UK: Raising finance in challenging markets: Key considerations for corporates

Introduction

The COVID-19 pandemic raises a range of issues for companies in all sectors, including the ability to access the finance necessary to maintain business operations during these challenging times.

In this briefing, we look at some of the different financing options that may be available, including through UK Government finance schemes (such as the Covid Corporate Financing Facility) and traditional and alternative debt and equity funding, and some of the key considerations that will be relevant in each context. Whilst certain options, in particular on the equity side, assume a UK-listed company, others will be of wider application.

Government finance?

A number of different government finance options may be available for companies depending on the circumstances – most notably the Covid Corporate Financing Facility, the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme and the Coronavirus Jobs Retention Scheme which are discussed in turn below.

CCFF – Covid Corporate Financing Facility

The Covid Corporate Financing Facility (CCFF) is intended to provide liquidity funding to larger non-financial companies that make a material contribution to the UK economy and were in sound financial health prior to the impact of COVID-19.

Under the CCFF, the Bank of England will purchase short-term debt in the form of commercial paper (CP) of up to one year in maturity. Companies wishing to use the CCFF are advised to liaise with their bank to confirm their eligibility – those that are eligible will be required to complete an application form and submit this together with the required supporting documentation. The CCFF must then be accessed via a bank that is a participant in the scheme.

The Bank of England has advised that companies able to use the CCFF will normally be:

• UK-incorporated companies, including those with foreign-incorporated parents and with a genuine business in the UK.
• Companies with significant employment in the UK.
• Firms with their headquarters in the UK.

The Bank of England will also consider whether the company:¹

• Generates significant revenues in the UK.
• Serves a large number of customers in the UK.
• Has a number of operating sites in the UK.

CP issued by banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the FCA will not be eligible. Further leveraged investment vehicles or companies within groups which are predominantly active in businesses subject to financial sector regulation will not be eligible.

The CCFF is intended to provide liquidity for companies that were in “sound financial health” prior to the outbreak of coronavirus. This can most easily be demonstrated by reference to appropriate credit ratings, although alternatives may be available where companies do not have an existing credit rating.

If an eligible company has an existing CP programme, it should be possible to use that existing programme to issue eligible securities for the CCFF. Where there is no existing programme, eligible securities will need to be issued, either under a new CP programme or a standalone issuance.

For a more detailed discussion of the CCFF (including the eligibility requirements and other practical considerations, such as interaction with existing financing arrangements) please see our separate briefing Bank of England launches Covid Corporate Financing Facility.

BBLS, CBILS and CLBILS schemes

The BBLS, CBILS and CLBILS schemes are administered by the British Business Bank (BBB) via its accredited lenders. They are intended to make it easier for commercial lenders to make loans to businesses that are generally viable, but that have suffered COVID-19-related business disruption.

Each scheme includes a UK Government-backed guarantee – under the BBLS scheme, this covers 100 per cent of the debt owed by the borrower, whereas under the CBILS and CLBILS schemes it covers only 80 per cent of the debt owed. As mentioned, the schemes are intended to make it easier for lenders to make loans, rather than to provide financial support directly to borrowers. Accordingly, the borrower under a BBLS, CBILS or CLBILS guaranteed loan will remain responsible for repaying the full amount of the relevant loan (even if the UK Government pays out under its guarantee to the relevant lender).

Borrowers must satisfy certain eligibility criteria to qualify for the schemes – these conditions are slightly less stringent for the BBLS scheme than for the CBILS and CLBILS schemes.

A very brief summary of each of the schemes is set out below, but for further detail and a comparison of their key terms and eligibility requirements, please see our separate briefing UK Government introduces series of loan schemes: Key features for borrowers.

BBLS: The BBLS scheme is aimed at borrowers that are UK-based SMEs, micro businesses and other businesses requiring smaller loans. A lender can provide facilities of up to £50,000 backed by a BBLS guarantee. These facilities will take the form of a term loan only.

CBILS: The CBILS scheme is aimed at borrowers that are smaller UK-based businesses with a turnover of less than £45 million. A lender can provide facilities of up to £5 million backed by a CBILS guarantee and these facilities can take the form of term loans, overdrafts, invoice finance and asset finance. It should be noted that not every lender will necessarily offer every type of facility that can be guaranteed under the scheme and it is worth checking that the accredited lender(s) being applied to offer the lending product being sought.

