCFF?
- The minimum issue size under the CCFF is £1 million nominal. When submitting an offer, offers will need to be rounded to the closest £0.1 million.
- Companies that make a material contribution to the UK economy can participate in the CCFF (via a bank as mentioned above). This will cover:
- UK incorporated companies (this can be a finance subsidiary, but a guarantee will be needed from the parent or primary entity in the group), including those with foreign-incorporated parents and with a genuine business in the UK;
- Companies with significant employment in the UK;
- Companies with their headquarters in the UK; and
- Companies which generate significant revenues, serve a large number of customers or has a number of operating sites in the UK.
- The company can be a non-financial company or a non-bank financial company if they materially contribute to corporate financing in the UK.
- The CCFF is available for companies that can demonstrate that prior to the COVID-19 situation, they were in sound financial health by either having a short-term investment grade rating (A-3/P-3/F-3/R3) or a long-term investment grade rating (BBB-/Baa3/BBB-) as at 1 March 2020 from at least one of the major credit rating agencies (S&P, Moody’s, Fitch or DBRS Morningstar).
- A company without a credit rating may also be able to access the CCFF by seeking an assessment of credit quality from one of the major credit rating agencies in a form which can be shared with the BoE and HM Treasury, noting that the assessment relates to participation in the CCFF. Suitable evidence of credit status is set out on the BoE website. It is unclear whether these requests will be expedited in light of the COVID-19 situation and the need to access the CCFF quickly.
- The BoE have confirmed that if a company is downgraded after 1 March 2020, then, provided that it has demonstrated good financial condition prior to 1 March 2020, then it can still be eligible to participate in the CCFF, subject to HM Treasury approval.
Eligibility – who cannot use the CCFF?
- CP issued by issued by banks, investment banks, building societies, insurance companies and other financial sector entities regulated by the BoE or the Financial Conduct Authority (“FCA”) or leveraged investment vehicles will not be eligible.
- If companies have different ratings from different agencies and one of those ratings is below investment grade, then the CP will not be eligible.
- The CCFF will offer financing on terms comparable with those prevailing in the markets before the COVID-19 situation. Different pricing arrangements are provided depending on whether the CP is being purchased in the primary or the secondary market.
- The BoE will hold purchase operations every working day between 10 – 11 am.
- The CCFF opened for drawings on 23 March 2020. The BoE will send a written electronic confirmation of each transaction on the day of purchase. The purchases of CP will normally settle on a T + 2 basis.
- The names of issuers and details of the CP declared eligible and/or purchased will be kept confidential and not made public.
- Every Thursday at 3:00 PM, the BoE will publish both the total amount of CP purchased that week in terms of the amount paid to the sellers and the total amount of CP purchased to date, minus any CP which has already matured.
How to apply?
2. The Coronavirus Business Interruption Loan Scheme
- The CBILS launched on Monday, 23 March, and is designed to support lending to SMEs who are experiencing lost or deferred revenues, leading to disruptions to their cashflow. It will initially run for six months. For these purposes a SME is a business which has a turnover of no more than £45million (further guidance on eligibility is set out below).
- The CBILS is an extension to the new Business Interruption Loan Scheme announced at the Budget on 12 March. The amount that can be borrowed has increased from £1.2 million to £5million, with no interest due for the first twelve months.
- There is no fee for SMEs. There are 40 accredited finance providers (the “Scheme Lenders”, each a “Scheme Lender”) who are offering the CBILS. The Scheme Lenders will pay the fee to access the CBILS.
- The CBILS provides the lender with a Government-backed guarantee against the outstanding facility balance, potentially enabling a ‘no’ credit decision from a lender to become a “yes”. However, the borrower bears the primary obligation for the loan and always remains 100 per cent liable for the debt.
- The Government will provide lenders with a guarantee of 80 per cent on each loan in the event a loan is not repaid by the borrower or recovered from any security given by the borrower (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs.
- The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, if any. Therefore, SMEs will benefit from no upfront costs and lower initial repayments.
- At the discretion of the Scheme Lender, the CBILS may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, the Scheme Lender must establish a lack or absence of security prior to businesses using the CBILS. Primary Residential Property (PPR) cannot be taken as security under the CBILS but personal guarantees or charges over other personal assets (such as other property) has not been excluded.
