Canada: Directors fiduciary duty in a pandemic: You need a protocol!
COVID-19 has had and will continue to have impacts on virtually every corporation in Canada and globally.
HM Treasury and the Bank of England have provided further operational details and pro forma documentation in relation to the COVID-19 Corporate Financing Facility (CCFF). This client briefing will be of interest to any large non-financial company that may wish to obtain immediate liquidity funding under the CCFF.
The CCFF is intended to provide liquidity funding to larger non-financial companies that make a material contribution to the UK economy, and which were in sound financial health prior to the impact of COVID-19 (the Coronavirus Business Interruption Loan Scheme is aimed at supporting smaller businesses). The CCFF was announced by HM Treasury and the Bank of England in a market notice issued on March 18, 2020 and supplemented by a further market notice on March 20, 2020.
Under the CCFF, the Bank of England will purchase short-term debt in the form of commercial paper of up to one year in maturity. Companies wishing to use the CCFF are advised to liaise with their banks to confirm 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 headline commercial terms of the CCFF are set out below.
|Eligible Issuers|| Companies1 (including their finance subsidiaries2) that:
|Eligible Securities||Sterling denominated commercial paper with the following characteristics:
|Minimum offer||£1 million nominal|
|Minimum offer increment||£0.1 million nominal|
No specified upper limit, but may be limited by issuer (which will only be disclosed upon request).
Where two or more issuers are part of the same group, an aggregate limit may be applied.
Minimum spread over reference rates based on the current sterling overnight index swap (OIS) curve.
Spreads will be set such that pricing is close to the market spreads prevailing before the economic shock from COVID-19.
Commercial paper purchased in the primary market will be discounted using a rate based on the maturity matched overnight index swap (OIS) rate, as determined on the day of purchase. The respective reference OIS rate will be determined at 09:45 on the day of the operation. Money market yield conventions will be applied. The spread to the OIS rate will vary according to the credit rating of the issuer and will be published in advance on the Bank of England’s website.
Commercial paper purchased in the secondary market will be purchased at the lower of amortised cost from the issue price and the price as given by the method used for primary market purchases, as set out above. The Bank will apply an additional small fee for use of the secondary facility, payable separately, as published on the Bank’s website.
Where an issuer has a split rating, the spread will be that derived from the lowest rating.
The CCFF is available from March 23, 2020 and will close to issuers on December 31, 2020. Issuers already signed up to the CCFF at that date will continue to be able to create new issuances until the closure of the CCFF.
The Bank of England intends to close the CCFF to new purchases on March 23, 2021. Securities with a maturity date beyond March 23, 2021 will be purchased on any day up to and including March 22, 2021.
|Timing||Daily purchases between 10.00 and 11.00|
|Access||Must be via a bank which is appropriately authorised under the Financial Services and Markets Act 2000 (FSMA) and a participant in the CCFF.|
|Published Information||On each Thursday at 15.00, the following information on the use of the CCFF will be published:
The following paragraphs consider certain aspects of the CCFF in more detail:
The Bank of England has advised that companies that can use the CCFF will normally be:
The Bank of England will also consider whether the company3:
Commercial paper issued by banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the Financial Conduct Authority 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 COVID-19, which will generally be determined by reference to credit ratings.
Where available, issuers should have a minimum short-term credit rating of A-3 / P-3 / F-3 from at least one of Standard & Poor’s, Moody’s and Fitch as at March 1, 2020. Where a company has more than one rating, it will not be eligible where one or more of its ratings are below the minimum rating specified above.
Issuers that were at the lowest rating and on negative watch or negative outlook as at March 1, 2020 will be considered.
If an issuer is downgraded after March 1, 2020 below the minimum credit ratings set out above, the issuer will remain eligible for primary and secondary market purchase in the CCFF, subject to HMT approval.
Where a short-term credit rating is not available the Bank will consider whether a long-term credit rating can be used to assess eligibility and pricing, or whether the Bank can assess that the issuer is of equivalent financial strength. Whilst it is not currently clear how such an assessment will be carried out, it is important to note that companies without credit ratings may still be able to access the CCFF. See “Headline terms of CCFF - Eligible Issuers” above.
Where a company does not have an existing credit rating, the Bank of England has suggested that it may be possible to obtain a public rating or a private credit assessment at a recent point in time from one of the major agencies that can be shared with the Bank of England and HM Treasury as evidence of investment grade credit quality. The Bank of England is speaking with the credit rating agencies on this subject.
If a company has an existing commercial paper programme, it should be possible to use that existing programme to issue eligible securities for the CCFF. The most notable requirements for those issuers intending to use existing an programme are:
If the existing programme satisfies all applicable eligibility criteria and this has been confirmed with the assisting bank, the relevant issuer can apply by submitting an application form and supporting documents (see How to Participate below).
Where there is no existing programme, eligible securities will need to be issued, either under a new programme or a standalone issuance. In either case, the key determinants of how quickly commercial paper can be issued are likely to be the appointment of parties (in particular, a dealer and paying agent), agreement of the legal documentation and delivery of condition precedent documents.
In terms of documentation:
Unless the company intends to be a regular issuer of commercial paper, a standalone programme based on the ICMA standard documents is likely to be the most straightforward option for prospective new issuers of commercial paper.
