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UK Government Launches New Loan Guarantee Programme for UK Businesses

April 20, 2020

The UK government today launched a new loan guarantee programme for UK businesses—the Coronavirus Large Business Interruption Loan Scheme (CLBILS)—intended to plug the gap by providing loan guarantees for medium and large businesses which were not covered by the two earlier UK loan guarantee programmes related to the coronavirus (COVID-19) pandemic.

The CLBILS, launched on 20 April 2020, forms part of the support package made available by the UK government to help UK businesses continue to trade during the pandemic by facilitating access to additional liquidity. It focusses on the mid-cap and larger companies which were not covered by the Coronavirus Business Interruption Loan Scheme (CBILS) and the Covid Corporate Financing Facility scheme (CCFF). The amount of funding available under the CLBILS will be demand-led.

What Support Is Offered by the CLBILS?

Businesses can apply for term loans, revolving credit facilities (including overdrafts), invoice finance and asset finance.

The maximum amount of the loan depends on the turnover of the borrower’s group. Where the borrower’s group has a turnover between £45 million and £250 million, an accredited lender may provide loans of up to £25 million. Where the borrower’s group has a turnover greater than £250 million, an accredited lender may provide loans of up to £50 million.

However, the loan amount cannot exceed:

  • double the borrower’s annual wage bill for the most recent year available; or
  • 25% of the borrower’s total turnover for the most recent year available.

With appropriate justification and based on self-certification of the borrower, the loan amount may be increased to cover its liquidity needs for the next 12 months.

Lenders are given a government-backed guarantee of 80% of the loan (including interest and fees), subject to an overall portfolio cap. Accredited lenders will pay a small fee for the government guarantee; the amount of which will vary depending on the length of the facility. The business does not have to pay a fee to access the CLBILS.

The term of the loan can be from three months to three years.

The borrower must repay the loan (including interest and fees). Unlike the CBILS, no business interruption payments will be paid by the UK government to cover interest and fees levied by the lender for the first 12 months.

It is expected that lenders will follow their normal credit policies when determining what security should be provided for the loan. For facilities under £250,000, personal guarantees are not allowed. For facilities over £250,000, the lender may require personal guarantees, but they are limited to 20% of the outstanding amount after all other recoveries.

There is no guidance on how lenders should deal with businesses with assets already subject to a security package under a separate debt facility provided by a different creditor. Lenders may require such security to be released, or alternatively, they may accept taking lower priority security (although presumably at the cost of a higher interest rate and also assuming the existing creditor is willing to waive any negative pledges for such purposes). If the existing security package is for the benefit of the CLBILS lender (e.g. under a historic debt facility) then it is likely that lender will not be as concerned with sharing the security package between facilities.

Which Businesses Are Eligible for the CLBILS?

The business must meet the following eligibility criteria:

  • Business activity must be based in the United Kingdom.
  • Annual turnover must be greater than £45 million (there is no upper turnover threshold).
  • Lender must consider that it has a viable borrowing proposal: Were it not for the current pandemic, the lender must believe the provision of finance will enable the business to trade out of any short-to-medium term difficulty.
  • Must be able to self-certify that it has been adversely impacted by the coronavirus.
  • Must not have received a facility under the CCFF.

There is no guidance as to what “based in the UK” requires, but one can assume it would require more than a superficial business presence within the UK. It is doubtful that the business applying for a loan would be prohibited from doing so if its parent company is incorporated overseas, insofar as the applicant has a substantive presence in the UK.

Like the CBILS, turnover for eligibility purposes is determined on a “group” basis, rather on the individual turnover of the borrower. As of yet, the British Business Bank has not published specific details of the turnover test, but one would imagine it would be similar to the CBILS, with group turnover calculated for the 12-month period ending on the date of application for the business interruption loan.

Businesses in all sectors are eligible to apply, except credit institutions (falling within the remit of the EU Bank Recovery and Resolution Directive), insurers and reinsurers (but not insurance brokers); building societies; public-sector bodies; grant-funded further-education establishments; and state-funded primary and secondary schools.

Lenders and borrowers are not prevented from entering into loan agreements outside of the CLBILS.

How Can an Eligible Business Apply Under the CLBILS?

The business should approach one of the accredited lenders. At the time of publication of this LawFlash, there are no details available regarding which lenders are accredited, although accredited lenders will be set out on the British Business Bank’s website.

Businesses should determine which accredited lender will offer the most appropriate financing for their needs and then approach that lender via their website in order to submit an application by way of a borrowing proposal. Under the CBILS, certain lenders accepted applications only from their existing customers, and this approach may also be followed for the CLBILS. For the reason set out above, the existing lender to the business may be the only viable choice.

If the lender rejects the application, the business can make a loan application to another accredited lender.

Conclusion

The CLBILS demonstrates that the UK government is taking seriously the need to encourage lenders to continue to make financing available to businesses in difficulty due loss of revenue and cash flow disruptions caused by the effects of the coronavirus pandemic.

As there is no upper limit for the purposes of the scheme, the CLBILS should be of particular benefit to the portfolio companies of private equity and venture capital funds that were ineligible for the CBILS because of its £45m upper threshold calculated on a group turnover basis. 

Moreover, the British Business Bank has stated that any company with a private equity sponsor, even when they are majority owned by that sponsor, will be deemed to be a separate and distinct entity for turnover criteria purposes and will be permitted to apply for a separate loan under the CLBILS.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Bruce Johnston
Paul Denham
Victoria Thompson
Georgia M. Quenby