March 24, 2020
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Update 3/25/2020: The Bank of England has confirmed that applications to access CCFF may be made accompanied by confirmation from a range of the issuer's credit counterparties that they internally considered the issuer equivalent to investment grade as at 1 March 2020 in lieu of the issuer providing an investment grade rating from Moody's/S&P/Fitch/DBRS.
Update 3/24/2020: DBRS is also an approved rating agency for the purposes of evidencing an investment grade rating.
On March 17, 2020, the Chancellor Rishi Sunak undertook to do “whatever it takes” to support U.K. business through the economic challenges created by the COVID-19 pandemic including providing up to £330 billion of government supported credit. In the same speech, the Chancellor also alluded to a potential specific support package for “airlines and airports.”
It remains to be seen if more tailored government credit support is to be made available to the airport sector but in the interim businesses affected by COVID-19, including airports, are considering if the CCFF could be a helpful source of liquidity during the months ahead.
In this article, we consider the suitability of the CCFF for U.K. infrastructure businesses and in particular U.K. airports.
The COVID Corporate Finance Facility/CCFF is a facility administered by the Bank of England on behalf of HM Treasury whereby HM Treasury will purchase commercial paper (a (usually unsecured) debt instrument with a maturity of less than one year) issued by eligible issuers to help them bridge cashflow disruption caused by the COVID-19 pandemic. Applications to utilize CCFF opened on March 23, 2020, and the Bank of England has indicated that the CCFF will remain open for at least 12 months with 6 months notice being given of its withdrawal. The minimum issuance is £1,000,000 and issuances must be increments of £0.1 million. Pricing published by the Bank of England on March 23, 2020, is set out below and is based on market spreads prior to the COVID-19 pandemic.
CCFF PRICING |
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|
SPREAD OVER REFERENCE RATE (BPS) |
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A1 Short Term Rating (Long Term Equivalent Rating: A to AAA) |
20 |
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A2 Short Term Rating (Long Term Equivalent Rating: BBB+ to A3) |
40 |
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A3 Short Term Rating (Long Term Equivalent Rating: BBB- to BBB) |
60 |
U.K. infrastructure businesses seeking to utilize the CCFF must make an application to the Bank of England which has published eligibility criteria. The first eligibility criteria for acceptance to the CCFF is that the relevant business makes a “material contribution to the U.K. economy.” This will be tested by reference to whether the business is U.K. incorporated (but the CCFF is also open to foreign incorporated parent companies provided the relevant subsidiary has a genuine business in the U.K.), has significant U.K. employment, revenues, operating sites or serves significant U.K. customers. We do not anticipate that U.K. infrastructure businesses will have any issues in meeting this eligibility criteria.
The second major eligibility criteria is that the relevant business demonstrates that it was in “sound financial health” immediately prior to the COVID-19 pandemic. The Bank of England intends businesses to evidence satisfaction of this criteria through a short term credit rating of at least A3 or a long term credit rating of at least BBB-/Baa3.
Many U.K. infrastructure businesses have solidly investment grade capital structures but do not maintain a credit rating. For those business the Bank of England has suggested that the business approach Moody’s, Fitch or S&P to obtain a private credit rating as at March 1, 2020, which can be shared with the Bank of England. As long as the issuer can show that it was investment grade prior to the COVID-19 pandemic, any subsequent loss of an investment grade rating does not affect the ability of the issuer to access the CCFF.
The Bank of England has reserved the right to accept other evidence of “sound financial health” outside of ratings from Moody’s, Fitch and S&P. Given the prevalence of USPP issuances in the U.K. infrastructure sector some issuers may want to ask the Bank of England to consider accepting evidence of NAIC2 accreditation (an investment grade equivalent accreditation from the regulator of the USPP market which the majority of USPP issuers in the U.K. infrastructure will already have) in lieu of a private credit rating or an investment grade rating from DBRS or Kroll (common rating agencies for USPP issuances).
Considerations for U.K. infrastructure businesses considering utilizing CCFF include:
Potential refinancing risk created by issuing debt with a maturity of less than one year – are longer dated working capital facilities available from other credit providers including the business’s relationship banks and investors?
While commercial paper is usually unsecured, the CCFF application documentation unsurprisingly suggests that where security is in place the CCFF would expect to share in that security. Consideration should be given as to whether the relevant business’s capital structure is set up for the CCFF to share in security and guarantees. This may be relatively easily achieved by those borrowers who have platform or multi-creditor financing structures but will require a more wholesale adaptation of intercreditor arrangements for those who do not.
What permissions or waivers are required under existing debt documentation? The debt documentation of many U.K. infrastructure businesses will include parameters on raising additional indebtedness including in relation to leverage levels and the maturity profile of new indebtedness.
Those small or medium U.K. infrastructure businesses with a turnover of less than £45,000,000 per year should consider whether a loan of up to £5,000,000 under the government’s Coronavirus Business Interruption Loan Scheme would offer appropriate liquidity as an alternative to the CCFF.
As highlighted above issuing commercial paper is not necessarily an obvious fit for the capital structures of some U.K. infrastructure businesses. As such we have asked the Bank of England and the Infrastructure and Projects Authority (IPA) if they could consider making government guarantees of working capital facilities available to U.K. infrastructure businesses in the form previously issued under the U.K. Guarantee Scheme for infrastructure project development in the U.K.
An IPA guarantee in this form would provide a government guarantee of debt provided by financial institutions (in loan, privately placed note or bond form) to U.K. infrastructure borrowers allowing them to access liquidity at a low cost. In our view the benefits of this would include (i) utilizing U.K. guarantee standard form documentation which the infrastructure market is highly familiar with, (ii) taking advantage of the IPA’s deep understanding from a credit perspective of U.K. infrastructure and (iii) allowing
U.K. infrastructure businesses to obtain longer term financing than available under the CCFF thus reducing refinancing risk.
The required intercreditor position of the IPA when issuing such guarantees would need consideration as depending on the position taken by the IPA, amendments to existing intercreditor agreements may be required but this may be more palatable to existing financing providers than short dated paper sharing in transaction security.
On the basis that the IPA has significant internal credit expertise relating to U.K. infrastructure (usually used to analyze projects applying for the U.K. Guarantee Scheme) we have also asked the Bank of England and the IPA if the IPA could provide the Bank of England with comfort on the “sound financial health” of U.K. infrastructure businesses applying to utilize the CCFF as an alternative to those businesses obtaining a private credit rating.
Borrowers wishing to utilize the CCFF should (i) engage with the Bank of England and start preparing a CCFF application, (ii) appoint a FSMA regulated financial institution who will act as its commercial paper dealer and sell the commercial paper to the Bank of England on its behalf, (iii) start preparing the CCFF commercial paper documentation and obtain necessary permissions under current financing arrangements and (iv) in the absence of alternative guidance from the Bank of England appoint a ratings advisor to assist with the rating process and the engagement of Moody’s, Fitch or S&P.
We are very happy to discuss this process with U.K. infrastructure businesses who are considering utilizing the CCFF and can assist with the required documentation and CCFF application.
We will continue to lobby the Bank of England and IPA on the issues raised in this article and provide updates when available.
Update: As of 3/24/20 DBRS is also an approved rating agency for the purposes of evidencing an investment grade rating.
Update 3/25/2020: The Bank of England has confirmed that applications to access CCFF may be made accompanied by confirmation from a range of the issuer's credit counterparties that they internally considered the issuer equivalent to investment grade as at 1 March 2020 in lieu of the issuer providing an investment grade rating from Moody's/S&P/Fitch/DBRS.
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