UK CBILS and CLBILS More hurdles for UK private equity?

On Tuesday, the government announced new statistics showing that as of May 10, more than £14 billion in loans and guarantees had been approved under the Coronavirus Business Interruption Scheme’s (CBILS) new Bounce Back loan scheme and the Coronavirus Large Business Interruption Loan Scheme (CLBIL). This significant amount of government support for UK businesses revealed another interesting statistic: CLBILS accounts for just £359m of that total. Only 16% of all applications under this program have been approved. This compares to 50% of CBILS applications and 74% of Bounce Back loan applications.

Are we in the same boat?

One constituency that won’t inflate the number of approved applications is private equity holding companies. They have not had easy access to CBILS or CLBILS since the programs were created. First, there was the issue of aggregation. The launch of CBILS on March 23 was quickly followed by uncertainty as to whether the annual turnover of all private equity portfolio companies under common ownership and control should be aggregated for the purposes of determining whether the maximum turnover threshold for CBILS beneficiaries of £45 million has been exceeded. The initial position of lenders accredited with the CBILS was to assume that the principle applied. As a result, all but a tiny fraction of the private equity portfolio companies that would have been eligible for review were excluded. Approved lenders have asked the government for clarification. Parallels have been drawn with the position in the United States under the Coronavirus Aid, Relief, and Economic Security Act launched on March 27, where the Paycheck Protection Program adopted the “affiliate” rules of the Small Business Administration with a similar effect on private equity holding companies.

CBILS’ big cousin, CLBILS, launched on April 20. With this scheme aimed at companies with an annual turnover of over £45m, it is potentially beneficial to many more private equity portfolio companies. Along with the launch of CLBILS, the British Business Bank (BBB) ​​has issued additional guidance on CBILS. These guidelines confirmed that aggregation should not apply. The BBB’s guidance on CLBILS was, and remains, silent on the equivalent point. Nevertheless, approved lenders followed their example and applied the same approach in both regimes. The lack of an upper turnover limit for CLBILS eligibility meant that aggregation was less of a concern with the broader scheme. Although such an approach would arguably have imposed a single funding limit for an entire portfolio. The aggregation point has therefore been resolved.

Everything was fine in December, right?

Then another obstacle appeared with sharpness. The government also took advantage of the launch of CLBILS on April 20 to emphasize the requirement that a company wishing to benefit from CLBILS or CBILS financing should not be a “firm in difficulty” by December 31, 2019. The guidelines published at the same time clarified that a “distressed company” included a company that had “accumulated losses of more than half of its subscribed share capital”. This requirement stems from the fact that “companies in difficulty” are excluded from most state aid schemes that the European Commission has approved via its temporary framework adopted on March 19 in response to the extreme turbulence caused by the coronavirus. The original EU regulation specifies that a “company [is] in trouble […] when the deduction of cumulative losses from reserves (and all other items generally considered to be part of the company’s equity) leads to a negative cumulative amount greater than half of the subscribed share capital”. There are some exceptions to this rule, especially in the case of SMEs that have been in existence for less than three years. Nevertheless, the problem for the many private equity portfolio companies unable to avail themselves of either exception is that a structure with a high debt ratio can also trigger this “distressed company” categorization. even if the company concerned was very successful before the coronavirus. .

Let existing creditors judge?

The consequence of all this is that most private equity holding companies remain excluded from the programs. The European Commission is under pressure from the British Venture Capital Association, Invest Europe and others to change this position to allow access to “primarily debt-financed companies investing heavily in grow and are performing well (with the exception of the current crisis).’ they account for over 800,000 jobs.If Private Equity Limited were a single company, it would be the UK’s second-largest employer, and a company leveraging the pension savings of millions of Britons.If CBILS and the CLBILS are schemes designed to provide a lifeline to businesses and the jobs they support, enabling them to overcome the crisis, so it seems imperative that the European Commission consider a new e modification of the temporary framework to allow the provision of this support .

It is no coincidence that the statistics above show an inverse correlation between the percentage of approvals and the complexity of the capital structures in which new funding is committed. Of course, the rapid success of the Bounce Back Loan scheme (268,173 approvals in its first week representing over £8.3bn of funding) may also be due to the 100% government guarantee this scheme carries. Debate over whether the 80% government guarantee for CBILS and CLBILS should be increased, although as noted somewhere elsethis debate to some extent overshadows broader concerns about the ability of some healthy companies to take on more debt and how the longer-term impact of these programs on companies can be addressed.

It would be CLBILS through which most portfolio companies would receive support. To achieve a position which, as required by the government, sees CLBILS financing accrue a claim against the borrower’s collateral which is at least past bet with all other senior obligations will require the consent of existing creditors. In leveraged finance structures supporting private equity holding companies, these creditors may very well be diverse and represent multiple levels of debt, each with a different view of the need and the rights that should be attached to the debt. CLBILS fresh money. And that’s not to mention their own price for such consent. In other words, applying for CLBILS is only half the story, accommodating CLBILS funding in the capital structure is potentially a much more complex and lengthy process.

This process is further rendered by the “financial distancing” that has taken place since 2008. Between 2010 and 2019, the number of European leveraged loans almost doubled and yet, in the latter part of this period between 2013 and 2019 , the number of financing transactions concluded by alternative (ie non-bank) lenders on the European market almost quadrupled. So, while all CLBILS Approved Lenders are bank lenders, it is likely that many holding companies will have capital structures that are not only more complex than their sponsorless cousins, but are also provided by a community. much more diverse creditors. This community will represent a much wider range of institutional perspectives that will need to be considered alongside the new CLBILS money provided by the accredited bank lender(s).

In this context, one thing is certain: whatever the concerns of the European Commission, existing creditors can be counted on to examine the viability of private equity holding companies seeking new funds. If the European Commission authorizes the requested amendment, this process can begin. But time is running out for the hardest-hit portfolio companies.