Insight Bite: Emergency Debt Deals Caught in Lending Bottleneck

To help keep ailing businesses afloat, the government is offering a swift injection of liquidity. But blockages threaten to stem the flow of funds.

Launched on March 23rd, the Coronavirus Business Interruption Loan Scheme (CBILS) offers a lifeline to businesses with a turnover of up to £45m. But data from industry body UK Finance suggests most businesses have yet to benefit from the funding, with only two percent of inquiries into the relief scheme resulting in loans.

Over the first week of the scheme just £90.5m had been lent out in 983 loans, with businesses reporting that banks were reluctant to grant the government funding, and instead were pushing the high rates and fees of standard commercial terms.

In response to the backlash, Chancellor Rishi Sunak adjusted the terms on April 2nd – releasing a second version of the scheme that ditched the requirement for firms to have first been turned down for commercial lending, and removed the need for directors to give personal guarantees on loans. He also announced a rescue package for larger businesses with annual turnover between £45m and £500m (the Coronavirus Large Business Interruption Loan Scheme), but as of yet no further details on this have been provided.

Despite the changes in the terms and the relaxing of requirements, as of April 15th, only 6,020 firms had received such loans, out of an estimated 300,000 that had enquired. Lenders received over 28,000 formal applications for CBILS loans – many firms were told they were ineligible even before applying. The total amount lent under the scheme currently stands at £1.15bn. Many PE funds with portfolio businesses that could ostensibly have benefited from the CBILS scheme have told us they see the scheme as not fit for purpose, and voiced concerns that the large business scheme, when finally launched next week, will face similar bottlenecks.

A key concern is that using government funds to support companies backed by private equity break EU state aid rules. That said, the Government is facing calls to consider adopting the approach used by Switzerland and Germany, where the state guarantees 100% of these loans. Private equity firms also report concerns that the companies in their portfolio will be aggregated into one group, and therefore seen as too big to qualify for aid.

As the lockdown persists and the economic implications come into sharper focus, lenders are likely to face increasing political pressure to streamline the distribution of support packages.

The best way for businesses to navigate this new debt market climate successfully is with the help of an experienced debt advisor – taking a well-articulated and thoroughly considered proposition to lenders makes it easier for them to sign-off on extending (further) credit.

Acuity Advisors’ debt advisory and corporate finance experts combine tech-sector focus with SME debt markets expertise; giving us the insight needed to assess your current financing agreements, quickly develop contingency plans, and lead discussions with lenders.

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