Accessing government funds - Part 1: The COVID Corporate Financing Facility

Rowena Morris (RM): Welcome to the latest episode in Covid-19 Business in Focus podcast, where we explore the business impacts of coronavirus. I’m Rowena Morris, a director at PwC, and I help clients prepare and respond to crisis situations, and I’m your host for this series. 

Coronavirus has had severe impacts on business and the economy. Fortunately the government has put in place a number of initiatives to support businesses that are struggling. In this special two-part episode, we’ll discuss two government-backed initiatives: the Covid Corporate Financing Facility (CCFF) and the Coronavirus Business Interruption Loans Scheme (CBILS). In this episode, we’ll discuss the CCFF, and explore the impact it will have on businesses. We’ll give you practical tips on how to access the support that you might need to navigate through this challenging period.

I’m delighted to be joined today by John Williams and Sarah Strang, who both work in our debt and capital advisory business. Hi both!

John Williams (JW): Hi Rowena.

Sarah Strang (SS): Hi Rowena, thanks for having us.

RM: Thanks both, and thanks for joining our virtual studio. So, to kick off Sarah, over the last few weeks we’ve seen the government introduce lots of different funding initiatives, including the job retention scheme and the business interruption loan schemes. In general, what have you been hearing from clients about the measures that have been set out by the government?

SS: So initially, I think most of our clients were just trying to understand the various schemes as there was a wave of new information to digest, on an almost-daily basis. Most of our clients were also spending time getting a view on their current and near-term liquidity position, and beginning to try and quantify the potential impact of the crisis on their business. Most also had started looking at what self-help measures were immediately available to them, for example a lot of companies started to draw down on their undrawn facilities to boost that liquidity in the short-term. During the first few weeks that the schemes were announced we had loads of client conversations across different industries, and it was clear that businesses of all sizes were being adversely impacted, and would require some sort of additional liquidity in the short to medium-term.

JW: Yeah, and just to add to that, I think it’s also fair to say that on the whole, businesses welcome the scale and extent of the measures announced by the government. What I think it’s also fair to say is that it’s taken a bit of time to understand which schemes are available for specific businesses, so for example, up until recently there was a large group of companies who were not covered by any of the loan schemes, and we’ve been trying to help clients understand the schemes and their eligibility criteria. 

RM: OK, that makes sense. And so how should businesses establish whether or not they’re eligible to apply John?

JW: The different schemes have different eligibility criteria as you’d expect. I think the overarching principle is that the businesses need to be able to demonstrate that they’re fundamentally sound aside from the impact of Covid-19, and that’s not actually as straightforward as it sounds. 

The second key principle is in terms of contribution to the UK. So, under the CCFF scheme, a company must demonstrate that it makes a material contribution to the UK economy. And under the business interruption loans scheme, the applicant must be UK-based in its business activity. So the point is, these schemes are clearly there to support the UK economy and so it makes sense that this is a key criteria which must be met. 

The next area to look for is basically around whether or not size is a key driver. So basically, a CCFF scheme for example, deals with investment-grade businesses so they’re clearly much larger in scale. The two business interruption loan schemes are focused around turnover size, so one for businesses up to £45m, and the other for above that level. And once the business has decided which scheme is the most appropriate for them, then there are some specific criteria for each specific scheme, and this is available on the websites of either the British Business Bank or the Bank of England. 

RM: Brilliant – really helpful overview there. So Sarah, the scheme we’re going to focus on today is the Corporate Financing Facility. I wonder if you could give us a brief overview of this scheme?

SS: Sure. So this scheme is aimed at investment-grade corporates, and broadly involves the company issuing a financial instrument called commercial paper, which is then bought by the CCFF fund, which is administered by the Bank of England. The paper can have a tenor of one week to 12 months, and is issued in amounts starting at £1m and can go up to £1bn depending upon the corporate’s credit rating. 

In terms of eligibility, there are a few key criteria for companies wishing to apply. As mentioned earlier, the company must make a material contribution to the UK economy, so when we think about that, that’s in terms of is it UK incorporated? Maybe does it have headquarters in the UK? If it generates a significant amount of revenue or employs a significant number of people in the UK, or has a large UK customer base. 

