The UK government has announced a number of measures designed to respond to the economic shock arising from Covid-19 coronavirus – these include providing businesses of all sizes with access to a £330 billion package of government-backed loans and guarantees. In this bulletin we consider the key elements and eligibility requirements of both the Covid Corporate Financing Facility and the Coronavirus Business Interruption Loan Scheme (the UK Covid Schemes).

Executive summary

The UK Covid Schemes will be available to businesses from Monday 23 March 2020 and will provide eligible businesses with some much-needed financial breathing space in the current turbulent market and economic downturn that is almost certain to follow. The UK Government and Bank of England (BoE) acting swiftly in making details of these important measures available. However, key questions regarding eligibility and access to the Schemes, and whether there will be restrictions on the usage of funds obtained, remain. Prospective borrowers will also need to consider the viability of access to the UK Covid Schemes in light of existing obligations and longer term cash flows.

The Covid Corporate Financing Facility (CCFF)

Introduction

On 17 March 2020, HM Treasury and the Bank of England announced a Covid Corporate Financing Facility (CCFF) to help bridge the negative impacts of Covid 19-on their cash flows, which are likely to driven by significant disruptions to supply chains and weaker economic activity.

The CCFF will provide funding to businesses across a range of sectors by purchasing commercial paper of up to one-year maturity, which has been issued by those corporates making "a material contribution to the UK economy" or by financing subsidiaries of such corporates. It is intended to support those businesses in paying salaries, rents and suppliers, even while experiencing severe disruption to cashflows. Determinations of eligibility will be made by the BoE's risk management staff.

Broadly, the CCFF will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock, and will be open to corporates that can demonstrate that they were in sound financial health prior to the shock. The facility will look through temporary impacts on firms’ balance sheets and cash flows by basing eligibility on firms’ credit ratings as at 1 March 2020. The scheme will operate for at least 12 months and for as long as steps are needed to relieve cash flow pressures on eligible businesses. The BoE will provide six months' notice before withdrawing the facility.

The BoE set out further details of the operation of the CCFF in a Market Notice which was published on 18 March and the following sections summarise the key elements and requirements as regards eligibility.

As articulated in the press announcement linked above, the CCFF is intended to preserve the capacity of the banking system to lend to other companies, including small and medium-sized enterprises (SMEs), which rely on banks. Last week, the BoE boosted this capacity by:

• launching a new Term Funding Scheme with additional incentives for lending to SMEs, which will be operational from May; and
• reducing the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect.

Eligibility – corporates that make a "material contribution" to UK economic activity

The Covid Corporate Financing Facility Limited (the Fund) – which is to be operated by the BoE on behalf of HM Treasury - will purchase commercial paper issued by companies (including their finance subsidiaries) that – in the opinion of the BoE's risk management staff - make "a material contribution to economic activity" in the UK. The Market Notice states that UK incorporated companies (including those with foreign-incorporated parents and with a genuine business in the UK), will normally be regarded as meeting this requirement. Companies with significant employment in the UK or with their headquarters in the UK will normally be regarded as meeting this requirement. It is not entirely clear how these limbs interrelate but we would expect further guidance to be forthcoming when the scheme opens on 23 March. The BoE will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK. The detail provided thus far does not suggest that the BoE will seek to monitor how funds are deployed within corporate groups, raising the question of whether funds may in fact flow to affiliates, employees or suppliers outside of the UK.

Commercial paper issued by non-bank financial companies should also qualify provided the BoE is satisfied that the issuer makes a material contribution to corporate financing in the UK. However, paper issued by leveraged investment vehicles or from companies within groups that are predominantly banks, investment banks or building societies will not be eligible.

Those issuers who wish to make paper available in the primary market are invited to contact the BoE directly to discuss eligibility, via applications@bankofengland.co.uk.

How will the CCFF operate in practice?

The Fund will purchase, at a minimum spread over reference rates and during a defined period each business day, newly issued commercial paper in the primary market via dealers and after issuance from eligible counterparties (who are authorised under FSMA 2000 (eligible institutions)) in the secondary market. These purchases will be financed by BoE reserves.

The Fund will purchase securities at a spread above a reference rate, based on the current sterling overnight index swap (OIS) curve. Spreads will be set such that pricing is close to the market spreads prevailing before the economic shock from Covid-19:

• Primary market purchase – commercial paper will be discounted using a rate based on the maturity-matched OIS rate, as determined by the BoE on the day of purchase. Money market yield conventions will be applied.
• Secondary market purchase – commercial paper will be purchased at the lower of amortised cost from the issue price and the price as given by the method used for primary market purchases as set out above.

