UK government extends lifeline to PE assets, but obstacles remain

On 16 April 2020, HM Treasury released an announcement stating that private-equity-backed businesses will have access to its guaranteed loan schemes. Prior to these announcements, several concerns surrounding the Coronavirus Business Interruption Loan Scheme (CBILS) were raised in the private equity community.

PE-backed and founder-owned businesses alike reported difficulties accessing funding, with banks offering loans at interest rates of 30% or asking for excessive personal guarantees. In a survey of 42 GPs by the British Venture Capital Association, of the respondents' more than 750 portfolio companies, only 29 had been successful in their application for CBILS as of early April.

Another concern was the grouping of PE-backed companies' revenues, so the sum of the portfolio's revenues would surpass the £45m cap for CBILS eligibility. However, soon after HM Treasury's initial announcement, the British Business Bank, the conduit for government funding to accredited CBILS lenders, also indicated that "grouping" arrangements would be removed.

Partner James Collis of Squire Patton Boggs says the clarification from the government is helpful, but has concerns about CBILS' larger cousin, the Coronavirus Large Business Interruption Loan Scheme (CLBILS): "They haven't given the same clarification for CLBILS, and this is the scheme that will be of interest to many more PE businesses. Of course, there's no upper turnover limit for CLBILS, so aggregation doesn't matter in that sense, but if it does apply does that mean the portfolio as a whole is capped at a single funding limit?"

While the government still needs to clarify on some terms, particularly with CLBILS, these announcements indicate its willingness to have PE assets gain access. GPs that have not already, can now turn to the practical implications of the funding, which have also garnered criticism.

Finding the right fit
How CLBILS funding will fit into the capital structure of portfolio companies is one area that has not yet been clarified. Callum Bell of Investec says: "There's a range of ways that government funding may fit into the capital structure. We've heard of these facilities being put in as subordinated loans. Equally, it could come under super senior and pari passu.

"All the options are there and all eyes are on how stakeholders, creditors and shareholders negotiate this, and in particular the inter-creditor aspects between different parts of the capital structure."

Without clarification from the government on where this funding can sit in the capital structure, taking on CBILS and CLBILS funding may require lengthy negotiations with credit holders and the possibility of outright rejection from lenders. Furthermore, there has been a shift away from traditional bank lenders towards private debt funds that may be less susceptible to government pressure.

These lenders, many of which participate in sponsored transactions, may not be amenable to having more debt brought into the company without a shift in their own terms to compensate for the greater risk implied by extra leverage.

Collis says: "Consent issues with existing creditors may still remain as any loan will need to find its place in the capital structure, particularly if additional indebtedness baskets are insufficient. This may be true for businesses not backed by private equity, but the capital structures around portfolio companies, coupled with tighter, leveraged credit, means these terms are likely to add an additional layer of complexity."

Ben Squires, a partner at Squire Patton Boggs, also raises concerns around other potential restrictions that could be implemented on companies taking out these loans, depending on the approach the government takes. He says: "If the CLBILS scheme in any way mirrors the proposals for the Main Street Lending Program (MSLP) in the US, there could be restrictions on executive remuneration and the payment of dividends and capital distributions. As such, private equity sponsors will need to consider the potential repercussions of these restrictions, if imposed, very carefully before accessing the CLBILS scheme."

Bell says of the potential for wider restrictions: "Every business has its own circumstances and the optimal outcome to cater for all stakeholders needs to be negotiated in light of these, but there are certainly some restrictions that are reasonable." Bell says, for example, that it is fairly typical to have restrictions on dividends for PE-backed businesses in the mid-market when the business operates at a high leverage.

It is unclear whether the potential obstacles to portfolio companies exist deliberately or are simply a result of teething issues. Market participants have suggested that with record-high levels of dry powder, the government may expect PE to shore up companies. Others suggest that as accredited lenders attempt to triage the companies most in need of funding, those with wealthy backers are unlikely to top the list.

However, Squires cautions against creating obstacles for these companies when accessing these loans. He said: "Clearly, large pension funds constitute a not insignificant proportion of the investor base of many private equity funds and, as such, providing PE portfolio companies access to schemes like CBILS and CLBILS not only supports the employees of such companies but also provides an indirect benefit to pensions pots of the population at large. Perhaps the PE industry as a whole could be better at explaining the wider benefits their structures bring to UK plc."

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• Topics
• Financing
• UK / Ireland
• coronavirus