Coronavirus: Corporate Financing Facility
On 17 March 2020, UK Chancellor Rishi Sunak announced the roll out of several measures of funding to support businesses through disruption resulting from the global COVID-19 epidemic.
This package includes the provision of Government-backed loans via two key sources:
- Coronavirus Business Interruption Loan Scheme (CBILS): the British Business Bank will provide Government backed loans of up to £5 million for eligible SMEs with revenues less than £45 million. CBILS is available through 40 accredited lenders. More information can be found on the scheme here.
- COVID-19 Corporate Financing Facility (CCFF): The Bank of England (the ‘BOE’) will provide short-term corporate debt (commercial paper) for large and medium-sized UK businesses to facilitate credit supply and maintain liquidity. The BOE, acting directly, will purchase short term debt from companies, commencing from Monday 23 March.
The purpose of CCFF
CCFF is the result of combined efforts from the BOE and HM Treasury to maximise support for UK businesses, and alleviate short-term pressure on cash flows and demand for working capital. CCFF is designed to allow large and medium-sized businesses to meet day-to-day operational funding obligations, including for example, payment of wages and suppliers.
The BOE has announced that the CCFF scheme will last for at least 12 months, although offers to sell commercial paper must be received in advance of 31 December 2020.
What is commercial paper?
Commercial paper is an unsecured, short-term debt instrument issued by a company, and under the CCFF scheme it will be purchased by the fund using central bank reserves.
Like a bond, commercial paper is a promise by the issuing company to repay the holder. For the avoidance of doubt, it is intended that CCFF funding is to be repaid – this funding line is not intended as a form of ‘bail out’.
How does the CCFF scheme work?
The BOE will purchase commercial paper issued by eligible companies with the following key characteristics:
- Maturity of one week to twelve months
- Minimum loan of £1 million (sterling denominated) per borrower, with a cap decided on a case by case basis
- Commercial paper will be purchased at a spread above a reference rate, meaning it will be interest bearing. The BOE has announced it expects rates to be comparable to those available in the market during the period preceding the COVID-19 economic shock
- Debt is to be issued directly into Euroclear and/or Clearstream (settlement houses)
- Whilst the commercial paper will be unsecured, parent company guarantees (in a form acceptable to the BOE) may be required where the issuer is a subsidiary of a larger group
The BOE and the Treasury have cast the eligibility criteria for CCFF purposely wide deeming that companies operating in multiple sectors which are ‘genuine UK businesses’ and which ‘make a material contribution to the UK economy’ may apply (this includes UK subsidiaries of overseas parents). The BOE has stated that businesses with a large customer base, significant employment, or a number of operating sites in the UK will be considered. Non- bank financial companies which make a material contribution to corporate financing in the UK may also qualify, subject to BOE approval.
The following are explicitly EXCLUDED from being able to apply:
- Leveraged investment vehicles
- Companies within groups that are predominantly banks, investment banks or building societies
CCFF has been designed to target fundamentally strong businesses that are experiencing severe disruption to cashflows, but which can demonstrate they were in sound financial health prior to the impact of Covid-19.
The BOE states that the clearest way of being able to demonstrate ‘sound financial health’ is to have an existing investment-grade short- term rating of A3/P3/F3/R3 or above, or a long-term rating of BBB-/Baa3/BBB- from at least one of the following credit ratings agencies as a 1 March 2020:
- Standard & Poor’s
- DBRS Morningstar
What if my company does not have a credit rating?
The BOE makes clear that eligible businesses do not need to have previously issued commercial paper, or to have an existing investment-grade rating. The BOE suggests that where an applicant’s existing bank is able to advise that the company is equivalent to investment-grade, the BOE will take that into account when making an assessment as to whether that applicant is eligible.
A further suggested route is to obtain an assessment of credit quality from one of the credit ratings agencies in a form which can be shared with HM Treasury; there are a number of products the BOE is treating as suitable evidence of investment-grade quality.
Companies interested in applying will be required to liaise with one of the 12-banks assessed by UK Finance as being able to issue commercial paper to the CCFF. Eligible companies will be required to submit market-standard documentation for the issue of commercial paper as specified by the International Capital Market Association (ICMA) – the BOE has committed to accepting some simplified versions of documentation based on the ICMA standards.
Timing and process
The scheme came into operation from Monday 23 March 2020.
If eligibility is confirmed before 16:00 on a working day, companies will be able to sell commercial paper to the BOE the next working day. On a more standard basis, this process would typically take 4-6 weeks. The BOE has committed to publishing usage stats for CCFF each Thursday at 3pm.
For applicant companies which lack an existing investment-grade credit rating, it is unclear at the present time as to how long it will take for the BOE to make eligibility assessments, however the commitment to do so is ‘as quickly as possible’ for all applications.
More information on the COVID-19 Corporate Financing Facility, including which lenders to contact, is available on the Bank of England’s website.