- The CBILS supports a wide range of business finance products, including; term facilities, overdrafts, invoice finance facilities and asset finance facilities. Finance terms are from three months up to six years for term loans and asset finance and up to three years for revolving facilities and invoice finance.
Eligibility and access
The CBILS is now open for applications and is available through the Scheme Lenders and is being supported by the British Business Bank (“BBB”).
In the first instance, SMEs should approach their own provider directly, not via the BBB. If the SMEs own provider or a Scheme Lender can offer finance on normal commercial terms without the need to make use of the CBILS, they will do so.
In order to be eligible for support via the CBILS, the SME must:
1. be a UK based company;
2. have a turnover of no more than £45 million per annum;
3. generate more than 50 per cent of its turnover from trading activity;
4. have a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable your business to trade out of any short-to-medium term difficulty (a “Borrowing Proposal”); and
5. use the CBILS -backed facility to support primarily trading in the UK.
Ahead of applying for the CBILS, a business should have the following information ready:
a) a cash flow statement showing the projected impact of COVID-19 over the next 3-6 months;
b) a Borrowing Proposal;
c) the latest year end accounts; and
d) the latest management accounts (full P&L and Balance Sheet).
The eligibility decision for the CBILS is fully delegated to the Scheme Lenders, which include; high-street banks, challenger banks, asset-based lenders and smaller specialist local lenders. Please see a list below.
Sole traders and freelancers are eligible as long as the business activity is operated through a business account and meets the above mentioned eligibility criteria.
Restrictions - there are a small number of excluded/restricted trades and organisations, including: 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 unions.
The Scheme Lenders
The following are a list of, but not limited to, the Scheme Lenders:
1. Bank of Ireland Group plc;
2. Bank of Scotland plc;
3. Barclays Bank plc;
4. Clydesdale Bank and Yorkshire Bank;
5. HSBC Bank plc;
6. Metro Bank plc
8. Royal Bank of Scotland;
9. TSB Bank plc; and
10. Lloyds Bank plc.
The BBB are accelerating accreditation for existing lenders to be able to provide additional variants of the CBILS and are accepting applications for new lenders to undergo accreditation.
Further guidance can be found here.
3. Other options for SMEs?
Another potential funding alternative for SMEs (but not a direct result of the COVID-19 situation) is the Bank of England’s TFSME. The BoE reduced interest rates last week to an unprecedented low of 0.10 per cent. The effect of this may limit the ability of banks to further reduce their deposit rates further or cut their lending rates. On 11 March 2020, the BoE published a Market Notice on its website setting out that the TFSME, in order to mitigate these pressures on the banks and to maximise the effectiveness of monetary policy will, over the next 12 months, offer 4-year funding of at least 10 per cent of participants’ stock of real economy  at interest rates either at or close to Base Rate. Additional funding will be available for banks that increase lending, especially to SMEs. The main points of the TFSME are set out below. Please see the BoE website here for further details.
What will the TFSME do?
- help reinforce the transmission of the reduction in Base Rate to the real economy to ensure that businesses and households benefit from the rate reduction;
- provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
- incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption; and
- provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.
Who is eligible to participate in the TFSME?
- Banks and building societies that are participants in the BoE’s Sterling Monetary Framework (“SMF”) and that are signed up to access the Discount Window Facility (“DWF”). There is already a broad range of participants operationally ready to participate in the TFSME.
- SMF participants that are not already signed up to the DWF can apply for access alongside applying to use the TFSME. Institutions that are not currently SMF participants can apply to join (see the BoE website here, subject to the BoE’s usual eligibility requirements.
- Institutions wishing to join the TFSME can apply via the BoE website (all documentation is now available)). A Scheme Letter will need to be signed by the applicant in order to become a participant in the TFSME.
- Eligibility and continued access to the TFSME is contingent on participants acting, in the BoE’s opinion, in good faith and in a manner consistent with the objectives of the TFSME. The eligibility criteria may be varied at the BoE’s discretion. Applicants and participants should review the criteria which is set out in the Operating Procedures and the Terms and Conditions on the BoE’s website.
- Drawdowns under the TFSME may be undertaken on each business day during the drawdown period (which will open no later than 27 April 2020 and run until 30 April 2021). Drawdown requests should be made to the Bank’s Sterling Markets Desk, as set out in the Operating Procedures.
