On 17 March 2020, HM Treasury announced the Covid Corporate Financing Facility (CCFF) as part of a wider package of tax and economic support measures designed to minimise the disruption caused to businesses during the Coronavirus pandemic.
The CCFF became operational from 23 March 2020. It is a joint scheme operated by HM Treasury and the Bank of England lending facility that is designed to support liquidity among “larger” firms, helping them to bridge Coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper (an unsecured, short-term debt instrument issued by a company) on terms comparable to those prevailing in markets in the period before COVID-19.
The scheme is open to companies that can demonstrate that they were in sound financial health prior to the impact of Coronavirus. However, to qualify for the scheme the companies must qualify as an “eligible issuer” and the commercial paper they are issuing must meet certain “eligible securities” criteria.
By purchasing commercial paper, the scheme provides a way to raise working capital for larger companies (although we note that size has not been defined anywhere) that are fundamentally strong but are experiencing disruption to cashflows, helping businesses across a range of sectors to pay wages and suppliers.
During a defined period each business day, the CCFF will purchase newly issued commercial paper in the primary market via dealers and from eligible counterparties in the secondary market. Purchases made under the CCFF will be financed by central bank reserves.
Companies that wish to participate in the scheme must do so via a bank.
Which companies are eligible?
The CCFF can be used by companies (and their finance subsidiaries) “that make a material contribution to the UK economy”. In practice this would typically 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; and
- Businesses headquartered in the UK.
The Bank of England has stated that it will also consider a number of other factors, such as whether the company:
- Generates significant revenues in the UK;
- Serves a large number of customers in the UK; or
- Has a number of operating sites in the UK.
Securities issued by a finance subsidiary will need to be guaranteed by the parent company in a form acceptable to the Bank of England.
The company must be able to demonstrate that it was in sound financial health prior to the shock, the Bank of England to assess the temporary impacts on firms’ balance sheets and cashflows from the Coronavirus disruption itself.
This is stated to mean companies that had a short or long-term rating of investment grade or equivalent as at 1 March 2020 from at least one of S&P, Moody’s, Fitch or DBRS Morningstar, ie either:
- A short-term rating of A3, P3, F3, R3 or above; or
- A long-term rating of BBB-, Baa3, BBB or above.
If a firm has different ratings from different credit rating agencies (CRAs), then their commercial paper will not be eligible if one of those is below investment grade.
Provided the company can demonstrate good financial health prior to 1 March 2020, it will remain eligible to participate in the facility, subject to HM Treasury approval, even if it gets downgraded after 1 March 2020 or its financial health deteriorates.
The CCFF is designed for larger businesses, but size is not defined. Therefore, it appears that there is no minimum size restriction, however in practice smaller companies may find it difficult to obtain a credit rating.
What commercial paper is eligible?
The CCFF will purchase sterling-denominated commercial paper, with the following characteristics:
- Maturity between one week and 12 months;
- Where available, a credit rating of A-, /P-3, F-3 or R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020; and
- Issued directly into Euroclear and/or Clearstream.
Commercial paper with non-standard features such as extendibility or subordination will not be eligible.
Commercial paper will not be eligible if issued by:
- Banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the Financial Conduct Authority; or
- Leveraged investment vehicles or from companies within groups which are predominantly active in businesses subject to financial sector regulation.
You do not need to have issued commercial paper prior to using the CCFF. If you would like to use the facility and have not issued commercial paper before, you should contact your bank.
It is important to note that not all banks issue commercial paper. If your bank does not issue commercial paper, UK Finance will provide a list of banks that are able to assist.
If your commercial paper is eligible for the scheme, your bank will help you to issue it to the CCFF.
Steps for companies with no existing credit rating
Where a company does not have an existing credit rating from the major credit ratings agencies, the Bank of England guidance provides two potential courses of action to take:
1. Speak to the company’s existing bank in the first instance:
If that bank’s advice is that the firm was viewed internally as equivalent to investment grade as at 1 March 2020, then email the Bank of England at [email protected] to discuss potential eligibility.
The Bank will then make an assessment of whether the company can be deemed as equivalent to having a public investment grade rating. This assessment will draw on a range of information, including the range of banks’ internal ratings across all of a firm’s commercial bank counterparties.
A company will need to be rated consistently by its banks as investment grade in order to be deemed equivalent to having a public investment grade rating.
2. Seek appropriate evidence of investment grade credit quality
The company or its bank should contact one of the major CRAs to seek an assessment of credit quality in a form that can be shared with the Bank of England and HM Treasury, noting that the purpose of the assessment is to use the CCFF.
The following products are currently envisaged as suitable evidence of investment grade credit quality:
- Moody’s Investor Services: long and short-term public corporate credit ratings; or, for those approaching CRAs for the first time, ‘indicative ratings’ (private) at a recent point-in-time.
- Standard & Poor’s Ratings Services: long and short-term public corporate credit ratings or, for those approaching CRAs for the first time, Credit Assessments (CAs) at a recent point-in-time.
- Fitch: long and short-term public corporate credit ratings; or, for those approaching CRAs for the first time, a credit opinion (private) at a recent point-in-time – a form of Fitch ‘credit opinion’ incorporating a rating rationale would be preferred, if available.
- DBRS Morningstar: for those approaching CRAs for the first time, a point in time private credit assessment.
For an individual security, the minimum size that the CCFF will purchase from an individual participant is £1 million nominal.
Applications are required to be rounded to the nearest £100,000.
Terms for the facility will match those prevailing in markets prior to the Coronavirus disruption.
Primary market purchases: The BoE will purchase securities at a spread above a reference rate, based on the current sterling overnight index swap (OIS) rate. The respective reference OIS rate will be determined at 09:45 on the day of the operation.
Secondary market purchases: The BoE will purchase commercial paper 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 BoE will apply an additional small fee (currently set at 5 basis points and subject to review) for use of the secondary facility, payable separately.
Duration of the scheme
The facility will operate “for at least 12 months and for as long as steps are needed to relieve cash flow pressures on firms that make a material contribution to the UK economy”.
Note: the contents of this document are based upon latest information available at time of publication 30 March 2020 at 5.00pm and subject to change as further details are published.