CLBILS: The CLBILS scheme is aimed at borrowers that are larger UK businesses with a turnover of more than £45 million. A lender can provide facilities of up to £200 million (depending on the size of the relevant borrower’s business – note that lower limits may apply to some borrowers) backed by a CLBILS guarantee and these facilities can take the form of term loans, overdrafts, invoice finance and asset finance. Again, it should be noted that not every lender will necessarily offer every type of facility that can be guaranteed under the scheme and it is worth checking that the accredited lender(s) being applied to offer the lending product being sought.

Coronavirus Jobs Retention Scheme (CJRS)

The CJRS operates to assist employers and to try to limit redundancies. In summary, it enables employers who operate PAYE to apply to HMRC to apply for a grant to cover the lower of 80 per cent of a furloughed employee’s (an employee who remains on the payroll but performs no work) regular wage or £2,500 per month, plus associated Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions.

The CJRS was backdated to March 1, 2020 and was open for an initial period of at least three months has now been extended until the end of October.

It will run in its current form until the end of July. From July there will be greater flexibility in the CJRS, for example, by allowing employers to bring back employees on a part-time basis. In addition, from August, employers will be asked to start making a contribution towards the remuneration costs of the furloughed staff, and so sharing the cost of the scheme. The level of contribution will increase gradually but the employer payments will substitute the contribution the government is currently making, meaning that the employees will continue to receive at least 80 per cent of their wages, subject to the cap.

For further information on this topic see our Global Workplace Insider blog.

Other debt financing?

Facilities

In the first instance, companies will need to analyse their existing facilities and, to the extent there is headroom, consider drawing these down (in full or in part) to meet their most immediate funding requirements. However, in this context it should be noted that:

• Further draw-downs may not be possible if default events have been triggered as a result of COVID-19 and the associated impact on the business, meaning that lenders are no longer obliged to lend further sums.
• Where this is the case, borrowers will need to engage with their lenders to seek support in advancing further funds and potentially issuing waivers of defaults and/or amending loan terms.
• Events of default which may be triggered by the COVID-19 crisis include non-payment of interest or principal, financial covenant breaches, cash flow insolvency, suspension of business, expropriation or defaults triggered by a material adverse change in a borrower’s ability to service its debt or its financial condition or business prospects.

These issues are discussed in further detail in our separate briefing COVID-19 (coronavirus): Potential for default triggers in finance arrangements.

Companies may also consider seeking new bank loans in addition to their current facilities. Whether this is feasible will depend on lender appetite in light of the company’s specific circumstances and creditworthiness. Borrowers should also be aware that, although interest rates have been cut, lenders will be reassessing credit risk of borrower groups and increasing pricing and security cover accordingly. They may also seek to include additional default events and termination provisions by reference to pandemic related scenarios. Forward start facilities may be considered which would provide borrowers with commitments well in advance of existing maturities.

Companies may also be able to obtain debt finance from alternative sources with greater risk appetite than traditional banks – for example, major shareholders, key customers/suppliers or other stakeholders, invoice discounting or ABL financiers (as discussed below), the bond markets (as discussed below), distressed debt investors or private equity/sovereign wealth funds. The interaction with existing debt facilities will need to be considered – it is common to include restrictions in loans against other borrowings and the giving of security to other lenders. Existing lenders will be more inclined to give consent if repayment of the additional loans is subordinated to repayment of the bank debt, and any existing security is given priority. However, traditional restructuring principles would ordinarily see new money loaned in a distressed situation given super priority to existing debt. Given the time required for due diligence by new lenders (and/or pricing to take into account lack of diligence), a company’s first port of call will usually be its existing lenders. In any event, early engagement with potential financiers and existing lenders will be important.

Some further considerations in relation to obtaining convertible debt from non-traditional lenders are discussed in the section on alternative equity fundraising below.

Invoice/receivables financing

Businesses with substantial receivables payable over future months, can consider invoice or receivables financing to sell those rights to be paid to a specialist lender who will pay a discounted rate to reflect the seller’s accelerated receipt. Collection of the invoices can then be received by the receivables purchaser directly, or by the seller (often as agent) who then passes the payments on to the purchaser.

