HM Treasury and the Bank of England very recently announced two schemes designed to deal with the financing and liquidity issues that UK companies are facing as a result of the Coronavirus. These schemes being the: (i) Covid Corporate Financing Facility (the “CCFF”); and the (ii) Coronavirus Business Interruption Loan Scheme (the “CBILS”, and together the “Schemes”). We discussed the Schemes in our COVID-19 UK Insight: Financing-related considerations and COVID-19 UK Insight: Government Support for SMEs articles and, for ease of reference, the Schemes are briefly summarised at the end of this note.
Whilst the Schemes are in their infancy, it appears that they are not available to all companies. Non-investment grade, leveraged and/or private equity owned companies, other than small and medium-sized enterprises (“SMEs”), are currently outside the scope of the Schemes. Accordingly, there is no direct government financing and liquidity stimulus or assistance available for such companies; although, they are subject to the same significant disruptions and issues.
The CCFF is designed for traditional corporate commercial paper issuers, rather than for non-investment grade and/or leveraged finance issuers/borrowers. It specifically excludes leveraged investments and effectively requires an investment grade rating, and it functions via the issue of commercial paper. There is also the more subjective requirement that the borrower/issuer makes “a material contribution to the UK economy”. Meanwhile, the CBILS is subject to a £45 million per annum turnover cap and so is limited to SMEs.
There is clearly an unserved middle or “gap”, not currently catered for by these two Schemes. We understand private equity and debt funds are focussing on this “gap”. Initially, this unserved middle will likely need to be covered by banks (outside of the Schemes) and direct/alternative lenders. Banks are currently extremely busy with managing liquidity issues in their existing portfolios and generally battling their own COVID-19 disruptions. Whilst banks will face increasing political pressure to make new liquidity available, being inundated with new credit requests (outside of the Schemes) will further stretch their already overstretched resources and capital. Direct/alternative lenders will have similar portfolio liquidity and COVID-19 disruptions issues as banks. We would not expect such issues to be as significant, given that direct/alternative lenders do not provide traditional commercial banking facilities, are not subject to the same capital adequacy requirements, and are generally nimbler and more flexible in their investment approach. As a side note, this appears to be another opportunity for direct/alternative lenders to take further market share from banks.
Debt and/or liquidity facilities provided by banks and/or direct/alternative lenders will likely be the first port of call for those companies in the unserved middle. Other liquidity options will become even more important for such companies. These options include drawing down their revolving credit facilities in full, shareholders or sponsors injecting additional equity/subordinated debt, and using receivables financings and/or private securitisation structures. See our COVID 19 – Financing Related Considerations article, which discusses such liquidity options in detail. Other liquidity measures to consider include:
Despite these options, there will still be acute challenges ahead for those companies stuck in the “gap”. We understand numerous proposals have been submitted to HM Treasury to try and address this issue and it is likely that further support (if any) to fill this “gap” will be by way of a third scheme. A third scheme is more likely than adjustments to existing schemes because, for example: (i) non-investment grade/non-cross-over companies are unlikely to issue, or be able to issue, commercial paper and, therefore, will struggle to access the CCFF, even if the rating requirement was relaxed; and (ii) raising the revenue threshold and/or available facility size under the CBILS is not really an option, as permissions under the European Union State Aid Rules (which continue to apply to the UK during the Brexit transition period) are focused on SMEs (and increasing the thresholds would take the CBILS outside of being just SME focused).
So ultimately, this remains a case of watch this space (and the Chancellor’s potential announcement on Friday 3 April 2020) or “mind the gap”!
Summary of the Schemes