By Drew D. Salvest & Natalie A. Stewart
31.03.2020
The UK government recently announced a package of measures to provide liquidity to UK businesses during the COVID-19 pandemic. Two schemes are particularly useful for financing needs: the HM Treasury and the Bank of England COVID-19 Corporate Financing Facility and the British Business Bank Coronavirus Business Interruption Loan Scheme. Our Alert provides summaries of the financing schemes, eligibility requirements and the application process.
HM Treasury and the Bank of England COVID-19 Corporate Financing Facility
Who Is Eligible?
Firms who make a material contribution to the UK economy, which are likely to be UK incorporated companies (including those with foreign-incorporated parents and with a genuine business in the UK), companies with significant employment in the UK and firms with their headquarters in the UK may apply for this assistance. Considerations include whether firms generate significant revenues in the UK, serve a large number of customers in the UK and have a number of operating sites in the UK.
Publicly owned and partially owned entities will not be eligible.
Companies will need to demonstrate they were in sound financial health prior to the COVID-19 pandemic, typically by having had a short-term rating of investment grade as of 1 March 2020, or equivalent.
What Financing Is Available?
The scheme will purchase commercial paper issued by firms with the following criteria:
- Maturity of one week to 12 months;
- Where available, a short term credit rating of A-3/P-3/F-3/R3 or above, or a long-term rating of BBB-/Baa3/BBB-/BBB or above from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as of 1 March 2020; and
- Issued directly into Euroclear and/or Clearstream.
The issuance of commercial paper previously is not a requirement. If firms have different ratings from different credit rating agencies and one such rating is below investment grade, then the commercial paper will not be eligible for the scheme.
If companies do not have credit ratings, they can discuss their eligibility for the scheme with their current lender who may be able to judge a company’s creditworthiness.
Commercial paper with nonstandard features (for example, extendibility or subordination) will not be accepted in the scheme, together with any commercial paper issued by banks, building societies, insurance companies or other regulated financial sector entities, or any issued by leveraged investment vehicles or from companies within groups that are predominantly active in businesses subject to financial sector regulation.
The minimum size of an individual security that will be purchased under the scheme is £1 million nominal.
Companies should be aware of the fees that will be involved in issuing commercial paper, such as arranger fees.
Eligible commercial paper will be purchased at a spread above a reference rate, based on the current sterling overnight index swap curve, with spreads being set such that pricing is close to the market spreads prevailing before the economic shock of COVID-19.
How to Apply
The scheme is open 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. Firms can apply by contacting their current lenders. If a firm’s current lender does not issue commercial paper, UK Finance has compiled a list of banks that are able to assist.
The British Business Bank Coronavirus Business Interruption Loan Scheme
Who Is Eligible?
Small and medium UK-based businesses which have an annual turnover of no more than £45 million, who are experiencing loss or deferred revenue leading to cashflow disruptions may apply.
Businesses must have a borrowing proposal that the lender would consider viable, were it not for the COVID-19 pandemic, and that the lender believes will enable the business to trade out of any short-term to medium-term difficulty. The proceeds of the facility must be used to support trading primarily in the UK and the business must generate more than 50 percent of its turnover from trading activity.
Any businesses can apply, with the exception of: (a) banks and building societies, (b) insurers and reinsurers (but not insurance brokers, who are eligible), (c) public sector organisations, (d) employer, professional, religious or political membership organisations, or (e) trade unions.
There are no fees for SME borrowers to access the scheme. Interest and lender-levied fees will be paid by the government for first 12 months, so there are no upfront costs and lower initial repayments.
Lenders will be provided with partial government backed guarantees of 80 percent of the outstanding facility balance guaranteed, subject to overall caps per lender.
What Financing Is Available?
Facilities of up to £5 million are available on repayment terms of up to six years, through term loans, overdrafts, invoice financing and asset financing. A six-year term applies to loans and asset finance facilities and a three-year term applies for overdraft and invoice finance facilities.
At the discretion of the lenders, the scheme may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, lenders must establish lack or absence of security prior to businesses using the scheme. Primary residential property may not be given as security. If a lender can lend on normal commercial terms without having to make use of the scheme, it will.
How to Apply
The loan scheme is operated by British Business Bank via over 40 accredited lenders and applications may be submitted by contacting one of the accredited lenders.
If an application is turned down by a lender in the scheme, other lenders can be approached. The application period will initially be open for six months.
For More Information
If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, any of the attorneys in our London office, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.