Asset-based lending

Companies struggling to raise more traditional forms of leveraged debt (i.e. where the lender is lending against a multiple of EBITDA and therefore primarily focused on the company’s balance sheet, projected cash flows and/or a financial covenant package) may consider asset-based lending (lending against the value of a trading business’ assets or “borrowing base”) as an alternative. Asset-based lenders focus primarily on operational covenants which evaluate and monitor the fluctuating performance of the asset classes (usually receivables and stock) against which funding has been provided.

The interest cost of an asset-based loan can be significantly less than a traditional leveraged loan. This is because the ultimate credit risk of asset-based lenders is usually lower as they are advancing against a company’s most liquid assets that have a readily identifiable value. Besides the pricing, the loan sizes available to certain companies may be higher than under a leveraged structure. This is especially true in the context of low margin businesses.

Bonds

Companies looking to raise capital through the issuance of bonds will need to consider a number of issues that are similar to those discussed in the context of traditional equity fundraisings below. For example:

• Anticipated level of demand from investors – this may be more challenging in the immediate term until market volatility begins to settle.
• The potential impact of the pandemic on the issuer’s (and any guarantor’s) ability to fulfil their obligations under the bonds – this is likely to have an impact on the underwriters’ due diligence.
• What form of offering document will be required – in particular, if an FCA-approved prospectus is needed, this will have an impact on overall timing of the fundraising. Whatever the form of offering document, in light of COVID-19 and its impact, careful consideration will need to be given to the form of the risk factors and other disclosures included in the document (including any impact of COVID-19 on any no significant or material change statements, or credit ratings, if applicable).
• Consideration of existing finance arrangements to determine if a bond issuance is permitted under the relevant terms, in particular, any restrictions on incurring financial indebtedness or on granting guarantees or security.
• Due diligence – the scope of due diligence to be carried out in light of the potential impact of COVID-19 on the underlying business and the practicalities of carrying out due diligence in light of current social distancing measures and other restrictions.
• Underwriting arrangements – including the form of any material adverse change or market MAC termination rights.
• The impact of potential delays and difficulties associated with the production of audited financial information by issuers in the current climate as a result of the COVID-19 pandemic and consequently, the ability to obtain traditional comforts from reporting accountants in the context of the bond documentation.

The International Capital Markets Association (ICMA) has highlighted some of these practical considerations on its COVID-19 Market Updates: Market practice page.

Traditional equity fundraising?

We have seen a number of companies using ABBs (accelerated bookbuilt placings) to shore up their balance sheets recently, and we expect this to continue to be a trend for so long as there is investor appetite, particularly given the revised Pre-emption Group guidance recommending that investors consider supporting issuances of up to 20 per cent (as discussed below).

Even for companies that are more immediately focused on evaluating other financing options, particularly the availability of potential government finance as discussed above, an equity fundraising may become a relevant consideration in the medium or longer term – including as a means of reducing any leverage taken on to manage the short term impact of COVID-19 on the business.

Where a traditional equity fundraising is proposed, thought needs to be given to the most appropriate structure. In this context there are three main options – a placing, an open offer, or a rights issue (the latter two options potentially coupled with a placing). In broad terms, an ABB placing is (depending on its size) likely to be faster and simpler to execute than a pre-emptive offering such as an open offer or rights issue, however it will be reliant on having the necessary shareholder authorities in place and/or using a cash box structure and, for Main Market companies, no prospectus being required to admit the new shares to trading due to the size of the placing. Pre-emptive structures, whilst more complex, may be more appropriate for larger fundraisings and enable pro rata participation by existing shareholders. As discussed below, the Pre-emption Group, the FCA and other investors and investor bodies have encouraged companies to deliver, so far as possible, “soft pre-emption rights” in the context of non-pre-emptive fundraisings.

Issuers should therefore consider, together with their advisers, the extent to which this is practical and/or appropriate in the circumstances. Where a prospectus is not otherwise required for the fundraising and soft pre-emption is intended to be delivered by including a retail element, issuers will want to ensure that this is structured to fall within an appropriate prospectus exemption. In this context, the most relevant is likely to be the exemption that allows an offer to the public of up to €8 million (aggregated over a 12-month period) to be made without a prospectus, which enables issuers to launch a concurrent retail offer that falls below this threshold alongside an institutional ABB.

