This page was last updated on 21 May 2020.
The impact of COVID-19 is intensifying and a significant economic downturn looks likely; we know that in these times of uncertainty many lenders are focussing on supporting existing clients and managing their loan books (and/or investors) and that all participants in the debt finance market are trying to assess what a recovery will look like and how long it will take.
Borrowers should be reviewing the terms of their existing banking facilities to understand any potential vulnerability and, where necessary, proactively begin a dialogue with their lender(s) towards agreement of waivers or amendments which will enable them to weather this storm.
Points to consider will vary by business, borrower and documentation but key questions are likely to include:
- What payments, of interest or principal, are due in the next 6 months under existing finance documents?
- Are there any milestones to be achieved in the next 6 months under existing finance documents and, if so, to what extent will they be adversely impacted by current circumstances?
- What drawings are anticipated/required during the next 6 month period?
- What impact does the current economic uncertainty have on any existing financial covenants (e.g. as a result of a loss of income or dip in valuations)?
- What restrictions are imposed on your flexibility to amend terms with your users, suppliers?
Keep in mind that in the current climate lenders may be reluctant to fulfil drawdowns pursuant to existing agreements (particularly in businesses in struggling sectors) without significant further due diligence, so engaging early will help to gauge their appetite and their requirements.
Similarly, where potential difficulties are identified, timely and open discussion may smooth the negotiation of a short-term interest payment or amortisation holiday and/or a moratorium for testing of financial covenants, as appropriate.
Many corporates with financing needs are finding that provisionally agreed finance packages are no longer available.
To provide some assistance, targeted particularly at SMEs, HM Treasury has brought forward the commencement date for the Coronavirus Business Interruption Loan Scheme (CBILS) to 23 March 2020. This scheme will be provided by the British Business Bank through circa 40 commercial banks and other lenders (listed here) and will provide the lender of a qualifying term loan or an asset finance facility (with a term of up to 6 years) or an overdraft or invoice finance facility (with a term of up to 3 years) with a Government-backed guarantee of up to 80% of the outstanding facility balance for loans of up to £5 million pounds. The Government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments (although the borrower remains liable for repayments of the capital and all other interest, costs and expenses).
The clear intention is to motivate lenders to provide funding and to reduce the initial costs of borrowing for qualifying SMEs.
Over and above amount and term (as above), the published criteria for a borrower looking to benefit from the Coronavirus Business Interruption Loan Scheme (helpful checklist available here) are:
- the application must be for business purposes;
- the borrower must: (i) be a UK-based SME with annual turnover of up to £45m; (ii) generate more than 50% of its turnover from trading activity; and (iii) not be a Bank, Building Society, Insurer, Reinsurer, public sector institution (including state funded primary and secondary schools), or employer, professional, religious or political membership organisation or trade union; and;
- the CBILS-backed facility must be used to support primarily trading in the UK; and;
- the borrower must show it has a borrowing proposal which the lender would consider viable, were it not for the current pandemic and self-certify that it has been adversely impacted by COVID-19.
On 3 April 2020, the Government banned banks from asking borrower-owners to guarantee loans with their own savings or property when borrowing up to £250,000 and removed the requirement that loans only be made available under CBILS to firms that had been turned down for a loan on regular commercial terms. The expectation is that these two updates will enable many more SMEs to access the CBILS.
On 3 April 2020, the Chancellor of the Exchequer announced a new scheme (the Coronavirus Large Business Interruption Loan Scheme (CLBILS)) targeting the so-called "squeezed middle" businesses which were not covered by CBILS.
Details of the current scheme are:
- the Government will provide an 80% guarantee for loans of up to £25m to businesses with a turnover from £45m to £250m, or £50m to businesses with a turnover of over £250m;
- in addition to the turnover qualification the borrower will need to show that it:
- is UK-based in its business activity;
- is unable to secure regular commercial financing;
- has a borrowing proposal which the relevant lender would consider viable, were it not for the COVID-19 pandemic and believes will enable you to trade out of any short-term to medium-term difficulty resulting from coronavirus; and
- the Government will not cover interest or fees in the same way as the CBILS.
On 19 May 2020, the Government announced changes to CLBILS that include:
- the maximum size of the loan will be increased from £50 million to £200 million; and
- businesses receiving help through CLBILS will be subject to the following restrictions:
- cannot make dividend payments other than those that have already been declared;
- cannot make any share buybacks; and
- cannot pay any cash bonuses, or award any pay rises to senior management (including the board) except where they were previously agreed and do not have a material negative impact on ability to repay the loan.
The changes are expected to come into effect on 26 May 2020.
If looking to take advantage of the CBILS or CLBILS, businesses are advised to approach their own provider first – ideally via the lender’s website. They may also consider approaching other participating lenders if they are unable to access the finance they need. Decision-making on whether you are eligible for CBILS or CLBILS is fully delegated to the 40+ accredited lenders so appealing a rejection is likely to be difficult.
Outside of the CBILS and CLBILS, despite the uncertainty, we know some lenders are still very much open for business but borrowers may need to be prepared for a longer lead in and more rigorous process than that to which they may have become accustomed and should expect that the commercial terms offered by lenders will likely reflect a more risk averse approach in the short term.
Practical guidance for COVID-19
Read the latest COVID-19 related updates on our hub.