Insight Bite

Today the UK Government launches the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”), following on from the earlier CBILS rescue loan program for smaller businesses (i.e. where annual turnover is under £45m).

We addressed how the original CBILS was not very accessible in our last insight bite. Here we deep dive into the new scheme to understand if it will fare better.

The key features of CLBILS known so far are:

• Viable companies with revenues over £45m may apply for up to £25m of finance, and companies with turnover exceeding £250m can apply for up to £50m. Larger businesses that have obtained a facility under the Bank of England’s Covid Corporate Financing Facility (“CCFF”, for businesses with an investment grade credit rating) are ineligible. For reference, the maximum loan under the CBILS is £5m.
• The amount a company may borrow under CLBILS funding is calculated as the maximum of (i) double the borrower’s annual wage bill for the most recent year available, or (ii) 25% of the borrower’s total turnover for the most recent year available, or (iii) with appropriate justification and borrower self-certification, the amount may be increased to cover liquidity needs for the next 12 months.
• The scheme is operated through accredited lenders, and similar to the CBILS, the UK Government will guarantee up to 80% of the loans. Accreditation and guarantees are administered by the British Business Bank.
• However, unlike the CBILS which has an interest and fee free period of 12 months, the CLBILS has no such holiday and loans will be made on commercial terms. Instead, the Government guarantee will cover the interest and fee amounts on loans made under the CLBILS.
• The scheme supports the provision of term loans, revolving credit facilities (including overdrafts), invoice finance and asset finance, with tenors between 3 months and 3 years. In practice, participating lenders will determine what products they offer under this scheme.

The treatment of personal guarantees

Similar to the CBILS, the government has specified that for facilities under CLBILS under £250,000, banks are not to take personal guarantees. For CLBILS loans over that threshold, lenders may only claim on personal guarantees up to 20% of losses on the facility amount outstanding after all other recoveries (e.g. from the sale of business assets or other collateral) have been applied. The primary residence of a borrower or guarantor cannot be taken as security to support a personal guarantee or as security for facilities under either scheme.

What does this mean for borrowers?

Given the influx of CLBILS enquiries that banks are likely to field, companies whose existing lender is CLBILS accredited are likely to be at the front of the queue to receive this support from their current bank – as borne out by what the market has witnessed with the CBILS.

CLBILS lenders will have more sensitivity towards extending these loans to businesses with pre-existing debt, as even though 80% of the loan is guaranteed by the UK Government, the 20% tail is at higher risk of having very limited recovery. CLBILS can be used for both new lending and to refinance existing debt, however there are limits placed on how much lenders can use the scheme for the latter.

Companies with existing debt facilities with multiple lenders seeking financing under CLBILS are likely to have to develop bespoke solutions that incorporates their existing lenders and the CLBILS lender.

Both CBILS and CLBILS borrowers with loans outstanding have a number of factors to assess with regards their existing facility, including (but not limited to) upcoming covenant tests, springing covenants, ‘permitted’ baskets, information and other undertakings, representations, audit implications, and definitions of “EBITDA”, “Exceptional items” and other key terms in their facilities agreement.

Lenders have their own set of considerations

At the time of writing, guidance for lenders and additional details of the scheme are expected later today (the 20th of April). As seen with the CBILS, the actual working and impact of this scheme will become apparent over time as lenders and borrowers digest the guidance from the government.

All funding under the CBILS and the CLBILS must be on an at least pari passu basis with other senior and/or super-senior obligations of the borrower. At Acuity Advisors, we have seen that this requirement has slowed down many applications under the CBILS, and expect it will be the same for the CLBILS. Lenders of existing facilities will need to consider how their position is affected when their borrowers approach with requests for waivers to make use of the CLBILS.

Aside from the question of seniority, lenders will also need to consider the potential for CLBILS new-money lenders to build blocking stakes in the credit. One important question will be how CLBILS lenders are going to behave in a default scenario given the Government support backing their loan; noting that the 80% guarantee from the Government is applied to the outstanding balance after all other applicable recoveries are made.

Key takeaways

The CLBILS will attract significant interest from businesses affected by the pandemic. Borrowers seeking funding under any of the government backed schemes are best served by taking to lenders a considered and well-articulated plan, one that addresses all requirements such as proving viability, and a financing structure appropriate to re-forecast business plans.

In addition to the already announced schemes, details of a Government scheme to suppport early-stage businesses ineligible for the CBILS are expected soon. At Acuity Advisors, we are closely following developments that impact financing for technology businesses. As the only specialist TMT-focused debt advisors in the market, we are uniquely equipped to help tech-sector businesses navigate the current environment. If you are seeking objective and tailored financial advice, reach out to us over LinkedIn or directly.