The BoE will send a written electronic confirmation of each transaction on the day of purchase and the purchase will normally settle on a T+2 basis. At 3pm each Thursday, the BoE will publish details of:

• the total amount of commercial paper purchased that week up until the previous day, in terms of the amount paid to the sellers; and
• the sum of commercial paper purchased, less redemptions, to date.

The Fund may limit the quantum of paper will purchase from an issuer (or a corporate group of issuers) in the primary market: details of any such limit imposed will be available (to the issuer only) on request. Limits applied to a corporate group of issuers on an aggregate basis will be fungible as between the issues in that group.

What securities will be eligible for purchase?

The Market Notice confirms that the Fund will purchase the sterling-denominated commercial paper which has the following characteristics - non-standard features such as subordination are unlikely to be acceptable:

• A maturity of one week to 12 months if issued to the BoE at issue via a dealer (an eligible institution acting as principal). Drawings can be rolled while the CCFF is open, subject to eligibility.
• Where available, a minimum short-term credit rating of A-3 / P-3 / F-3 from at least one of Standard & Poor’s, Moody’s and Fitch as at 1 March 2020. This reference point is deliberately set prior to the possible impact of Covid-19 on firms’ short-term credit ratings. Issuers with split ratings where one or more rating is below the minimum are not eligible. The BoE and HM Treasury will consider the eligibly of issuers at the lowest rating that were on negative watch or negative outlook as at 1 March.
• Where a short-term credit rating is not available the BoE will consider whether a long-term credit rating can be used to assess eligibility and pricing, or whether the BoE can assess that the issuer is of equivalent financial strength.
• Issued directly into Euroclear and/or Clearstream.

If an issuer is downgraded after 1 March 2020 below the minimum credit ratings set out above, the issuer will remain eligible for primary and secondary market purchase in the CCFF, subject to HM Treasury approval.

Securities issued by a finance subsidiary should be guaranteed by their parent company in a form acceptable to the Bank.

The Coronavirus Business Interruption Loan Scheme (CBILS)

In addition to the CCFF, HM Treasury has brought forward the commencement date for the CBILS which had been announced as part of the Budget on 11 March 2020 and was intended to become available "over the coming weeks".

The CBILS will be available in the week commencing 23 March and will be provided by the British Business Bank through approximately 40 participating providers (i.e,. commercial banks and other lenders). The scheme will provide the lender with a government-backed guarantee against the outstanding facility balance and the government will also cover the first 6 months of interest payments, so businesses will benefit from lower initial repayments. The business borrower will remain liable for repayments of the capital. The maximum value of a facility provided under the scheme will be £5 million pounds (increased from the originally expected limited of £1.2 million).

The scheme will be available to small business who are:

• UK based, with turnover of no more than £41 million per annum.
• Operate within an eligible industrial sector (a small number of industrial sectors are not eligible for support as indicated by this list which is operated by the British Business Bank. Almost all business sectors are eligible, however there are a small number of excluded/restricted sectors arising primarily from EU de minimis state aid rule.
• Be able to confirm that they have not received de minimis State aid beyond €200,000 equivalent over the current and previous two fiscal years.
• Have a sound borrowing proposal, but insufficient security to meet the lender’s requirements.
• The CBILS is intended to support a wide range of business finance products including term facilities, overdrafts, invoice finance facilities and asset finance facilities. Finance terms will be from three months up to ten years for loans and asset finance facilities and up to three years for revolving facilities and invoice finance.

Further details on the CIBLS is expected to be published by the British Business Bank shortly, including in relation to the full eligibility criteria. In advance of that, those businesses that are wanting to apply for a CBILS-backed facility, are being encouraged to approach one of the lenders listed on the British Business Bank's website.

Next steps

Businesses considering access to the UK Covid Schemes should monitor the Bank of England and British Buisness Banks' websites for updates, expected on 23 March in the case of the CCFF and "shortly" in respect of the CBILS. Queries regarding eligibility and applications for participation should be directed to the BoE in the case of the CCFF (at applications@bankofengland.co.uk) or to a participating lender in the case of the CBILS.

The UK Covid Schemes are intended to help businesses weather the turbulent economic times expected in the short to medium term and should provide some welcome relief. However, those businesses considering availing themselves of funding via the Schemes would be prudent to consider their exiting financial covenants and also their longer term expected cash flow position, as both Schemes will provide funding requiring repayment in due course.