UK Covid-19 liquidity support snubs leveraged and mid-market companies

Last week the UK government rolled out two funding packages to address liquidity issues for UK companies as a result of the Covid-19 disruptions. While it is still early days and much is still left to interpretation, it appears the stimulus package is not available for all. Certain eligibility stipulations leave mid-market and leveraged issuers out of the safety net, although there could be changes ahead.

The UK business financing scheme is split into two initiatives: Covid-19 Corporate Financing Facility (CCFF) and Coronavirus Business Interruption Loan Scheme (CBILS).

CCFF and CBILs: Who is it for?
CCFF will provide short-term debt to larger, investment-grade-rated companies that are experiencing a liquidity crunch because of Covid-19 pressures, via the purchase of commercial paper that has a maturity between one week and 12 months. Companies must also make a material contribution to the UK economy in order to be eligible, according to market guidelines released by the Bank of England (BoE). The scheme is expected to run for 12 months and the Bank of England will provide six months' notice before withdrawing the facility. Pricing is "comparable […] to those prevailing in the market pre-Covid-19", according to the guidelines.

The market guidance specifically says that commercial paper will "not be eligible if issued by leveraged investment vehicles". 

CBILS – which temporarily replaces the Enterprise Finance Guarantee (EFG) scheme that was already operational – is focused on SMEs experiencing lost or deferred revenues as a consequence of the coronavirus measures.

The aim is to support SMEs that may have limited or insufficient security to raise additional financing, according to a report by PwC.

The scheme will provide loans of up to £5m to companies that are based, and have business activity, in the UK in eligible industrial sectors, with annual turnover of no more than £45m per year, according to the British Business Bank. Loans will have repayment terms of up to six years, with the government backing 80% against the outstanding facility balance. Interest and fees will also be paid by the government for 12 months. Term loans, asset finance, overdrafts and invoice finance are among the facilities available. More than 40 accredited lenders will participate in the scheme.

Mid-market left in the lurch
Given CCFF's leveraged issuer exclusion and investment-grade rating requirement, and CBIL's maximum turnover rule, mid-market companies have little recourse despite being hit with the same disruptions. 

"There is a gap in the middle, it's something that our private equity and debt fund clients are quite focused on," said a lawyer.

"It's designed with traditional corporate issuers in mind instead of leveraged finance issuers," said a second lawyer. "There's a clear guideline – you need to have a rating from 1 March – which will knock out many leveraged finance issuers. And then there's the more subjective question of whether you contribute to the UK economy." 

The liquidity gap will likely fall to banks and alternative lenders, wrote an adviser in a market note. However, the adviser noted that banks are likely to be inundated with applications and stretched thin as they battle Covid-19 disruptions and a steep learning curve.

"Businesses are drawing down on liquidity facilities," said the first lawyer. "We've heard of a lot of businesses drawing down on available revolvers and finding creative ways of getting to their capex and working capital facilities, and lenders are supportive of that."

The BoE has more information about accessing the facility here. If a company's bank does not provide commercial paper, the BoE recommends reaching out to one of 11 banks suggested by UK Finance. 

Additionally, the government is bringing a number of tax deferrals and rates holidays to help businesses. These include: Time To Pay, which allows all businesses and self-employed people in distress with outstanding liabilities to apply to defer VAT payments; and Business Rates Reduction, which gives full tax relief for all companies in retail, hospitality and leisure sectors, including a 12-month business rate holiday, among other initiatives, according to the PwC report.

The government also announced three employee-related schemes. First, the Coronavirus Job Retention Scheme, which covers 80% of salaries up to £2,500 a month for workers who cannot work because of the pandemic, as long as they are kept on the payroll, and it is open to all employers. It is expected to last for at least three months. Second, Refund Statutory Sick Pay, which is open to eligible employees from day one instead of day four, and also allows businesses to reclaim statutory sick pay paid to employees for up to two weeks' sickness absence due to Covid-19. It is open to SME businesses. Finally, there are payroll initiatives, which delays IF35 until April 2021 to help businesses and contractors.

Other sector-specific initiatives have also been introduced.

The leveraged finance market has been in touch with government officials about how to address the gap in mid-market financing, sources said, and there could be changes ahead. "I've heard the government is quite keen to know if it is hitting the mark and they've been quite receptive," said the first lawyer.

For now, advisers have several recommendations for companies to prepare for conversations with banks and other potential lenders: these include considering eligibility, demonstrating credit strength, keeping in mind the length of time for approval, limiting the use of proceeds, and deliberating whether commercial paper is the right avenue for financing. 

BoE declined to comment. The UK Treasury did not respond to a request for comment.

This article was originally published in Unquote sister publication Debtwire

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• Topics
• Financing
• UK / Ireland
• coronavirus
• United Kingdom