COVID-19 UK: Finance - Large Business Loan Scheme launched and available to PE owned and large companies - Insight

Further to the Chancellor's announcement on 3 April 2020 (which we covered in COVID-19 UK: Finance - Mind the Gap - Insight and COVID-19 UK: UPDATE: Finance - Mind the Gap - Insight), the U.K. Government officially launched the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”) on 20 April 2020. 

As part of CLBILS’s official launch, the Chancellor clarified that CLBILS (and the existing Coronavirus Business Interruption Loan Scheme (“CBILS”) launched on 23 March 2020 (and expanded on 6 April 2020)) can be accessed by private equity owned companies and expanded CLBILS to all companies with an annual turnover greater than £45 million. When CLBILS was initially announced companies with an annual turnover of more than £500 million were not eligible, but such cap has been removed following consultation with the business community.

Unsurprisingly, other than the turnover thresholds, the key features of CLBILS are like those of CBILS. The key features of CLBILS are:

• It applies to companies:
   
  
  • whose business is UK-based. (Further details as to what this means in practice are awaited. That said, in respect of CBILS, the British Business Bank (who operates both CBILS and CLBILS), has said that in principle foreign-owned companies are eligible to apply, provided the company is trading in the U.K. (not just selling into the UK and has the core of its business operations in the U.K.) and uses the relevant facility to support its business activity in the U.K. The same is true for overseas companies with UK ownership);
  • that have a turnover of more than £45 million for the 12 months preceding the relevant CLBILS application. (Where the relevant company is part of a corporate group (i.e. controlled on either a legal or de facto basis) then the turnover for the wider group, rather than just that of the relevant company, will be used. The expectation is that such wider group turnover will be the group’s global turnover (rather than just its UK turnover). However, this has not currently been expressly clarified);
  • that have a borrowing proposal that would have been, were it not for the COVID-19 situation, considered viable by the relevant lender and were not an “undertaking in difficulty” as at 31 December 2019^[1];
  • where the provision of finance, in the relevant accredited lender’s opinion, will enable the business to trade out of any short-to-medium term difficulty;
  • that certify that it has been adversely impacted by COVID-19; and
  • that have not received credit under the Covid Corporate Financing Facility (which we discussed in COVID-19 UK: Finance - Mind the Gap - Insight and COVID-19 UK: Finance – Financing Related Considerations – Insight);
• Eligible companies may apply for facilities of up to £25 million, or, if they have an annual turnover greater than £250 million, of up to £50 million; provided that in each case the amount borrowed should not be greater than (i) double the company’s annual wage bill for 2019, or (ii) 25% of the company’s turnover for 2019, or (iii) with appropriate justification and based on self-certification of the company, the amount needed to cover the company’s liquidity needs for the next 12 months;
• As with CBILS, it operates through accredited lenders (subject to an annual lending limit for CLBILS transactions allocated to such accredited lender by the British Business Bank), the U.K. Government will guarantee up to 80% of the outstanding amount due under the relevant facility (net of all other recoveries), and the relevant borrower remains liable for 100% of any outstanding amount;
• The facilities will be made on commercial terms (with no interest holiday or payment of interest by the U.K. Government) and any eligibility decisions are fully devolved to the relevant accredited lender;
• Personal guarantees of any form are not permitted for facilities below £250,000.For facilities above £250,000, personal guarantees may be taken, but claims under the guarantee cannot exceed 20% of the lender’s losses after all other recoveries have been applied;
• The relevant facility must be on at least a pari passu basis with the company’s other senior obligations (including secured and/or super-senior obligations, if any); and
• CLBILS can apply to term loan facilities, revolving credit facilities (including overdrafts), invoice finance facilities and asset finance facilities, with maturities of between 3 months and 3 years.

Importantly, as noted above, the Chancellor also clarified on 16 April 2020 that companies owned by private equity firms are eligible for CLBILS and CBILS. There had previously been confusion over whether such companies were eligible for CBILS (and would be eligible for CLBILS). This was after a number of private equity owned companies said they had been turned down for facilities provided under CBILS or were facing additional hurdles to access it. Among the hurdles raised were, according to Bloomberg, the requirement that private equity-backed applicants aggregated their turnover at the private equity fund level when deciding which scheme they were eligible for. This meant some companies missed out on loans designed for businesses of their size. This prompted parts of the private equity industry to lobby the U.K. Government to clarify the rules and broaden the scope of CBILS and clarify the CLBILS position.

It will be interesting to see how CLBILS develops. While CLBILS related facilities can be provided by any accredited lender, as with CBILS, the expectation is that companies will be practically restricted to using their existing bank/lender (for example, due to speed of execution, intuitional knowledge of the company and the fact lenders are prioritising their existing customers).

Structuring of any CLBILS facility will also be an important consideration. Especially, given the pari passu requirement noted above and that CLBILS companies are, given their size, likely to have existing debt and complex capital structures. For example:

• Under their existing credit agreement(s): does the company have capacity to incur and/or secure such debt, are there any restrictions on who can borrow such new debt, and are there any restrictions on what instrument or agreement such new debt can be incurred under?
• Given CBILS debt cannot have a maturity of greater than three years, will this debt mature inside any existing debt? And if so, is this permitted under the existing credit agreement(s)?
• Will the CLBILS debt be covered by the existing security package (if any)? Will the CLBILS lender need to become a party to an existing intercreditor agreement? Will it require intercreditor negotiations with other creditors? Given the pari passu requirement noted above, the general expectation, would be yes.
• What security and/or intercreditor position is acceptable to the CLBILS lender and/or the existing creditors? Particularly given the 80% U.K. Government guarantee of the new CLBILS debt.

Given CLBILS facilities are to be provided on commercial terms, these structuring issues will impact the cost of these facilities to the company and the time it will take to put the CLBILS facilities in place. Such structuring issues may potentially require bespoke/deal specific solutions and/or agreements between the CLBILS lenders and existing creditors, which again will have timing and execution implications. Given the potential need for bespoke and deal specific solutions, it will be interesting to see whether direct lenders/alternative credit funds will look to become accredited lenders under the scheme so to take advantage of the risk reducing U.K. Government guarantee. These alternative lenders are used to, and are well positioned to, structure and provide bespoke financing solutions. 

Another important point to consider, is how will CLBILS lenders behave in an event of default and/or enforcement scenario. Particularly because the 80% U.K. Government guarantee is only applied to the outstanding balance of the relevant facility after all other applicable recoveries are made. Could this mean that the lenders will try to hold out in a restructuring scenario? Or will they, due to the guarantee, be less interested in the initial level of recoveries?  Only time will tell.

As with everything relating to the U.K. Government backed COVID-19 loan schemes it remains a case of watch this space for further detail, clarifications, practices, lobbying and potential changes.

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