UK: Managing conversations with lenders

Last week was certainly a rollercoaster ride with the UK Government launching various schemes and initiatives to help underpin the UK economy and support business owners.

Support measures announced by the Chancellor last Tuesday (17th March), with further detail released this morning, are headline grabbing but we have identified challenges in accessing this capital. Whilst the £350bn package will go some way to addressing COVID-19 related cash-flow concerns for businesses, there are barriers to accessing this funding for mid-market businesses.

Mid-market gap

  • The COVID-19 schemes will undoubtably help certain businesses but there is clear gap in support for the mid-market
  • The commercial paper scheme is only available to investment grade businesses, some sub-investment grade large businesses in specific sectors or large employers. It will not be directly relevant to the mid-market
  • The CBIL (Coronavirus Business Interruption Loan) scheme will only be made available to businesses with less than £45m turnover
  • Current thinking is that this liquidity gap for the mid-market will fall on the banks and other alternative lenders, who are viewed to be well capitalised and resourced
  • Our view is that the banks will struggle to perform as they will be overwhelmed by applications (see below), impacted by COVID-19 themselves and very much learning as they go

Accessing CBIL – an issue of logistics

  • Access to funding via the CBIL scheme won’t be straight forward and the EFG scheme it replaces was cumbersome. Banks will need to follow due process and prioritise those with imminent cash requirements
  • Considerations around pre-COVID-19 performance, on-going viability and equity injection/shareholder input will likely be apparent
  • It is unclear whether the CBIL scheme will be available to businesses with potential access to other sources of capital, such as personal shareholders with material wealth or financial sponsors. This is likely to fall down to the individual’s lenders discretion
  • Along the lines of the above, if a business has a relatively strong credit profile then we expect the lenders to look at this as being a more conventional facility rather than fall within the CBIL
  • The success of CBIL will be reliant upon the banks having the resource to handle the deluge of applications that we expect to be tabled, which we see as a key risk
  • Whilst the Government will underwrite say £4m of a £5m loan, the Bank will still carry £1m of risk. This will require a full credit analysis from the commercial lender and there will be areas and sectors they will find wholly unattractive. Essentially business as usual
  • Finally, but importantly, the teams within the banks are going to be very stretched with the quantity of businesses needing additional support reaching a high. This will become a huge challenge with the teams having to operate remotely and potentially losing team members to ill health - such as key members of credit committees
  • For completeness the British Business Bank’s criteria and guidelines can be found here

Credit process – bank priorities

In an attempt to accommodate the above, lenders will:

  • Prioritise existing borrowers above new business, particularly where providing short-term liquidity that protects existing credit exposure
  • Look at entities with immediate cash requirements ahead of those who are contingency planning
  • Pay close attention to pre-COVID-19 performance
  • Consider a range of measures, including rescheduling current capital repayments and potentially rolling up interest in addition to providing “new money”

Coronavirus is a major consideration however it will not be seen as a “get out of jail free” card.

Our advice - be prepared

  • Ahead of approaching a lender, prepare downside forecasts showing the anticipated impact of COVID-19 which can be presented against your BAU forecast. Cash analysis is essential and should extend past the usual 13 weeks in detail
  • Highlight measures taken and planned to protect profitability and cash. Have all available options been considered/pursued?
  • Ensure that the lender is aware that the business is “backable” in normal circumstances. Portray the business in its best shape
  • The proposal to the lender needs to clear and well thought through. Focusing on what lenders require for their decision will help expedite the credit process and get a positive response
  • Consider alternative sources of liquidity at the same time as speaking to your incumbent bank. We are monitoring a number of alternative lenders looking to deploy capital outside of the Government-backed schemes to businesses impacted by COVID-19

Things will undoubtably change as the situation continues to unfold and we will ensure we keep you up to date with our practical views the Government’s financial support measures.

More importantly we are here to help so if you have any questions or concerns don’t hesitate to call us for advice.

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