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A High-Level Review of the Coronavirus Business Interruption Loan Schemes10 June 2020

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As the impact of Covid-19 continues to unfold, a realisation of the level of economic damage it has wrought is beginning to come into focus. A survey conducted by the Office for National Statistic in April confirmed that 58% of businesses had seen a plunge in sales since the UK lockdown started, with 25% of them seeing a reduction of over 50%¹.

The UK Government is continuing to update its response to the potential economic impact of Covid-19, and at the end of April launched two schemes designed to help businesses struggling with the impact of the lockdown restrictions, the Coronavirus Business Interruption Loan Scheme (“CBILS”) and the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”) (together the “Government Schemes”).

The Government Schemes are not specifically aimed at real-estate businesses but are likely to be of use and of interest to them², and in particular, to those in the hospitality or care homes sectors.

"The schemes are designed to provide liquidity to businesses impacted by Covid-19."

Overview of the Government Schemes

Broadly, the schemes are designed to provide liquidity to businesses impacted by Covid-19. This financial support is provided through accredited lenders listed on the Government’s British Business Bank website³ and, in both instances, the Government will provide a guarantee of up to 80% of the value of each of the loans.

The CBILS is aimed at small to medium sized businesses with an annual turnover of up to £45m. It provides access to financial support (loans and other kinds of finance) up to £5m for a term of up to six years. It is noted that most of the lenders participating in the CBILS scheme are using non-negotiable in-house documentation. The CLBILS, meanwhile, is aimed at larger businesses with an annual turnover of over £45m. It provides companies with access to loans of up to £25m for a term of up to three years (firms with a turnover £250m can apply for up to a £50m). The Government’s schemes do not contain any restrictions on the use of the proceeds of the loans for rent, though a wider discussion on the purpose of the loan will need to be had with the accredited lender.

The lenders will need to go through their normal credit processes as well as considering the viability of the applicant business’s proposal. We would expect that in relation to both schemes, the interest rates are likely to be floating rates over LIBOR and the margin will reflect the fact that the bank will be benefiting from a Government guarantee of up to 80% of the value of the loan. We understand that some lenders are charging arrangement fees, but this is likely reflective of the fact that any accredited lender is required to pay a fee to the Government to take part in the schemes. In an interview with The Times, the Royal Bank of Scotland’s Chairman noted that a recent survey of 500 companies carried out by the Business Banking Resolution Service found that of those companies that had accessed the Government’s scheme since the 23 March lockdown, 43% did not expect to repay the loans⁴. We would anticipate that this expectation will be priced into the loans resulting in higher interest rates.

We would also expect the accredited lender to seek to obtain security whatever the amount of the loan but note that under the British Business Bank guidance for the CLBIL scheme it is a requirement for any loan over £250,000. After all, the security will not only be underwriting the accredited lender’s risk of 20% but also the taxpayers 80% risk (vis-à-vis the Government guarantee). Any loan made under the Government’s schemes will be equal in right of payment with any existing debt and in the context of the CLBILS scheme, larger businesses are likely to have existing debt.

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"The CBILS is aimed at small to medium sized businesses with an annual turnover of up to £45m."

Conclusion

Larger real-estate-based businesses with operational assets, in particular those in the hotel, food and beverage and retail sectors are likely to be interested in the CLBILS scheme given the larger loan amounts available. But, given the requirement that for any loan made under the Government’s schemes will be equal in right of payment with any existing debt, in terms of structuring, the CLBILS accredited lender will likely be an existing lender of the business and in that context, we would expect such lender to utilise any existing security for such loans (assuming they are drafted on an all monies basis).

The Government’s response is constantly being updated and so as with many Covid-19-related schemes it is a case of watch this space. If you would like to discuss any of the topics raised in this summary please get in touch.

This article is provided for general, non-specific guidance only. It is not intended to be and should not be considered or relied upon as advice from Watson Farley & Williams LLP. 

Summary of the Schemes

CBILS

The CBILS scheme is aimed at small to medium size business with an annual turnover of up to £45 million. It provides access to finance (loans and other kinds of finance) up to £5 million for a term of up to 6 years.

The scheme is provided by commercial lenders and the government provides a guarantee of up to 80% of the value of each loan. To be eligible to access the scheme companies should⁵:

  • be based in the UK;
  • have an annual turnover of up to £45 million;
  • be able to show that the business would be viable were it not for the Covid-19 pandemic; and
  • be able to show that the business has been adversely impacted by the Covid-19 pandemic.

For more information please see the guidance issued on the government’s website (https://www.gov.uk/guidance/apply-for-the-coronavirus-business-interruption-loan-scheme).

"The CLBILS, meanwhile, is aimed at larger businesses with an annual turnover of over £45m. "

CLBILS

The CLBILS scheme is aimed at larger businesses with an annual turnover of over £45 million. It provides companies with access to loans of up to £25 million for a term of up to 6 years (firms with a turnover £250 million can apply for up to a £50 million).

As with CBILS, the scheme is available through the accredited lenders (listed on the government owned British Business Bank website) and the government provides a guarantee of up to 80% of the value of the loans.

To be eligible to access the scheme companies should⁶:

  • be based in the UK;
  • have an annual turnover of over £45 million;
  • be able to show that the business would be viable were it not for the Covid-19 pandemic;
  • be able to show that the business has been adversely impacted by the Covid-19 pandemic;
  • not have received a facility under the Bank of England’s COVID-19 Corporate Financing Facility;
  • a proposal which the lender:
    • would consider viable were it not for the Covid-19 pandemic; and
    • believes will enable the business to trade out any short-term to medium-term difficulty.

For more information please see the guidance issued on the government’s website (https://www.gov.uk/guidance/apply-for-the-coronavirus-large-business-interruption-loan-scheme).

[1] Analysis summarised in PWC’s UK Economic Update. https://www.pwc.co.uk/services/economics-policy/insights/uk-economic-update-covid-19.html[2] There are also specific business rate reliefs for hospitality and leisure business.[3] Note some of the lenders are existing clients of the firm https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/[4] Treanor, Jill. 31 May 2020 – RBS boss Sir Howard Davies calls for toxic coronavirus loans fund; Chairman warns of mass defaults by stricken small firms. The Times.[5] Note that certain business are not eligible for the scheme, (banks, insurers and reinsurers (but not insurance brokers), public-sector bodies, and state-funded primary and secondary schools).[6] Note that certain business are not eligible for the scheme, (banks, insurers and reinsurers (but not insurance brokers), public-sector bodies, and state-funded primary and secondary schools).

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