Key considerations that will be relevant when determining the appropriate structure for any fundraising include:

• Whether shareholder approval is required to issue the shares – this will depend on the size and structure of the fundraising, the scope of the company’s existing authorities and whether a cashbox structure is being used. Where shareholder approval is required, consideration will need to be given to the logistics of convening and holding a general meeting in light of current social distancing measures and other restrictions (these issues are covered in more detail in our separate briefing Impact of COVID-19 on UK AGMs: An update – whilst this focuses on AGMs, the same issues will apply to other general meetings).
• Whether shareholders would support the use of a cash box structure to effect a significant ABB placing in order to minimise cost, time to completion and use of management time – this will likely involve consulting with key institutional shareholders ahead of launch to garner support. Main Market companies will be restricted as to the size of the fundraising they will be able to execute on this basis without a prospectus in light of the rolling 20 per cent annual threshold above which a prospectus is required to admit shares to trading on a regulated market. 
• Whether shareholder approval is required for any other reason – for example, Premium Listed companies may require approval under the Listing Rules where shares are being issued at a discount of more than 10 per cent.
• If shareholder approval is required, how deliverable this is and whether any steps (such as obtaining irrevocable voting undertakings from major shareholders) can be taken to mitigate execution risk.
• Whether an FCA approved prospectus will be required – this will clearly have an impact on the overall timetable but consideration will also need to be given to practical matters, including the content of the risk factors, disclosure around current trading and prospects, how the working capital statement will be formulated in light of the impact of COVID-19 and the nature of the sensitivities and assumptions underpinning the working capital exercise. The FCA has published guidance on temporary changes to its approach on working capital statements in light of the coronavirus crisis – this is discussed in detail in our separate briefing COVID-19: UK FCA announces measures to assist listed companies in raising new share capital.  
• Due diligence – the scope and logistics of the due diligence exercise (as discussed in the context of Bonds above).
• Whether the fundraising will be underwritten and, if so, by whom - will it be by one or more traditional investment banks, or by another entity such as a major shareholder? In this context, where the issuer is subject to the UK Takeover Code, a Rule 9 whitewash could be required if an underwriter ends up with a shareholding at or above the 30 per cent mandatory offer threshold (arguably a greater potential risk in volatile markets). If there is any scope for an underwriter to go through 30 per cent, this should be discussed with Panel in advance – we expect the Panel may be prepared to discuss practical measures in circumstances where the Rule 9 obligation is incurred unexpectedly.
• Consideration should also be given to the underwriting or placing agreement terms, including customary market MAC provisions, company undertakings and representations and warranties and whether it is necessary for them to be modified or expanded in light of the current circumstances and/or consequences of the COVID-19 pandemic.
• Whether lender approval is required – new issues of equity may be restricted in existing loan arrangements.
• Whether timelines to completion are such that bridging finance (or an extension or refinancing of existing facilities) is required in the interim. If so, will this come from a traditional lender or from an alternative source such as a major shareholder, key customer or supplier? In some circumstances, lenders may want additional comfort that an equity fundraising is deliverable within a reasonable timeframe – in this context, standby underwriting of an equity offering may be an option to consider, although appetite to underwrite on this basis is likely to be limited given prevailing market conditions.

The FCA and other regulators have been lobbied about making temporary adjustments to the rules to facilitate emergency/distressed fundraisings during this challenging period. In April, the FCA published a Statement of Policy on measures intended to assist companies to raise new share capital in response to the coronavirus crisis. The measures include, amongst other things, temporary changes to the FCA’s approach in relation to working capital statements and to the requirement to convene shareholder meetings to approve Class 1 and related party transactions. The package of measures is discussed in further detail in our separate briefing COVID-19: UK FCA announces measures to assist listed companies in raising new share capital.

