On Tuesday, the Government announced new statistics showing that as at 10 May over £14 billion in loans and guarantees have been approved across the new Bounce Back Loan scheme, the Coronavirus Business Interruption Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS). This significant amount of Government support to British business, revealed another interesting statistic: CLBILS accounts for just £359 million of that total.   Just 16% of all applications under that scheme had been approved.  This compares to 50% of CBILS applications and 74% of Bounce Back Loan applications.

We’re in this together?

One constituency that will not be swelling the numbers with approved applications is private equity portfolio companies.  They have not had an easy time accessing CBILS or CLBILS since inception of the schemes.   First, there was the aggregation question. The launch of CBILS on 23 March was soon followed by uncertainty around whether or not the annual turnover of all private equity portfolio companies under common ownership and control should be aggregated for the purposes of determining whether or not the maximum turnover threshold for CBILS beneficiaries of £45 million was exceeded.  The initial position of lenders accredited to CBILS was to assume the principle did apply.  As a result, all but a tiny proportion of private equity portfolio companies which would have qualified for consideration were excluded.   Accredited lenders sought clarification from the Government.  Parallels were drawn with the position in the US under the Coronavirus Aid, Relief, and Economic Security Act launched in 27 March where the Paycheck Protection Program adopted the Small Business Administration “affiliation” rules with a similar effect on private equity portfolio companies.

CBILS’ larger cousin, CLBILS, was launched on 20 April.  With this scheme directed at businesses with an annual turnover in excess of £45 million, it is of potential benefit to far more private equity portfolio companies.  Alongside the launch of CLBILS the British Business Bank (BBB) published supplemental guidance on CBILS.  This guidance confirmed that aggregation should not apply.  The BBB’s guidance as concerns CLBILS was, and remains, silent on the equivalent point.  Nonetheless, accredited lenders took their cue and applied the same approach across both schemes. The lack of an upper turnover limit for CLBILS eligibility meant that aggregation was less of a concern with the larger scheme.  Although such an approach would arguably have imposed a single funding limit across an entire portfolio.  So the aggregation point was resolved.

It was all fine in December, wasn’t it?  

Then another hurdle came into sharp focus.  The Government also used the launch of the CLBILS on 20 April to highlight the requirement that a business wishing to benefit from CLBILS or CBILS funding should not have been a “business in difficulty” as at 31 December 2019.  The guidance published at the same time clarified that a “business in difficulty” included a company that had “accumulated losses of more than half of its subscribed share capital”.  This requirement stems from the fact that “undertakings in difficulty” are excluded from most of the State Aid schemes that the European Commission has approved via its Temporary Framework adopted on 19 March in response to the extreme turbulence caused by Coronavirus.  The original EU Regulation specifies that an “undertaking [is] in difficulty […] when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital”.  There are a couple of exceptions to this rule, notably in the case of SMEs that have been in existence for less than three years.  Nonetheless, the problem for the many private equity portfolio companies unable to avail themselves of either exception is that a structure with a high debt to equity ratio can also trigger this “business in difficulty” categorisation even though the relevant business was performing strongly pre-Coronavirus.

Let the existing creditors judge?  

The consequence of all this is that most private equity portfolio companies remain blocked from the schemes.  The European Commission is being lobbied by the British Venture Capital Association, Invest Europe and others to amend this position to allow access for “businesses that are funded primarily by debt, are investing heavily to grow and are otherwise performing well (save for the current crisis)”.  As we have noted in previous commentaries, over 3,400 businesses in the UK are private equity-owned, and between them they account for over 800,000 jobs.  If Private Equity Limited were a single business it would be the UK’s second largest employer, and also a business putting the pension savings of millions of Britons to work.   If CBILS and CLBILS are schemes designed to provide a lifeline for businesses and the jobs they support, enabling them to bridge the crisis, then it seems compelling that the European Commission should consider a further amendment to the Temporary Framework to allow that support to be delivered.

It is no coincidence that the statistics above show an inverse correlation between the percentage of approvals and the complexity of the capital structures into which the new funding is being committed. Of course, the rapid success of the Bounce Back Loan scheme (268,173 approvals in its first week representing over £8.3 billion of funding) may also be due to the 100% government guarantee that scheme carries.  The debate on whether the 80% government guarantee for CBILS and CLBILS should be increased still continues, although as we have noted elsewhere, that debate is to some extent eclipsing wider concerns about the capacity of some healthy businesses to incur more debt and how the longer term impact on business of these schemes 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 the CLBILS funding accrue a claim on the borrower’s collateral which is at least pari passu with all other senior obligations will require existing creditors to consent.  In the leveraged finance structures supporting private equity portfolio companies, those creditors may well be diverse and account for multiple tiers of debt, each with a different view of the need for, and rights which should attach to, the CLBILS new money.  And this is not to mention their own price for such consent.  In other words, making a CLBILS application is only half the story, making way for the CLBILS funding in the capital structure is potentially a far more complex and protracted process.

That process is made even more so 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 that period between 2013 and 2019, the number of financing deals completed by alternative (i.e. non-bank) lenders in the European market almost quadrupled.  So, whilst all CLBILS accredited lenders are bank lenders, it is likely that many portfolio companies will have capital structures that are not only more complex than their sponsor-less cousins, but are also provided by a far more diverse community of creditors.  That community will represent a far wider range of institutional perspectives which will need to be accommodated alongside the new CLBILS money provided by accredited bank lender(s).

Against this backdrop, one thing is for sure: regardless of the European Commission’s concerns, existing creditors can be counted on to scrutinise the viability of private equity portfolio companies seeking new money.  If the European Commission does allow the amendment demanded of it, that process can begin.  But time is running out for the worst-hit portfolio companies.