The government has announced a number of emergency measures designed to support businesses during the Covid-19 pandemic. One of the major measures announced is the joint HM Treasury and Bank of England lending facility, named the Covid Corporate Financing Facility (CCFF).
What is the purpose of the Covid Corporate Financing Facility?
The facility is designed to support cash liquidity among larger non-financial firms and businesses and to help them to pay their immediate liabilities including wages and suppliers, even while experiencing severe disruption to cash flows.
This facility is supplementary to the Coronavirus Business Interruption Loan Scheme (CBILS) which is designed to help SMEs (see related article: COVID-19: Understanding how the Coronavirus Business Interruption Loan Scheme can help your organisation).
How does the Covid Corporate Financing Facility Work?
The fund is operated by the Bank of England on behalf of HM Treasury, and will purchase ‘Commercial Paper’ during a defined period of 10am-11am each day. Purchases under the fund will be financed by central bank reserves.
What is Commercial Paper?
Commercial Paper is an unsecured form of debt that pays a fixed rate of interest. It is essentially a financial instrument that contains a written promise by one party (the issuer) to pay another party (payee) a definite sum of money, either on demand or at a specified future date.
In terms of a practical example of how the CCFF would operate, we have set out the example below:
Widget Company Limited issues Commercial Paper of £1million which is purchased by the CCFF Fund.
Widget Company Limited will receive the relevant market price from the CCFF Fund by way of a cash injection, and will pay a rate of interest depending on the issuers credit rating and market spreads.
Widget Company Limited will be able to use this cash injection to meet immediate cash flow needs.
The price of the facility will be on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock.
What type of Commercial Paper can be used?
The fund will purchase sterling-denominated commercial paper, with the following characteristics:
- Maturity of one week to twelve months
- Where available, a credit rating of A-3 / P-3 / F-3 / R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020.
- Issued directly into Euroclear and/or Clearstream.
The minimum size of an individual security that the fund will purchase from an individual participant is £1 million. All offers are to be rounded to the closest £0.1 million.
Companies do not need to have issued Commercial Paper prior to using the CCFF.
Commercial paper issued by banks, building societies or insurance companies will not be eligible.
Who is Eligible to use the Covid Corporate Financing Facility?
Companies that make a material contribution to the UK economy are able to participate in the facility. The examples given by the Bank of England as to what would constitute a material contribution to the UK economy include companies with significant employment or revenues in the UK, a large UK custom or a number of UK operating sites.
The facility is open to businesses that can demonstrate they were in sound financial health prior to the Covid-19 outbreak, which will enable the Bank of England to look through temporary impacts on firms’ balance sheets and cash flows caused by the pandemic.
The best way for a company to demonstrate that it is in sound financial health (or was as at 1 March 2020) is to have, or acquire, a credit rating from one of the major credit rating agencies (Standard & Poor, Moody’s or Fitch). Companies with a short or long-term rating of investment grade, as at 1 March 2020, or equivalent, will qualify.
If firms do not have an existing credit rating from the major credit ratings agencies, one potential route to evidencing credit status is for your firm or your bank to get in touch with one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with us and HM Treasury, noting that you are doing so because you wish to use the CCFF.
We understand that the Bank of England is currently speaking with the largest credit rating agencies to provide clarity as to what it required in terms of suitable evidence of credit status for this scheme. However, the Bank of England envisages accepting the most common standard rating agency products as suitable evidence of investment grade credit quality
How do you access the Covid Corporate Financing Facility?
In order to access the CCFF, applicants are being advised to liaise with their bank or finance providers in the first instance.
It is important to note that not all banks issue commercial paper. If your bank does not issue commercial paper, UK Finance will provide a list of banks that are able to assist including contact details UK Finance: COVID-19 Corporate Financing Facility.
If, after speaking with your bank, you believe you are eligible then you will need to complete the following application documents:
Note that the impact on any existing financing arrangements needs to be considered, in particular whether the issuance of Commercial Paper is permitted. Also check if there are any restrictions on the incurring of financial indebtedness, or any restrictions on granting guarantees and security under existing financing.
You will also need to provide evidence of authority to sign on behalf of your company.
Completed documents are to be sent to CCFF-Applications@bankofengland.co.uk
Please do not hesitate to contact us if we can assist with any queries or application paperwork, including the terms of any legal documents required in connection with the application.
Our Banking & Finance Team is on hand to advise on the legal aspects of the standard application documents including the Undertaking and Confidentiality Agreement, form of Guarantee and Legal Opinion required in relation to the primary entity.