As part of the UK government’s response to economic disruption due to COVID-19, HM Treasury and the Bank of England have jointly established the Covid Corporate Financing Facility (CCFF). The CCFF will offer temporary financing to investment grade companies in the UK to assist with their cashflow and working capital funding requirements whilst such companies are adversely affected by COVID-19 disruption, so that they can continue trading and maintain their operations during this period.
The CCFF has similar aims to the UK government’s Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS), as CCFF, CBILS and CLBILS will all provide financial assistance from the UK government to business to assist them to continue trading. The differentiating factor between the three schemes is that the CCFF is aimed solely at assisting investment-grade companies, whereas the CBILS is aimed at assisting small and medium sized businesses, and the CLBILS aimed at assisting businesses that are not eligible for assistance under the CCFF or the CBILS due to their size. King & Wood Mallesons’ summary on CBILS can be found here and its summary on the CLBILS can be found here.
Set out below is a summary of the main aspects of the CCFF, including eligibility criteria for obtaining access to the CCFF.
The CCFF facility
The CCFF is a facility whereby The Covid Corporate Financing Facility Limited (the Fund), a subsidiary of the Bank of England, will purchase commercial paper (CP) from eligible issuers on each business day during a defined period. The CCFF is intended to initially operate for 12 months, which may be extended by the UK government should the need arise. At this point in time, counterparties and issuers must be approved by 31 December 2020 for participation in the CCFF. The Bank of England has confirmed that it will give at least six months prior notice of the withdrawal of the CCFF, with the current intention of allowing counterparties and issuers to sell CCFF eligible CPs to the Fund up to 23 March 2021.
Purchases of CCFF eligible CPs by the Fund will be funded from central bank reserves.
CCFF Eligible Issuers
The Bank of England has stated that the CCFF is open to participation by companies that make a material contribution to the UK economy. Eligibility decisions will be determined by the Bank of England’s risk management team, and determination of eligibility will be made on a case-by-case basis based on several different factors.
The Bank of England has elaborated on the types of characteristics that it will expect companies to exhibit in order to be considered eligible issuers of CPs for the purposes of the CCFF. Some of these are as follows:
companies incorporated in the UK with a genuine business in the UK, noting that foreign ownership of such companies will not be a bar to potential participation in the CCFF;
companies with significant employment in the UK;
companies with headquarters in the UK;
companies generating significant revenues in the UK, serving a large number of customers in the UK or with a significant number of operating sites in the UK; and
companies that had a short-term or long-term credit rating of investment grade as at 1 March 2020, as a threshold test to demonstrate sound financial health prior to the onset of COVID-19 economic disruption.
The Bank of England has also confirmed factors that will deem a company as ineligible to participate in the CCFF even if these companies can demonstrate that they are material contributors to the UK economy as set out above. These exclusions are:
banks, building societies, insurance companies and other financial sector entities regulated by the Bank of England or the Financial Conduct Authority;
leveraged investment vehicles or companies within groups that are predominately active in businesses subject to financial sector regulation;
public bodies or authorities; or
entities governed by public law or public undertakings (a public undertaking will be considered to be an undertaking which the State or other regional or local authority may directly or indirectly exercise a dominant influence by way of ownership, financial participation or rules governing it).
The Bank of England has confirmed that its minimum threshold of investment grade will require a rating by at least one of the major credit rating agencies (S&P, Moody’s, Fitch or DBRS Morningstar) of:
Where a company has different ratings from different credit rating agencies, none of the ratings may be below investment grade otherwise that company will be deemed to be ineligible.
Where a company doesn’t yet have a credit rating from a major credit rating agency, a company may still be eligible to participate in the CCFF if it has been rated as investment grade by several of the major UK banks. Alternatively, companies could contact one of the major credit rating agencies to discuss such agencies making a credit assessment as at 1 March 2020 to facilitate eligibility to participate in the CCFF.
As the credit rating assessment will be as of 1 March 2020, any subsequent credit downgrading below investment grade will not of itself deem a company ineligible to participate in the CCFF.
If a company would meet eligibility criteria as an issuer but hasn’t yet issued any CPs to the market, this of itself will not be a bar to eligibility for the CCFF. As participation in the CCFF will require issue of CPs, further preparatory steps will need to be taken to facilitate eventual issue of CPs and therefore participation in the CCFF.
