Accessing the Covid Corporate Financing Facility: A step by step guide

Accessing CCFF - Background

HM Treasury ('HMT') has announced that the Bank of England ('the Bank') will operate on behalf of HMT a new COVID-19 Corporate Financing Facility ('CCFF'). CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity.

On 18 March 2020 HMT and the Bank published a Market Notice ('the Notice') setting out initial details of the CCFF. According to the Market Notice, the facility will operate through the Covid Corporate Financing Facility Limited ('the CCFF Fund') which will purchase commercial paper ('CP') in the primary market via dealers and in the secondary market from eligible counterparties at a minimum spread over reference rates during a defined period each business day. An updated consolidated version of the Notice was published on 19 May 2020, which was further updated on 26 May 2020. The Notice can be found here.

The scheme envisages the issuance by eligible issuers of commercial paper. On 23 March 2020, the Bank published further information and documentation for the CCFF which can be found here as well as terms and conditions, which can be found here ('the CCFF Terms and Conditions') and operating procedures, which can be found here ('the CCFF Operating Procedures'). These were further updated during May 2020, most recently the CCFF Operating Procedures were updated on 28 May 2020. 

Update to the terms of the CCFF - 19 May 2020

From 4 June 2020, the Bank and HM Treasury intend to disclose the names of the issuers that have outstanding CP issued into the CCFF and the aggregate amounts that each issuer has issued

HM Treasury and the Bank have announced that they will include in their weekly publications the names of the issuers and/or the names of entities in the issuer's group that have accessed the CCFF and the aggregate amount of CP issued under the CCFF. Both the CCFF Counterparty Terms and Conditions and the Issuer Confidentiality and Undertaking Letter have been amended so that both counterparties and issuers acknowledge and agree to such publication by the Bank.

A CCFF issuer may now request that the Bank sells the CP back to the issuer

From 19 May 2020, the Bank will provide a standing offer to sell back the CP held by the Fund to the issuer, on request, of such CP in advance of its maturity date, with the aim of giving businesses greater flexibility to exit the CCFF in an orderly way where they are able to access alternative sources of funding, for example in capital markets.

The Bank will sell CP back at the higher of either (a) the amortized cost from the price at which the Fund purchased the CP, or (b) the current price as given by the method used for primary market purchases of equivalent maturity from the same issuer. 

For buy backs from 1 July 2020, the Bank will apply a fee to be set at 5 basis points and kept under review, which will be deducted from the yield offered in the re-sale transaction before calculating the final price and cash proceeds. The fee will not be applied to resale transactions entered into on or before 30 June 2020.

The minimum size of CP that the CCFF Fund will sell back to an issuer will be the lower of £1 million nominal or the full amount held by the CCFF Fund. The amount requested should be expressed in increments of £0.1 million nominal. 

Buy back of CP by issuers may be subject to such other terms and conditions as the Bank may specify in its absolute discretion. The Bank and the CCFF Fund reserve the right to reject any request from an issuer to repurchase CP from the CCFF Fund for any reason. 

New measures introduced to impose additional conditions on new CCFF issuances – restrictions on capital distributions and senior pay for additional CCFF issuances above limits or for CP that matures on or after 19 May 2021

An issuer may be required to provide a letter addressed to HM Treasury that commits to showing restraint on the payment of dividends and other capital distributions and on senior pay during the period in which their commercial paper is outstanding if (a) an increase in the issuer's limit is requested and approved by the Bank; and/or (b) a CCFF transaction is entered into and CP maturing on or after 19 May 2021 is issued.

Issuers are required to acknowledge and agree in the Issuer Undertaking and Confidentiality Letters that the Bank may publish information on whether or not the issuer (or another entity in the issuer's group) has delivered such a letter to the Bank or HMT in connection with the CCFF. The form of this letter can be found here.

An issuer may request an increase in their CCFF limit, by submitting an application indicating its desired limit. Such increases will be subject to detailed engagement between the issuer and HM Government to understand whether the company has sought alternative sources of financing, and to discuss repayment strategies. The cost of borrowing will be higher for drawings that an issuer makes above its initial limit.

Summary of steps for accessing the CCFF

Set out below is a summary of the steps required to be taken, which are further described in more detail below: 

Step 1: Check whether the company wishing to access the CCFF is able to meet the required issuer eligibility and ratings criteria.

Step 2: Contact a bank that has been approved by the Bank as a dealer to take part in the CCFF and also start the process to obtain a rating if required.

Step 3: If a company does not have an existing CP programme, establish a CP programme to issue CPs that meet the CCFF eligibility criteria.

Step 4: Once a CP programme is in place, apply to the Bank to access the CCFF and send the Bank the required documentation.

