In brief...
On 17 March 2020, the Chancellor the
Rt. Hon. Rishi Sunak MP announced that HM Treasury
would provide an unprecedented level of support
for UK business in response to the economic impact
of Coronavirus. The total value of the package
announced was GBP330 billion, 15% of UK GDP. The
package included two mechanisms for businesses to
access finance; the Covid Corporate Financing Facility
for larger investment grade businesses; and the
Coronavirus Business Interruption Loan Scheme for
smaller businesses with turnover under GBP45 million
per annum. It also included business rates relief for
retail, hospitality and leisure businesses and grants for
small business and businesses in the retail, hospitality
and leisure sector.
It is striking that large sub-investment grade businesses
were not directly provided for in this package with no
meaningful provision for businesses that would typically
access the high yield or sub-investment grade capital
markets, leaving them to rely on continued support
from equity holders and commercial lenders.
What is the Covid Corporate
Financing Facility?
Liquidity support for large investment grade businesses
will be provided by the Covid Corporate Financing
Facility Limited (CCFF) operated by the Bank of England
(BOE) on behalf of HM Treasury.
The CCFF will provide finance to businesses across a
range of sectors by purchasing Commercial Paper with
an initial term of up to 12 months. The CCFF scheme
itself will operate for at least 12 months and “for as long
as steps are needed to relieve cash flow pressures”.
The BOE will provide 6 months’ notice of the withdrawal
of the CCFF.
The Fund will purchase Commercial Paper in sterling
during a defined period each business day. The Fund
will purchase, at a spread based on pre-Covid spreads
over the current sterling overnight index swap rate ,
newly issued Commercial Paper in the primary market
and after issuance from eligible counterparties in the
secondary market.
Further details on the Bank of England’s Covid Corporate
Financing Fund for investment grade non-financial
issuers were announced on Monday 23 March. The banks
that were approved to act as dealers are the following:
Barclays, HSBC, Lloyds Banking Group, Natwest, Bank of
America, Citi, Goldman Sachs, JP Morgan, Morgan Stanley
and Standard Chartered. Contacts have been provided
for all except, at the time of writing this, Standard
Chartered and are available here.
Who can apply?
The funding will be available to:
- non-financial companies who make a material
contribution to the UK economy; and
- that had, prior to being affected by COVID-19, a short
or long term rating of investment grade, or financial
health equivalent to an investment grade rating.
It is therefore a requirement that companies accessing
the CCFF make a material contribution to the
UK economy. This test is explained as follows:
“In practice, firms that meet this requirement would
normally be: UK incorporated companies, including those
with foreign-incorporated parents and with a genuine
business in the UK; companies with significant employment
in the UK; firms with their headquarters in the UK. We 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. ”
Companies that do not currently issue Commercial
Paper but are capable of doing so will in principle be
eligible to utilise the facility provided that they meet the
eligible securities criteria. Issuers must have a minimum
short term credit rating of A-3/P-3/F-3/R3 or above
or a long-term rating of BBB-/Baa3/BBB-/BBB low or
above from at least one of Standard & Poor’s, Moody’s,
Fitch and DBRS Morningstar as at 1 March 2020. This
reference point is deliberately set prior to the possible
impact of COVID-19 on businesses’ credit rating. Where
an existing credit rating is not available, companies
should speak to their existing lenders and if those
banks advise that the company was viewed internally
as equivalent to investment grade as at 1 March 2020,
then the BoE should be contacted to discuss potential
eligibility. The BoE will then make an assessment of whether the BoE can assess that the issuer is of
equivalent financial strength. This rating or equivalent
requirement means that access to the facility will not be
available to sub-investment grade issuers and hence not
available to leveraged loan and high yield issuers.
Such companies must be “fundamentally strong” but
be experiencing short-term funding pressures caused
by the current economic conditions. As yet, there is no
guidance on how this can be demonstrated as part of the
application process. However, we would suggest that
companies interested in the CCFF get a clear view (as far as
possible) on liquidity requirements so that they are able to
make an appropriate and measured request for funding.
On the eligibility criteria for companies that do not have
a credit rating, the guidance is to contact one of the
major credit rating agencies to seek an assessment of
credit quality in a form that can be shared with the Bank
of England and HM Treasury, noting that the company is
doing so to use the CCFF. Here they envisage, in addition
to public credit ratings, accepting the following (for those
approaching credit rating agencies for the first time):
-
from Moody’s Investor Services: (Private)
‘Indicative ratings’ at a recent point-in-time
- from Standard & Poor’s Ratings Services:
'Credit Assessments’ (CAs) at a recent point-in-time
- from Fitch: (Private) Credit opinion at a recent
point-in-time. A form of Fitch ‘credit opinion’
incorporating a rating rationale would be preferred,
if available.
- from DBRS Morningstar: Point in time private credit
assessment (for those approaching CRAs for the
first time)
The rating agencies have established stream-lined
processes to enable private determinations to be made
within a couple of weeks.
How is the scheme accessed?
The guidance from the Bank of England is to speak
first to one of the dealer banks and then to get more
information on eligibility the Bank can be emailed on ccffeligibleissuers@bankofengland.co.uk.
Accessing the scheme requires completion of an Issuer
Eligibility Form. Details of the CP programme to be
established are to be included in the form.
Questions to be answered include the following:
-
Nature of UK business activity: For example, number
of UK employees and UK generated revenue
- If the Issuing Entity has no current credit rating,
confirmation of whether the process to obtain a
private rating has been initiated
- If the Issuing Entity has no current credit rating,
evidence of the Issuing Entity’s financial condition
prior to 1 March 2020, including any Group support
- Confirmation that there is no financial covenant
breach or default continuing under any of the Group’s
financing arrangements, or likely to occur as a result
of issuing this CP programme
- Confirmation whether drawing the CP programme
results in the breach of any borrowing limit of
the Group
- Confirmation that the Group’s revenues are
experiencing disruption as a result of the
COVID-19 outbreak
- Details of the CP programme (and dealer who will be
trading it) and confirmation that it is substantially in
the form of the ICMA recommended template
- Confirmation that CP issued under the programme
ranks at least pari passu with unsecured and
unsubordinated indebtedness of the Group
There is also a form of Issuer Undertaking and
Confidentiality Agreement to be entered into which
the Bank of England have prepared. This includes
representations as to solvency and to the accuracy of the
eligibility form information submitted (which includes
representations as to financial statements and to any
financial projections or forecasts) and an undertaking
to notify the Bank if it grants security interests over any
of its assets to secure financial indebtedness unless the
Bank purchased CP also benefits from such security. It
also contains an undertaking to pay the Bank’s costs and
expenses and charges including legal expenses. There
is a confidentiality undertaking which does not have
an express carve-out for disclosures under the DTRs
but does have a carve-out for disclosures agreed to or
disclosures “required to be disclosed by law, regulation
or any governmental or competent regulatory authority”.
Finally, if the CP is to be issued by an entity other than
the primary entity in the group, there is also a form of
guarantee and associated legal opinion to be given.