Term of the transactions
- The term of each transaction will be for four years from the date of drawdown. Participants may terminate any transaction, in part or in full, before its maturity date, in accordance with the Operating Procedures.
- Interest on TFSME transactions will be charged at Base Rate plus a scheme fee.
- The BoE will publish the size of each participants’ outstanding drawings quarterly with a lag (the timetable will be published on the BoE website in due course). Details of aggregate TFSME drawings will also be published weekly on the BoE’s website. By participating in the TFSME, participants agree to the BoE publishing this information.
There are legitimate concerns in the market about a funding gap as worries are growing that midsized companies are being left without any financial help. The British Retail Consortium wrote to the BoE last week raising concerns that many of its members are too large to use the CBILS, and they do not have strong enough credit ratings in order to access the CCFF. The retail and hospitality sectors estimate that between 80-90 per cent of companies fall into this trap. Rishi Sunak told MPs on 24 March 2020 that not all businesses would be able to be saved or helped by the Government. Treasury ministers indicated that these companies could instead access interest-free loans and business rate relief however, business rate relief was only offered to companies in the hospitality, leisure and retail sectors. Several other businesses are ineligible for this relief and now have had to close. Many companies have also been left out of the TFSME, risking jobs at businesses that are worried about paying their workers as the Government's wage scheme is still not in place. What now for these companies?
It appears that this funding gap is now being taken seriously as the Chancellor, the BoE and the FCA have written to the chiefs of the UK’s biggest banks on 25 March 2020 (a link to the letter is here) appealing to them to support UK companies which are not covered by the CCFF and the CBILS by stating “we must ensure that firms whose business models were viable before this crisis remain viable once it is over.” The letter also stated that the banking sector would “rise to the challenge to support the economy and protect jobs”, adding that the BoE and the FCA will monitor the situation closely.
The postponement by the BoE of the annual stress testing for banks and the reduction this month of the BoE’s countercyclical capital buffer (the fund set up to ensure banks maintain extra capital to use during a crisis) should free up an extra £190 billion which will help banks maintain lending volumes which can then be used to help those companies which need funding and are not covered by the CCFF and the CBILS.
Although the BoE have extended the eligibility criteria for the CCFF so that companies which have not issued CP before could still participate in the scheme and if a company does not have a credit rating, it will consider whether that company is of equivalent financial strength. These measures are well intended, but putting a CP programme in place and receiving an assessment of credit from one of the main credit rating agencies takes time, and the BoE have not given any indication as to whether these time frames can and will be expedited. Therefore, at this point many companies are in limbo due to the uncertainty of if and when they will be able to access the CCFF.
The BBB estimated that the guarantees under the CBILS would cover up to £1bn in new loans, and the chancellor has stressed that greater sums could be made available if demand is higher than expected. There is concern that the CBILS falls foul of the state aid rules, meaning the banks will have to fund the 12 months interest holiday and fees. There has also been some criticism of the CBILS by businesses that have spent hours on the phone trying to speak with their lenders. Lenders have indicated they are committed to serving their customers, but the volume of calls and queries about the CBILS has been difficult for lenders to keep up with.
Will the loan guarantees help? Major lenders have stressed their determination to help business customers. However, some of the biggest supporters of new SME lending (alternative lenders and challenger banks) were excluded from the CBILS. There are concerns in the market that the existing panel of lenders is not sufficient to lend all the necessary and required funds.
The Government needs to consider turning to the challenger banks and alternative lenders who could potentially help plug this funding gap so more of those companies and businesses who do not qualify under the CCFF, the CBILS or the TFSME can survive.
 For the purposes of the TFSME, SMEs are defined as private non-financial corporations with an annual debit turnover of less than £25 million on the business account or unincorporated businesses resident in the UK (eg sole traders). Lending to unincorporated businesses should not include buy-to-let lending.
 The term ‘larger businesses and corporates’ is not defined in the guidance, but it will refer to companies that have an investment grade credit rating that make a material contribution to the UK economy.
 For these purposes the ‘real economy’ concerns the flow of goods and services compared with the monetary sector that covers the circulation of money and other documents that represent ownership or claims to ownership of real sector goods and services.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2020