CCFF Eligible CPs
In order for a CP to be eligible to be sold to the Fund as part of the CCFF, CPs must meet the following criteria:
issued by a CCFF eligible issuer that has been confirmed prior to the date of offer and denominated in pounds sterling;
maturity between one week and 12 months;
the issuer meeting the minimum short-term credit rating of investment grade as set out above (the Bank of England has said that it will consider eligibility at the lowest rating for an issuer where they were on negative watch or negative outlook as at 1 March 2020);
where there is no short-term credit rating available, long-term credit rating of investment grade or equivalent financial strength will be considered;
CPs being issued directly into Euroclear and/or Clearstream;
CPs with standard features issued using ICMA market standard documentation or simplified versions of ICMA standard documents, governed by English law and subject to the jurisdiction of the English courts; and
where the issuer is a finance subsidiary, the parent of the finance subsidiary has provided an acceptable guarantee directly to the Bank of England.
CPs with non-standard features such as extendibility or subordination will be deemed to be ineligible for participation in the CCFF.
The Bank of England has reserved the right to deem ineligible CPs that were previously deemed to be CCFF eligible CPs, and also to subsequently approve eligibility of CPs that were previously deemed ineligible for participation in the CCFF.
Process of participation in the CCFF
Prior to a CCFF eligible issuer being able to participate in the CCFF, the CCFF eligible issuer must first confirm with the Bank of England that its CPs are in fact CCFF eligible CPs. This is done by way of application to the Bank of England, which will include providing details of the CPs intended to be issued and sold to the Fund. The Bank of England will then confirm to the issuer whether the CPs are CCFF eligible CPs.
Provided that the Bank of England has confirmed eligibility of CPs by 16:00 on a business day, a CCFF eligible issuer will then be able to sell CCFF eligible CPs to the Fund from the next business day onwards. Offers to sell CCFF eligible CPs will need to be made to the Bank of England’s sterling dealing desk between 10:00 and 11:00 on a business day by phone or email. The minimum size of offer will be £1 million nominal, with increments of £0.1 million nominal.
CCFF eligible CPs can be sold to the Fund in the secondary market or in the primary market directly to the Fund. For secondary market sales, counterparties will need to provide the ISIN and ticker of the CP, the original issue price and date or the money market yield on an amortised cost basis, the maturity date of the CP and the nominal amount offered. For primary market sales, counterparties will need to provide details of the issuing entity, the CP programme under which the CCFF eligible CPs are issued from, the nominal amount offered and the maturity date.
Issuers operating in the primary market may also be subject to holding limits, and where there is more than one issuer for a corporate group, an aggregate limit may apply to that corporate group. Confirmation of any holding limits can be requested by the issuer. Issuers in the primary market will also be limited to sales from one dealer per business day.
Following an offer being made to the Fund, the Bank of England’s sterling dealers will subsequently confirm whether an offer has been accepted and if so, the cash amount relating to the sale (and for primary market sales, the maturity date using the “modified following” convention). Counterparties of primary market purchases will also need to provide the ISIN of the new CPs following the Fund’s acceptance of the offer to purchase the CPs.
CCFF eligible CPs acquired through the CCFF will be purchased at a spread above a reference rate based on the current sterling overnight index swap (OIS) curve, with the spread set at close to the market spreads that were available prior to the onset of economic disruption from COVID-19.
CCFF eligible CPs purchased in the primary market will be discounted using a rate based on the maturity-matched OIS rate. The reference OIS rate will be determined by the Bank of England at 9:45 on the day of the purchase. The spread to the OIS rate that will apply to a purchase will be based on the credit rating of the CCFF eligible issuer, with spreads published in advance on the Bank of England’s website.
CCFF eligible CPs purchased in the secondary market will be purchased at the lower of amortised cost from the issue price and the price determined using the pricing methodology for purchases of CCFF eligible CPs on the primary market. A separate fee will be payable for purchases on the secondary market, with details of the fee published on the Bank of England’s website.
Counterparties selling CCFF eligible CPs will also need to pay or reimburse all costs, charges, fees and other expenses of the Bank of England relating to the purchase of the CCFF eligible CPs.
Publication of CCFF purchase information
The Bank of England will provide information weekly on the use of the CCFF. On Thursday of each week, the Bank of England will publish the total amount paid to sellers of CPs purchased under the CCFF for the week ending the day prior to publishing date and the total sum of CPs purchased, less redemptions, under the CCFF since the CCFF commenced in March 2020.
The Bank of England has confirmed that the names of counterparties, issuers, CPs that have been purchased under the CCFF or that are CCFF eligible CPs will not be publicly disclosed.
King & Wood Mallesons’ Banking & Finance team are available to discuss your queries on all areas of finance and financial markets law, please contact Khai Nguyen or Vanessa Docherty in our London office.