With the ongoing COVID-19 crisis, each day brings new challenges and announcements on the potential support available to businesses and individuals.
With the ongoing COVID-19 crisis, each day brings new challenges and announcements on the potential support available to businesses and individuals. At the same time laws, regulations and rules are being relaxed so as to allow businesses to retain their much needed cash flow.
With the likely duration of the crisis still unclear and more detail on business support yet to come, inevitably many corporate transactions are on hold. Whilst Bank funding is a route being considered by many businesses as a means of support, some companies are looking to their shareholders to inject funding in the form of further equity or loan notes. It is worth considering with existing investors whether interest payments under loan notes might be delayed and rolled up for example. There are many issues to cover when considering the type of funding, depending on the business, which need to be worked through and documented carefully with lawyers. The terms of existing shareholder and banking arrangements will need to be considered for shareholder consents, pre-emption rights, priority of repayment, covenant breaches, events of default and directors’ duties.
Whilst a number of corporate transactions have either gone abortive or are on hold pending the target business emerging from the current lockdown and re-commencing trading, we are also working with a number of private equity investors who see the current uncertainty in the market as an opportunity to acquire businesses at a discount to what would be a normal market valuation. Many entrepreneurial clients may seek to utilise the current uncertainty around the long-term viability of certain businesses to ‘trade-up’ their acquisition targets as a consequence of these companies becoming more affordable. This also provides a potential exit strategy for struggling businesses at this time.
Banking and Finance
The impact of COVID-19 is intensifying and a significant economic downturn looks likely; we know that in these times of uncertainty many lenders are focussing on supporting existing clients whilst trying to assess what a recovery will look like and how long it will take.
Existing Borrowers should be reviewing the terms of their existing banking facilities to understand any potential vulnerability and, where necessary, proactively begin a dialogue with their lender(s) towards agreement of waivers or amendments which will enable them to weather this storm. Points to consider will vary by business, borrower and documentation but key questions are likely to include:
- What payments, of interest or principal, are due in the next 3-6 months under existing finance documents?
- What drawings are anticipated/required during the next 3-6 month period?
- Are there any milestones to be achieved in the next 6 months under existing finance documents and, if so, to what extent will they be adversely impacted by current circumstances?
- What restrictions are imposed on your flexibility to amend terms with your users, suppliers?
- What impact does the current economic uncertainty have on any existing financial covenants (e.g. as a result of a loss of income or dip in valuations)?
In the current climate lenders may be reluctant to fulfil drawdowns pursuant to existing agreements without significant further due diligence, and may look to increase the security available to them by way of additional charges and/or personal guarantees
As an alternative, the Coronavirus Business Interruption Loan Scheme (CBILS) is a scheme, primarily aimed at SME’s, will be provided by the British Business Bank through circa 40 commercial banks and other lenders and will provide the lender of a qualifying term loan or an asset finance facility (with a term of up to 6 years) or an overdraft or invoice finance facility (with a term of up to 3 years) with a Government-backed guarantee of up to 80% of the outstanding facility balance for loans of up to £5 million pounds.
The Government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments (although the borrower remains liable for repayments of the capital and all other interest, costs and expenses).
The clear intention is to motivate lenders to provide funding and to reduce the initial costs of borrowing for qualifying SMEs. Over and above amount and term (as above), the published criteria for a borrower looking to benefit from the Coronavirus Business Interruption Loan Scheme are:
- The application must be for business purposes;
- The borrower must: (i) be a UK-based SME with annual turnover of up to £45m; (ii) generate more than 50% of its turnover from trading activity; and (iii) not be a Bank, Building Society, Insurer, Reinsurer, public sector institution (including state funded primary and secondary schools), or employer, professional, religious or political membership organisation or trade union;
- The CBILS-backed facility must be used to support primarily trading in the UK; and
- Whilst the scheme may be used for unsecured lending for facilities of £250,000 and under, for facilities above £250,000, the lender must establish a lack or absence of security prior to businesses using CBILS and if the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.
If looking to take advantage of the CBILS, businesses are advised to approach their own lender first, although they may also consider approaching other participating lenders if they are unable to access the finance they need.
Outside of the CBILS, there are still some lenders that are open for business but these loans are likely to take longer than usual whilst the commercial terms offered by lenders will likely reflect a more risk averse approach in the short term.
To find out more information on these and other matters please contact me on the following details below: