On 17 March 2020 the Chancellor announced a new Covid-19 Corporate Financing Facility (CCFF), to help larger, financially sound, companies through the economic disruption caused by the coronavirus.
The CCFF is intended to support companies suffering a squeeze on their cash flow that would usually seek market-based finance for their working capital and other short term needs, but are unable to do so in this period of economic flux.
While further details are awaited, the Bank of England (BoE) has set out in broad terms how the facility will work, and which businesses will be eligible for support.
How does the CCFF work?
The BoE has established Corporate Financing Facility Limited (the Fund), which will purchase Commercial Paper (CP) of up to one year maturity issued by firms making a material contribution to the UK economy.
The Fund will purchase newly issued CP on the primary market via dealers and, after issuance from eligible counterparties, in the secondary market. Purchases will be made at a minimum spread over reference rates.
Purchases will be financed from central bank reserves.
How long will the CCFF be available?
The CCFF will last for at least 12 months and will continue for as long as needed to relieve cash flow pressures on eligible companies. Six months' notice will be given prior to the withdrawal of the facility.
Who can issue CP?
The Fund will purchase CP issued by companies that make a material contribution to economic activities in the UK and prior to the outbreak of coronavirus had a short or long-term rating of investment grade, or financial strength equivalent to an investment grade rating.
Relevant factors include whether the company:
- is a significant employer in the UK;
- is headquartered in the UK;
- is incorporated in the UK (including those with foreign-incorporated parent companies and with a genuine business in the UK);
- generates significant revenue in the UK
- serves a large number of customers in the UK;
- has a number of operating sites in the UK.
Companies that do not currently issue CP but are capable of doing so will, in principle, be eligible to use the CCFF if they meet the eligible securities criteria. These companies will need to establish a mechanism for issuing CP, and will need to act fast in doing so.
CP issued by an internal group finance subsidiary is in principle eligible, subject to the BoE being satisfied that the issuer (or a member of its group) makes a material contribution to corporate financing in the UK. However, CP issued by leveraged investment or private equity funded vehicles or from companies within groups that are predominantly banks, investment banks or building societies will not be eligible. If securities are being issued by a finance subsidiary they should be guaranteed by its parent company.
A CP which contains non-standard features, for example, may not be approved by the BOE as eligible. This likely rules out formally subordinating such new CP to other unsecured credit of the business concerned. More generally, the BoE, the Fund and the Treasury are reserving the right to deem any security ineligible for any reason.
Eligible CP and counterparties
The Fund will purchase CP that meets the eligible securities criteria and that has been in the primary market from dealers acting as principal or in the secondary market from eligible institutions. It seems likely at this stage that CP will need to be listed, and that dealing counterparties must be appropriately authorised for the purposes of FSMA 2000. This could represent a significant barrier to availability.
The CCFF will be open for drawing on 23 March 2020 and we understand final scheme documentation including a pricing schedule will be published then.
Further details on the CCFF including applications forms, terms and conditions and the operating procedure will also be published on the BoE's website on that date.
Osborne Clarke comment
Pending further details, we have concerns as to whether the CCFF goes far enough to support UK businesses that might fall between this scheme and those schemes announced that are intended to support SMEs. There is a significant chunk of UK PLC that meets the headline criteria stated by the BoE, but does not possess a formal investment grade credit rating or otherwise participate in listed-debt issuance – both of which seem to, initially at least, preclude them from accessing CCFF. Osborne Clarke is making representations to the Bank of England on behalf of our clients seeking an extension of the CCFF to this crucial part of the UK economy.
Consideration should also be had as to whether any prior steps are required to be taken under any existing credit facilities prior to participation, many of which are likely to contain restrictions on additional structured borrowing of the nature provided by CCFF, and have implications for financial covenant compliance. Please contact one of the experts listed below or your usual Osborne Clarke contact if you have any queries about the CCFF or the impact on your existing facilities.