Secondly, you need to have been in sound financial health prior to Covid-19, and that’s taking the first of March 2020 as the key date. For CCFF, this measure is based on whether the company is investment-grade or equivalent. What’s interesting on this scheme is that the eligibility criteria has evolved over time. So initially it was targeting those companies of external investment-grade rating as of the first of March, but as it became apparent that this only covered a small number of UK corporates, the criteria actually widened out, so now companies can use other ways of demonstrating that they were in fact investment-grade at that date. For example, they can get an internal rating through their bank rather than having an external rating. This widening of the criteria has opened the scheme up to a greater number of countries who traditionally would not have tapped the commercial paper market. So we’ve now seen some actually much smaller companies who haven’t previously issued commercial paper due to a lack of credit rating or a small issuance size, who are now approved for this scheme. So in terms of scale, by the end of April, there was £46bn had either been issued or approved to be issued by 93 issuers within this scheme. And then on top of that, a further 103 businesses have been approved in principle for the CCFF.

RM: And what impact might it have on these businesses?

SS: So in the short term, this scheme should help companies survive through the disruption caused by Covid-19. Many corporates are now seeing a huge fall-off in trading, so hopefully this scheme will allow those companies to offset that initial financial impact. I think fundamentally, the aim of this scheme is to ensure they have sufficient baseline capital to continue to pay their bills and wages through this period of uncertainty, and I think that last point is actually quite a key one: the impact should also extend beyond the companies directly applying – businesses of this size will generally have extensive supply chains and lots of employees, so the continued ability of these companies to pay their bills should have a knock-on impact for businesses lower down the chain. 

The longer-term impact is probably much more difficult to predict. The scheme was designed for businesses which were fundamentally sound pre-Covid-19. In theory, they should have no issue in repaying these balances, but it’s still very difficult to predict what recovery will look like – U-shaped, V-shaped, lopsided V-shaped recovery have all been commented on, and this may also vary across different sectors. The impact of this is that none of us can accurately forecast the speed at which companies will rebound. Therefore, we’re advising clients to run a number of scenarios, in particular looking at what the impact of a longer period of lockdown and a slower ramp-up to BAU means for their business. 

I think on a more positive note, companies who go through the CCFF process will learn more about the commercial paper market, and credit ratings, and this may in turn open up a new financing market to them that they wouldn’t have considered in the past. 

RM: So, John, for businesses looking to apply, what challenges are they likely to face, do you think?

JW: It’s a good question. I think the challenges probably fall into three buckets. There’s the getting a credit rating, sizing of the ask and then the process itself. In terms of the credit rating, Sarah just mentioned it, the application form and process, they’re quite straightforward if you have got a rating. If you don’t currently have a rating you’ve got to go and get one, and there are some options out there for you, so whether it’s either a streamline credit assessment from one of the four ratings agencies, or you can use one of your syndicate banks’ internal credit ratings as well as a guide. In terms of assessing what your liquidity need actually is, given the uncertainty of how long restrictions actually will be in place, this is clearly quite a challenging task, so we’d advise businesses to run a number of different scenarios to ensure they’ve appropriately considered a whole range of outcomes. And then finally, the time it takes to get through the process itself, so for example you may need waivers from your existing lenders to access the scheme, as well as the actual scheme process steps themselves. So each of these can impact the final pace to get funds in the door. 

RM: Brilliant, OK, thank you. So finally, just to finish off and wrap up, what tips do you both have for organisations that are thinking of applying for government funds? So maybe John, if I start with you?

JW: OK, I think getting a view on cashflow is absolutely key. Regardless of the industry and the size, this is the one piece of information which is going to be critical, as it will tell you how much additional liquidity you’ll need, and also for how long. And secondly, having an open dialogue with your lenders and being proactive. Even if you don’t end up accessing the scheme, lenders may still be able to provide other solutions to help you, and they’re more likely to do this if they feel that you’re on top of the numbers and being open with them.

SS: Yeah, and I think the key for me is building a strong evidence base and crafting a credible and compelling story to support your case – for example, demonstrating how you’re a viable business and illustrating your importance to the UK economy. Fundamentally, a well-articulated credit story should maximise your chances of success under this scheme. 

RM: Some great tips there – thanks John and Sarah. And thanks to everyone for listening. If you’d like some more practical advice around accessing government funds, you can visit our website at pwc.co.uk/covid19. Here you’ll find an overview of all the government-backed initiatives that are available. I hope you’ll join us next time for the second half of our two-part special on accessing government funds, where we’ll be discussing the two Coronavirus Business Interruption Loan Schemes. Please remember to subscribe to keep up to date with all of our latest episodes, and thanks very much – until next time, stay safe and well. 

Participants

• Rowena Morris, Director, PwC
• Sarah Strang, PwC
• John Williams, PwC