In addition to the CCFF application documents discussed below (see How to participate below), the condition precedent documents to be delivered for an issuance of commercial paper would typically include:
In addition to the eligibility requirements, stakeholders will need to consider the impact on any existing financing arrangements, in particular whether the issuance of commercial paper is permitted. This is important given that the Issuer will be required to represent and warrant to the Bank that the issue of the commercial paper will not conflict with, or violate, an agreement or instrument binding on it and the Bank’s obligation to fund is also subject to a draw stop event where any event of default, default termination, acceleration event or termination event has occurred.
This will generally require a review of existing finance documents to determine if the issuance of commercial paper is permitted under, in particular, any restrictions on the incurring of financial indebtedness, any restrictions on granting guarantees and security by any obligor under existing financing (given the requirement to notify the Bank of any security or guarantees created and to offer equally and rateably such guarantees and security to the Bank, the knock-on impact on existing financial covenants on issuing commercial paper.
The existing contractual position may influence whether the commercial paper is issued via an existing company or a special purpose vehicle to issue the commercial paper, noting that where a special purpose vehicle is used, the requirement for a primary entity guarantee may also require consent under existing financing documents and there are similar representations in the standard form guarantee to those set out above as to the authority and ability for the guarantor to give such a guarantee without these breaching or conflicting with other agreements binding on the guarantor.
To the extent consents or waivers are required there is, as yet, no mention of legislation being introduced to override any provisions in existing finance documents related to a company’s existing financial indebtedness or to shorten the period for obtaining their consent by imposing short “snooze and lose” voting periods. Will the company seek a waiver or amendment of any restrictions on incurring further debt? Will existing financiers be able to react in time or will a company access the CCFF notwithstanding such restrictions, assuming existing creditors will be supportive and/or the needs of the business should prevail? In any event, early engagement and stakeholder management will be key. Consideration will also need to be given by Issuers as to whether they can give the representations and warranties as to its solvency (or where these have arisen as a result of the COVID-19 outbreak these have been disclosed to the Bank).
The directors of the Issuer will need to consider carefully in the current circumstances whether they should incur further debt in the form of the programme. In particular, given the relatively short-term maturity of the commercial paper, whether they can reasonably conclude that they will be able to repay this upon its maturity, or whether other arrangements will be put in place at that time to see it refinanced, repaid, settled or waived. In light of companies and groups facing huge financial difficulties at the current time, the directors will need to take advice as to whether they can benefit from the programme without the risk of personal liability.
The Issuer Eligibility Form requests that the issuer is to provide certain information and/or confirmations, including:
The Issuer Undertaking and Confidentiality Agreement contains:
Issuer Undertaking and Confidentiality Agreement incorporates the Operating Procedures. The Operating Procedures document governs participation in the CCFF, explains the operational procedures of the CCFF and also incorporates the CCFF Terms and Conditions (as defined and discussed below).
We anticipate that in many cases, Companies will wish disclose to their shareholders and creditors that they have obtained funding under the CCFF and note that this would appear to be excluded by the confidentiality undertaking. The form of confidentiality undertaking includes a customary carve-out for information that “is required to be disclosed by law, regulation or any governmental or competent regulatory authority”. This carve-out should permit disclosure to the market where required under applicable market abuse legislation but would not permit disclosure to other parties (even where disclosure would be required as a contractual obligation). This is a matter that will require careful consideration and on which regulatory guidance would be helpful.
Where securities are issued by a finance subsidiary, the issuer must provide a guarantee from the primary entity of their group. If the primary entity is not incorporated in the United Kingdom, the guarantor should also provide a legal opinion on the guarantee. Both documents should follow the pro forma documents on the Bank of England’s website (see How to Participate below).
Prospective issuers should note that pro forma form of guarantee includes a representation that the guarantee does not conflict with “any agreement or instrument binding upon the Guarantor”.
Upon being accepted, the issuer will receive an Admission Letter which incorporates the Terms And Conditions For Counterparties in the Covid Corporate Financing Facility (the CFF Terms and Conditions). The CFF Terms and Conditions largely repeat the representations made in the Issuer Undertaking and Confidentiality Agreement; the same issues already discussed in Issuer Undertaking and Confidentiality Agreement above will apply with the addition of the following:
Eligible companies wishing to access the CCFF will need to confirm their eligibility with an appropriate bank and complete the following forms:
|Issuer Eligibility Form||Sets out administrative details in relation to the issuer and commercial paper programme.
Requests the issuer to provide certain information and confirmations.See Considerations - Issuer Eligibility Form above.
|Issuer Undertaking and Confidentiality Agreement||
Incorporates Operating Procedures.See Considerations - Issuer Undertaking and Confidentiality Agreement above.
|Guarantee (if required)||Pro forma guarantee to be provided by primary entity (if required).|
|Legal Opinion in relation to Guarantee (if required)||Pro forma legal opinion to be provided by issuer legal counsel in respect of Guarantee where the primary entity is not incorporated in the United Kingdom, the guarantor should also provide a Legal Opinion on the Guarantee|
The forms are available here.
In addition to the above, the following supporting documents will need to be provided with the application:
Completed documentation should be sent to CCFF-Applications@bankofengland.co.uk.
We can advise on:
COVID-19 has had and will continue to have impacts on virtually every corporation in Canada and globally.
As business resumes in the workplace and circumstances change, American companies must be ready.