Step 5: Once the Bank confirms eligibility, the company will be required to sign an Admission Letter confirming agreement to the CCFF Terms and Conditions. Once eligibility has been confirmed, securities can be eligible for sale the following day.

Step 1: check issuer eligibility

Check whether the company wishing to be admitted into the CCFF is likely to meet the required issuer eligibility and ratings criteria.

The Bank has specified that the following criteria need to be met by an issuer in order for it to be permitted to participate in the CCFF.

Companies who are considering setting up a CP programme may complete the issuer and group information sections of the Issuer Eligibility Form (further details below) and submit the partially completed form to the Bank in order to obtain an early indication from the Bank of their potential eligibility as an issuer under the CCFF.  

Issuer Eligibility Criteria

Companies (including their finance subsidiaries) that make a material contribution to economic activities in the United Kingdom are able to participate in the CCFF. Eligibility will be a question for risk management staff at the Bank but the following guidance has been provided.

Normally the following issuers will be eligible:

• UK incorporated companies with a genuine business in the UK (including those with foreign incorporated parents);
• Companies with significant employment in the UK;
• Companies with their headquarters in the UK and
• Housing Associations that meet certain criteria.

The following issuers will be considered for eligibility:

• Companies that generate significant revenues in the UK, serve a large number of customers in the UK or have a number of operating sites in the UK.

The following issuers will not be eligible:

• Banks, building societies, insurance companies and other financial sector entities regulated by the Bank or the Financial Conduct Authority.
• Leveraged investment vehicles, companies within groups that are predominantly active in businesses subject to financial sector regulation.
• Public undertakings.

In principle, entities that meet the above criteria and do not currently issue CP but are capable of doing so will be eligible, providing they meet the ratings and if the CPs meet the eligible securities criteria.

Issuer Ratings Criteria

The issuer will need to demonstrate that is is in sound financial health. The clearest way to demonstrate this test is to have, or acquire, a rating.  The requirements are as follows:

• Where available, minimum short term credit rating of A-3/P-3/F-3/R3 or a long-term rating of BBB-/Baa3/BBB-/BBB (Low) from at least one of S&P, Moody's, Fitch or DBRS Morningstar as at 1 March 2020.
• If firms have different ratings from different agencies, and one of those is below investment grade then the commercial paper will not be eligible.
• If an issuer is downgraded after 1 March 2020 below the above minimum rating criteria, it will remain eligible for primary and secondary market purchase in the Facility, subject to HMT approval..

If a company does not have an existing credit rating from the major credit ratings agencies, the company should speak to their bank in the first instance. If that bank’s advice is that the company was viewed internally as equivalent to investment grade as at 1 March 2020, then the Bank should be contacted through CCFFeligibleissuers@bankofengland.co.uk to discuss potential eligibility. The Bank will accept banks' internal ratings of corporates to assess credit status. Further to a request confirmed by HM Treasury, Credit Benchmark has provided a credit assessment file to the Bank, which consolidates, in aggregate form, the corporate credit estimates of a number of the largest UK banks.

In order for a company to be considered as having investment grade status based on internal ratings of such company's banks for the purpose of assessing its eligibility for the CCFF, the Bank has indicated that a company will ordinarily be required to have at least three investment grade bank ratings and no speculative grade bank ratings as at 1 March 2020. To avoid a single bank’s credit view unduly affecting the overall assessment, the Bank will generally not exclude firms with speculative grade ratings provided the average of bank ratings available is at least BBB/Baa2/BBB/BBB. The Bank will accept two bank ratings as sufficient proof of investment grade status where both view the issuer as strong investment grade i.e. BBB+/Baa1/BBB+/BBB(High) or above.

Another potential route to evidencing credit status is for a company or its bank to get in touch with one of the major credit rating agencies to seek an assessment of credit quality in a form that can be shared with the Bank and HM Treasury, noting that this is to use the CCFF. This would remain an option if the Bank were unable to deem the Company to be investment grade rated under the option outlined above, and so the Bank advises that the above option may be better to pursue first. 

The Bank currently envisages accepting the following standard rating agency products as suitable evidence of investment grade credit quality. They reserve the right to make use of other products:

• Long and short term public corporate credit ratings.
• (Private) ‘Indicative ratings’ at a recent point-in-time (for those approaching Credit Rating Agencies for the first time).

Standard & Poor’s Ratings Services:

• Long and short term public corporate credit ratings.
• 'Credit Assessments’ (CAs) at a recent point-in-time (for those approaching Credit Rating Agencies for the first time).

Fitch:

• Long and short term public corporate credit ratings.
• (Private) Credit opinion at a recent point-in-time (for those approaching Credit Rating Agencies for the first time). A form of Fitch ‘credit opinion’ incorporating a rating rationale would be preferred, if available.

