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Coronavirus and the Covid Corporate Financing Facility - How Broad is Its Scope?

on Tuesday, 31 March 2020.

In its summary on Monday 30 March of the government's programmes to support the economy, the Financial Times reported criticisms of the narrow scope of the Covid Corporate Financing Facility ("CCFF") which are not entirely merited.

The CCFF permits the Bank of England to lend newly issued cash on an unsecured and confidential basis to non-financial participants in the UK economy which were in "sound financial health" before the virus shock and are now experiencing short-term cash flow difficulties. The rate of interest is extremely attractive and the borrowing can be for up to 12 months.      

The borrower's maintenance of an investment grade rating on 1 March is the principal indicator of financial health, and the Financial Times notes that "just over 100 companies in the UK have such a status" according to Fitch. The Bank of England is correctly reported as encouraging unrated, midsized companies to approach their banks to discuss how they might evidence their eligibility by obtaining a 'private' credit rating or other means.

But the scope of CCFF is not quite so narrow as suggested because there are many UK borrowers in housing, higher education, infrastructure, and local government which already maintain investment credit ratings in reliance upon a perceived guarantee by central government or other grounds. For example, Moody's lists 96 "sub-sovereign" UK borrowers, including nine universities (two of which famously have a higher credit rating than the United Kingdom), as of 31 March. 

These sub-sovereigns would satisfy the "financial health" criterion for borrowing from the CCFF. Granted, accessing this financing is a bit convoluted because it takes the form of a capital markets transaction - albeit one not involving the public - in order to preserve an exit for the Bank of England. That is, a borrower must issue "commercial paper" in exchange for its cash, and most sub-sovereigns would need to establish a new facility for doing so, including:

  • appointing a paying agent and a dealer bank
  • making clearing arrangements with Euroclear and Clearstream

But for those sub-sovereigns which have already issued public bonds (such as the universities), this simply would repeat existing arrangements. 

The Bank of England has made every effort to ease the process for UK entities that have not issued commercial paper before, simplifying the documentation. A detailed bond-type prospectus would not be required. Upon the Bank of England's acceptance of its application, the borrower would sell its commercial paper to its dealer bank, which would immediately on-sell to the Bank of England. 

 UK entities facing short term cash flow challenges from the virus would naturally turn first to their bankers and draw upon any available revolving credit facilities. But those UK entities which already maintain investment grade ratings, including the 'sub-sovereigns' mentioned above, also have the opportunity to approach the CCFF for cheap and confidential money.


For specialist advice on what the CCFF means for you, whatever your sector, during the coronavirus pandemic, please contact Thomas Dick in our Corporate Law team on 07968 559217, or David Emanuel on 07876 210497, or complete the form below.

 

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