New credit checks needed? Changes to the UK Government’s CCFF scheme to support large businesses

On Friday HM Treasury and the Bank of England announced some important changes to the Covid Corporate Financing Facility (CCFF) that apply with immediate effect. The details of the changes are set out in the Bank of England’s updated ‘questions and answers on the CCFF’ page of its website. In particular:

• Credit quality review for all new issuers: The purpose of the CCFF continues to be the provision of short-term liquidity to fundamentally strong businesses. To ensure that businesses that access the CCFF are strong, all new issuers (including those accessing the CCFF for the first time that have already been approved for issuance and those that have previously accessed it but seek to issue further CP, for example, to refinance maturing CP) will be subject to a new credit quality review. Eligible issuers should notify the Bank of their intention to sell new CP into the CCFF no later than 11am five Business Days prior to their requested sale date. The notification should include the issuer’s recent credit rating or equivalent evidence of investment grade credit quality.
• Further HM Treasury review for issuers that are no longer investment grade: Issuers whose credit rating (or equivalent) has fallen below investment grade will only be able to access the CCFF after a review process with HM Treasury. As part of that review, supporting information will be requested by HM Treasury from such issuers, although at this stage it is not clear what this would involve. The outcome of the review will be communicated to the issuer once the review is complete. The review should be expected to take at least four weeks. HM Treasury may, in its sole discretion, allow an issuer to issue new CP into the CCFF while the review process is underway (on a case-by-case basis on request by the issuer).
• Drawing limit capped for non-investment grade issuers: Issuers whose credit rating (or equivalent) has fallen below investment grade will have their aggregate drawing limit capped at a maximum of £300 million. This will not affect outstanding drawings if already in excess of £300 million.

• No change for issuers that do not intend to issue further: The above changes do not affect outstanding drawings which the CCFF will continue to hold until maturity (unless under the existing terms of the scheme outstanding CP is rolled). Issuers that do not intend to issue further into the CCFF will not be required to provide updated evidence of investment grade status.

This announcement follows earlier announcements that seek to limit use of the CCFF. These include: (1) the Bank of England’s confirmation on 22 September that CCFF will close for new issuance with effect from 23 March 2021 and will also close to new applications from counterparties and issuers looking to become eligible on 31 December 2020; and (2) as discussed in our earlier briefing, the Bank of England’s notice on 19 May that issuers that wish to draw from the CCFF for a term extending beyond 19 March 2021 must provide a “restraint letter” to HM Treasury, committing to suspend the payment of dividends and other capital distributions and “pay restraint for company management” during the period their commercial paper is outstanding, and that from 4 June 2020 the Bank of England will publish weekly the names of CCFF issuers with commercial paper outstanding and the quantity of commercial paper each issuer has outstanding with the CCFF.

According to data published by the Bank of England, since peak usage in April and May in the immediate aftermath of lockdown, CCFF usage has significantly reduced in recent weeks and months, both in terms of weekly usage and in terms of the total stock of CP outstanding. The Bank of England also indicates that the pipeline of new applications to the CCFF has tailed off. This is not surprising: the public debt capital markets have been open in the normal way for several months and investment grade issuers are therefore typically able to access funds using conventional capital raising processes. For issuers still active in the capital markets, the CCFF has therefore already served its purpose and it is therefore no surprise that the Government continues to wind it down. For those issuers that are not able to access the capital markets so easily (either because their funding needs are lower than a minimum benchmark capital markets issuance or because they are not investment grade) the CCFF may still be a welcome alternative.