As noted above, the Pre-Emption Group has temporarily revised its guidelines (Revised PEG Guidelines) in relation in relation to non-pre-emptive placings, by recommending that investors consider supporting issuances of up to 20 per cent on a case-by-case basis in order to help companies in these exceptional circumstances. The Pre-emption Group notes that where this additional flexibility is sought there should (among other things) be proper consultation with a representative sample of the company’s major shareholders and, as far as possible, the issue should be made on a soft pre-emptive basis. The revised PEG Guidelines were also highlighted by the FCA in its Statement of Policy referred to above with the FCA noting the important role that issuers can play in delivering “soft pre-emption” and encouraging them to exercise their right to be consulted on/direct bookrunners’ allocation policies. In Primary Market Bulletin No.28 (published on May 27, 2020) the FCA further noted, in the context of delivering soft pre-emption rights, that issuers with a large number of smaller shareholders could consider if there are routes that may be available to make participation in a capital raising available to those shareholders (although the FCA recognises that this may not be possible in all cases due to time pressures or legal risks and notes that it is for the issuer to decide whether to undertake a capital raising in this way).

Consistent with the Revised PEG Guidance, certain investors have indicated a willingness, in appropriate circumstances, to support significant equity issuances (including by way of cashbox) by companies with a long-term sustainable business, subject to certain conditions. For example, in its open letter to UK PLCs in April, Schroders indicated, among other things, that it would expect dialogue with issuers around clarity on working capital, litigation and any significant changes made since the last report and accounts and set out its expectations in areas such as dividends and management remuneration.

Alternative equity funding?

For some listed companies, alternative means of equity fundraising may also be available – for example through private investments in public equity, also referred to as “PIPE” transactions – although maximum discount levels and market volatility may present a challenge in the short term. A PIPE typically takes the form of a cash injection from a major shareholder, customer/supplier, or private equity, venture capital or sovereign wealth fund which results in the investor holding a significant percentage of shares in the issuer (whether as a result of a direct investment and/or by underwriting a broader equity offering).

Depending on the company's circumstances, a PIPE may be more feasible than a traditional equity offering - for example, an existing major shareholder is likely to have different motivations to those of a traditional institutional investor.

A PIPE transaction can take a number of different forms, including:

• A standalone placing of listed shares to one or more cornerstone investors – depending on the size of the fundraising, this may give rise to issues relating to shareholder approval and the requirement for an FCA approved prospectus, as outlined above. One or more cornerstone investors may also underwrite all or part of any associated broader fundraising to gain additional exposure.
• Subscription for a new class of unlisted preference shares – for UK companies this will require shareholder approval but it should be possible to avoid the need for a prospectus as the shares are unlisted. As a practical point, consideration needs to be given to the ability of the company to pay any preferential dividend. The terms of the preference shares more generally would also need to be carefully considered, including any transfer and conversion rights (and associated anti-dilution provisions), and whether a prospectus would be likely to be required to list the resulting shares following conversion.
• Convertible debt – this gives investors downside protection with exposure to potential upside and is likely to require shareholder approval but not a prospectus. It can be structured in a range of ways including through bilateral debt or through loan stock (the latter commonly being referred to as CULS). In addition to the form the debt will take, consideration should also be given to the conversion price/terms and anti-dilution provisions, as well as the potential requirement for a prospectus on conversion.
• Certain investors may prefer to detach the debt element from the equity kicker by having straightforward bonds (or preference shares) coupled with equity warrants, enabling them to deal with the package of rights separately.

Where the investment results in the investor holding a significant position in the issuer, this will also give rise to a range of issues, including:

• Whether the investor will have a contractual right to appoint one or more directors to the issuer’s board and, if so, the mechanics around this, including the process for appointment and the management of information flows.
• The scope of the due diligence exercise – this is likely to be driven by the nature of the investor and whether or not a prospectus is required to be produced. Typically the due diligence required by an existing major shareholder (that is already familiar with the business) will be less extensive than that required by an incoming PE or VC investor. The provision of financial information by the issuer to prospective PIPE investors (already restricted under MAR) is likely to be more challenging in the current environment, due to the impact of potential delays and difficulties associated with the production of audited financial information by issuers and the challenges inherent in providing meaningful trading updates to the market. To the extent any inside information is provided to the investor in due diligence, consideration will also need to be given at the outset as to how this will be cleansed. As a practical matter, the scope and logistics of the due diligence exercise will also need to be considered at the outset in light of current restrictions (as discussed in the context of Bonds above).
• Where the issuer is subject to the UK Takeover Code, the potential requirement for the transaction to be “whitewashed” in order to avoid triggering a mandatory bid obligation on the part of the investor – this applies not only to new share issuances but also to the issue of convertible securities/convertible debt and, broadly speaking, will be relevant in circumstances where the investor and its concert parties will (or may) end up holding 30 per cent or more of the issuer’s voting rights. Typically the Takeover Panel will require the issuer to publish a detailed circular and to convene a general meeting for the transaction to be approved by independent shareholders before the securities are issued. Alternatively, if time is of the essence, an ‘accelerated’ whitewash procedure may be available (essentially where sufficient independent shareholders confirm in writing to the Panel that they are supportive of the transaction), avoiding the need for a pre-vetted circular and shareholder vote. Ultimately, we expect the Takeover Panel may be prepared to flex its approach to some extent in circumstances where the issuer is in severe financial difficulty.
• The need for a relationship agreement with the investor and if required/appropriate, the scope of the provisions to be included for the company’s benefit on the one hand (for example, as to independence, corporate governance, non-compete/non-solicit obligations and management of information flows) and the investor’s benefit on the other (such as contractual board appointment rights, information rights and anti-dilution rights). For premium listed issuers a relationship agreement (or controlling shareholder’s agreement) is mandatory if the investor becomes a controlling shareholder (broadly, holding 30 per cent or more of the issuer’s voting rights) and must contain certain provisions prescribed under the Listing Rules, but it is not unusual for relationship agreements to be entered into by Main Market and AIM listed issuers in circumstances where the investor’s shareholding is significantly below this, particularly where PE or activist investors are involved.

Asset disposals?

Another possible route for raising funds may be the disposal of assets, such as real estate which can be leased back to the business, loan books or other receivables, or assets representing non-core businesses. Whether any of these options are viable will depend on a number of factors including expected market appetite, whether potential purchasers will have the resources and risk appetite to finance an acquisition in the current climate and whether purchasers will be in a position to move with sufficient speed to execution. Further, these factors will have to be balanced against the likelihood of receiving attractive asset prices as well as the potential for ongoing liabilities, for example arising as a result of warranty and/or indemnity comfort required by a buyer.

Key structuring considerations that will be relevant in this context include:

• How are the assets held? Can they be easily spun out of the group? Will any pre-sale restructuring/packaging of the assets for sale be required?
• How will the transaction be structured – as a straight sale or as an equity injection into a subsidiary (effectively creating a joint venture entity)?
• How will the assets be marketed and how much preparatory work and management time will be involved to produce the necessary marketing materials and sale documentation?
• If relevant, will there be appetite in the warranty and indemnity insurance market to extend cover to the deal?
• Will shareholder approval be required for the disposal? For example, where the seller is premium listed, is the transaction sufficiently material to constitute a Class 1 disposal (depressed share prices mean transactions may be more likely to cross the relevant threshold)? For a Class 1 disposal, shareholder approval and publication of a detailed, FCA approved circular will typically be required, although the FCA does have the ability to flex its approach where the company is in severe financial difficulty. Where the counterparty is a related party, additional disclosure and approval requirements may also apply under the related party rules. As mentioned above, the FCA has announced temporary changes to its approach in relation to the requirement to convene shareholder meetings to approve Class 1 and related party transactions as discussed further in our separate briefing COVID-19: UK FCA announces measures to assist listed companies in raising new share capital.  
• Will lender approval be required? Most loan agreements will include a restriction on asset disposals outside the usual course of business.
• Will any merger control or regulatory approvals be required? If so, what impact will this have on the timetable and execution certainty?

For an overview of some of the areas of private M&A transactions which may be affected by the continuing effects of the COVID-19 pandemic, see our separate briefing COVID-19: Private M&A transactions: Issues and emerging trends.

Conclusion

As discussed above, there are a range of potential funding avenues that may be available, all of which come with their own pros and cons. Companies will need to work with their advisers to identify the most appropriate source(s) of finance in light of their specific circumstances – this will be relevant not only in the immediate term but also looking ahead when the focus may move to refinancing or reducing leverage taken on to manage the short term impact of the pandemic.

At Norton Rose Fulbright, we have extensive experience of helping clients navigate the complex legal and structuring issues that can arise in these areas. Please speak to your usual Norton Rose Fulbright contact if you would like to discuss any of the issues raised in this briefing in further detail.