BANKS & GOVERNMENT SUPPORTED LOAN SCHEMES
HOW TO MANAGE MY BANK / LENDER
If you have any questions, please get in touch with our COVID-19 Task Force here
RELEVANT AS OF 1:00PM 30TH MARCH
It has not been long since the government announced £330bn of loan support under the Coronavirus Business Interruption Loan Scheme (CBILS).
As a reminder, CBILS is broadly for SMEs with less than £45m turnover (applied on a group basis). It is a guarantee scheme designed to support loans or overdrafts of up to £5m and up to six years that don’t meet “normal” bank lending criteria. The business remains liable for the borrowing in the first instance, but the government covers 80% of the liability if it isn’t repaid in due course. The government will pay to cover the first 12 months of interest payments and any lender-levied fees. The funding will be provided by banks and other lending institutions.
This was initially seen by many as the “silver bullet” that would provide businesses with much needed extra cash during the disruption period. We have now started to see and work with businesses who have, or who are planning to, approach their banks and this is what we’ve heard:
Banks are scrambling to resource and establish processes to manage the deluge of approaches – most are focusing on supporting existing customers and indicating that they will not have much appetite for lending to “new-to bank” businesses. Having said that, we are also aware of some non-traditional lenders working quickly to become part of the CBILS accredited lenders programme so that they can make further capital available.
The CBILS criteria has some ambiguities and these are being actively worked through and understood by lenders, with the chance of different interpretations by different institutions.
The has been negative media coverage around banks asking for personal guarantees – we are now hearing and seeing that political pressure is being brought to bear and we expect these requirements to disappear.
Banks are viewing loan applications in the way they would for any other loan or overdraft – business viability and debt service will remain at the core of their assessment. You will need to demonstrate business viability pre-Covid – and a plan to show how the business will recover and over what time period, post Covid.
The essence of any lender assessment has to be “once this is all over” can the business repay the resultant debt over a reasonable period of time (say 3-5 years maximum).
The absence of any government loan programme for larger businesses (over £45m revenue) remains a concern for a large part of the UK business world given the Covid Corporate Financing Facility (CCFF) is aimed at very large, well-capitalised businesses and is out of reach for most.
Early experience of businesses and banks working through CBILS indicates some areas that are less clear or being interpreted differently, for example:
How the £45m revenue limit is being applied and on what historical time period – we also believe the limit is being applied on a consolidated basis to groups of companies so any smaller subsidiaries will be measured on the group basis.
The types of debt products being offered under the CBILS framework varies – some banks are trying to streamline their approach by developing standardised loan products which is proactive but may not suit every situation
Whether CBILS is available to private equity-owned businesses?
What security and pricing requirements are being demanded and how does the new debt relate to existing debt facilities (for those facilities expected to endure beyond the initial 12-month interest-free period)
What should you be doing?
We think the following immediate actions are the best way to consider and approach your bank / lender;
Realistically assess your cash requirements for the next 3 and 6 months at least; banks will expect you to have taken account of all the available government support options, such as VAT deferral, HMRC Time to Pay, Job Retention Scheme, etc. We also think your forecast should extend to show how the business recovers post-Covid and into the next 3 years (to be able to show how existing and new debt can be repaid).
Evaluate your cash need over this period, and consider a number of scenarios – worst, mid, best and a variety of recovery time periods.
How quickly can the business repay the incremental debt – therefore what is the right debt structure and repayment period to request and accept from lenders?
Are your shareholders and management comfortable with the additional debt – are there any other options, i.e. shareholder injection, creditors, etc. Be mindful of the impact on medium term shareholder value
Also be aware of directors’ personal responsibilities around treating creditors and shareholders fairly, and the risks of trading whilst insolvent – does the incremental debt change these views.
Consider carefully what your ask of the lender is – you may only get one shot. Should this be capital repayment deferral, covenant testing deferral, or additional money (currently all banks are resisting deferring interest payments as this causes them regulatory capital problems – but watch this space).
If you are looking for help with funding, we have a number of specialists in the team who worked through the 2008-10 crisis. Please get in touch with our Debt Advisory specialist Paul Ambrose
Detailed information on the CBILS scheme and accredited lenders can be found here.