Following the Treasury and the Bank of England’s (BoE) unveiling of the Covid Corporate Financing Facility (CCFF), James Lawson, corporate finance director at MHA MacIntyre Hudson, says that many medium-sized businesses likely face significant barriers to accessing urgently needed capital.
The goal of CCFF is to facilitate credit supply for large and medium-sized UK businesses in ‘sound financial health’ prior to the coronavirus economic shock, enabling them to issue short-term commercial paper purchased with central bank reserves to maintain liquidity. While a laudable initiative the assessment criteria for access to the scheme appears restrictive, especially for medium-sized and entrepreneurially owned companies.
The BoE emphasises the clearest way of being able to demonstrate ‘sound financial health’ is to have an existing investment-grade short-term rating of A3/P3/F3/R3 or above, or a long-term rating of BBB-/Baa3/BBB- from one of the large credit ratings agencies. Companies without an existing credit rating are not excluded from applying, however a large swathe of UK businesses have not needed them historically.
The BoE will consider internal ratings from these applicants’ incumbent bank, but also recommends they seek a credit quality assessment from a credit ratings agency. This creates additional ‘red tape’ in a fast-changing business environment.
Many businesses are likely to be dissuaded from exploring CCFF funding in the belief they will not meet investment-grade credit requirements. A natural ‘gap’ may emerge where medium-sized businesses are left out in the cold as too small for CCFF, but too large for the Treasury’s Coronavirus Business Interruption Loan Scheme (CBILS).
Businesses in need of funding should not immediately assume they won’t be eligible but those without an existing investment grade credit rating have more work ahead of them to secure it in an already tumultuous time. Companies considering CCFF funding will need to ensure they have up to date financial information available, so they are fully armed with proof of their financial health prior to 1 March 2020.