The Right Honourable Rishi Sunak MP
Chancellor of the Exchequer
1 Horse Guards Road
Governor of the Bank of England
Bank of England
FCA Head Office
12 Endeavour Square
9 April 2020
CBILS and CLBILS Amendment Proposals
We welcome the recent announcements with regards to the Covid-19 Corporate Finance Facility (CCFF), Coronavirus Business Interruption Loan Scheme (CBILS), and the newly announced Coronavirus Large Business Interruption Loan Scheme (CLBILS).
However, whilst we recognise the unprecedented nature of the UK Government’s response to the Covid-19 pandemic, neither CBILS or CLBILS go far enough. Unless there is immediate action by the UK Government to materially amend both schemes, then the negative economic consequences from the current Covid-19 pandemic will be greater than at any point in our modern history.
We have been working every day with many businesses in the UK to guide them through this period of uncertainty and help them access the funding they desperately need. We are sympathetic to lenders, who have been left to implement the UK Government’s schemes without sufficient guidance. The current schemes, whilst well intentioned, are simply not working. Almost every business we are working with, regardless of sector, is seeking funding support. These issues have also been highlighted by other organisations and in the financial press, for example:
- According to UK Finance, there have been more than 130,000 CBILS applications and less than 1,000 approved as per last week’s report, equating to only c. £90m of loans[i]
- UK Corporate Finance Network research highlights there is a risk that up to 1 million businesses may not get the funds they need in the next four weeks[ii]
- BVCA estimates that there are circa 9,600 businesses not included in either CBILS or CCFF. Whilst CLBILS is being introduced to support these businesses, unless the programme is incredibly simple and easy to access, then the funds will come too late for many[iii]
UK businesses have taken action, at the request of the UK Government, to slow the spread of Covid-19. That is exactly the right thing to do and they should be commended for it. UK businesses, and their shareholders, should not be punished for complying with the UK Government’s guidelines, nor should they need to seek alternative distressed capital at a time when many debt and equity markets are closed.
As it has promised, the UK Government should be supporting all UK businesses that were viable before Covid-19 with financial aid. Whilst some of this will be temporary, for others, it should be recognised that the funds will take longer to repay. Ultimately, all of the measures that the UK Government has introduced are just burdening UK businesses with additional liabilities.
CBILS, in particular, is failing to provide the support for UK businesses for which it is intended. We are aware of many viable businesses whose applications for CBILS funding has been rejected by participating lenders. We fear many of the issues will be replicated with the larger CLBILS. The main issues with CBILS are as follows:
- The volume of demand and pre-existing debt / security is, in practice, restricting CBILS to the current lender used by a particular company
- The fact that lenders are exposed to 20% of losses arising from any loans, in a time of unprecedented crisis, means that lenders are naturally being cautious when boldness is required
- Interaction of existing debt and security with CBILS is slowing the credit assessment process. This issue will be magnified for CLBILS, given debt structures for larger businesses are typically more complex
Taking into account our practical experience of advising on these type of transactions, we have considered modifications that could be made under the current schemes, to increase the flow of money into the economy. UK businesses need something that is more radical, perhaps more akin to a War Bond in structure – zero coupon and long dated debt that can be repaid over a longer period of time. This could still be routed and managed through participating lenders under CBILS / CLBILS, subject to some modifications:
- Increase the UK Government guarantee from 80% to 100%. Whilst we understand that this may present some issues with EU State Aid rules, lenders should just be acting as agents on behalf of the British Business Bank / UK Government. By asking lenders to take ‘risk’ at this time, albeit small, unnecessary complexity and additional decision making has been introduced into the process. This is slowing the flow of money to UK businesses at a time when they urgently need it. Consideration could be given to paying participating lenders a nominal asset management fee for managing these loans
- Remove the £500m CLBILS turnover cap. Whilst we are sure there is some rationale, it is an arbitrary number. All UK businesses should have access to some form of support via CCFF; CLBILS or CBILS. We would also suggest that no UK business should be able to access more than one scheme
- The debt should be issued at a moderate discount and then repaid at par at maturity. The maturity of the loans should be long dated (e.g. minimum of 20+ years). Both of these changes would avoid any interest being paid during the life of the facility and also place the maturity of any new CBILS / CLBILS debt beyond the maturity of any other pre-existing debt facilities, in nearly all cases
- Make it clear that the Government is not the ’lender of last resort’ through CBILS and CLBILS, but instead, the schemes are there as a first option for funding requirements (for a defined availability period e.g. 6 months)
- New debt from CBILS / CLBILS should be repaid on a special ‘super senior’ basis (e.g. first pound on any enforcement, insolvency event; refinancing or change of control). To avoid issues with pre-existing security, this ranking could be agreed contractually on a case by case basis via standard documentation, or could be enshrined in UK Law (similar to Crown Preference on insolvency). In theory lenders should be more comfortable with the inclusion of CBILS / CLBILS debt, given the new debt is zero coupon with a long dated maturity. If lenders / investors decide that they do not want this preferential debt in the capital structure, then that is their choice. The onus is then on those lenders / investors to step up and provide the necessary funding required.
We recognise that the amendments above will increase the level of funding required from the UK Government and require operation of the schemes outside the current EU State aid rules. We believe that the failure to get CBILS / CLBILS correct may result in an even bigger cost to the exchequer.
We have discussed the above proposals in great detail and recognise that there will be some challenges in implementation. We would be pleased to discuss these proposals and specific cases in more detail.
We strongly believe that if these proposed amendments are adopted, then there would be a faster flow of funds to UK businesses, with a consequential lower level of business failure and the preservation of more jobs.
We welcome the opportunity to discuss the above in more detail.
UK Chief Executive