DBRS Morningstar:

• Point in time private credit assessment (for those approaching Credit Rating Agencies for the first time).

How is the facility priced?

The facility will offer financing on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock.

For primary market purchases the Bank 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.

For secondary market purchases the Bank will purchase CP 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 Bank will apply an additional small fee (currently set at 5bps and subject to review) for use of the secondary facility, payable separately.

The respective spreads are subject to review. As at 19 May 2020 these are:

Step 2: appoint dealers and obtain rating

Contact a bank that has been approved as a dealer to take part in the CCFF and also start process to obtain a rating if required.

The Bank advises that the first step a company should take if they think they might be eligible for the CCFF is to speak to a bank that is involved in the CCFF scheme.

The Bank has indicated that it will purchase CP in the primary market via dealers and in the secondary market from eligible counterparties. Eligible counterparties must be appropriately authorised under the Financial Services and Markets Act 2000 (FSMA). These eligible counterparties (the Dealers) will need to be appointed on a trade-by-trade basis or under an 'umbrella' programme that would allow for on-going issuances; a paying agent will also need to be appointed since the securities need to be cleared through Euroclear and/or Clearstream.

There is a list of banks that are currently involved in the CCFF scheme published by UK Finance here. There is a process for Dealers to apply to participate in the CCFF and the Bank has made available an application form for dealers to complete for this purpose.

If a company that wishes to use the CCFF does not have a credit rating, it should speak to its bank in the first instance as outlined in Step 1 above. 

Step 3: establish an ECP Programme

If a company does not have an existing CP programme, establish a CP programme to issue CPs that meets the CCFF eligibility criteria

A company intending to apply to access the CCFF needs to set up a CP programme to be able to issue securities which are eligible for the CCFF unless it already has an existing CP programme that is capable of meeting the CCFF criteria. The criteria are set out below:

Eligible securities criteria

• Sterling denominated
• Maturity of one week to 12 months if issued to the Bank at time of issue via a dealer. Drawings can be rolled while the CCFF is open, subject to maintaining on-going eligibility.
• Issued directly into Euroclear and/or Clearstream.
• May not be approved if contain non-standard features. Examples given are extendibility and subordination.
• Must meet ICMA standards and be governed by English law and subject to the jurisdiction of the English courts.
• If issued by a finance subsidiary, must be guaranteed by the parent company in a form acceptable to the Bank.
• Minimum denomination of £1,000,000 and integral multiples of £100,000.

The Bank, the CCFF Fund and HMT each reserves the right to deem securities ineligible at any time at their sole discretion for any reason, and to deem securities the CCFF Fund has previously purchased to be ineligible and vice versa. On 26 May 2020, the Bank updated the Notice to confirm that notwithstanding the foregoing, whereas it reserves the right not to roll over the CP at maturity and not to acquire any CP that is (or is deemed to be) ineligible, the Bank does not have the right to and will not unilaterally:

• cancel any CP (whether or not it is ineligible or deemed to be so);
• require or make any variations to the terms of any issued CP acquired by the CCFF Fund; or
• require any ineligible CP previously acquired by the Fund to be bought back by the issuer.

The Bank has published links to standard form documentation on its website here.

Conditions precedent to the issue of any CP

We would expect to see the following conditions precedent to any issue of CP. The following are all conditions precedent required under the ICMA standard templates:

• Constitutional documents of the issuer (and Guarantor if relevant).
• Corporate authorisations of the issuer (and Guarantor if relevant).
• Specimen signatures.
• Any governmental or other consents required for the issue of the securities.
• Executed copies of the Dealer Agreement, Agency Agreement, Deed of Covenant (and Guarantee if relevant).
• Information Memorandum or Information Sheet ( a form is provided on the Bank's website).
• Confirmations from the paying agent that they had received the Deed of Covenant and the forms of the Global Notes.
• Legal opinions as to capacity and enforceability which are addressed to the Dealers.
• Ratings confirmation – although here it seems that a ratings confirmation for the CP programme itself will not necessarily be required by the Bank.
• Process agent appointment (if relevant).

Tax considerations

To the extent that the issuer is a UK incorporated company and the CP has a maturity of less than 365 days then withholding tax should not be applicable.

However, we note that the Notice states that the CP can have a maturity of "between 1 week and 12 months". Whilst commercial paper is typically issued for a period of less than 365 days, to the extent that an issuance had a maturity of exactly 365 days, the withholding position would need further analysis and consideration.

Similarly, to the extent that a non UK incorporated company were to issue CP, the withholding position in respect of any interest paid by a foreign issuer would need further analysis and consideration. However, we understand that the intention is for the CPs to be non-interest bearing and instead issued at a discount to the face value which may assist in some jurisdictions.

Timing

Given the need to involve Dealers, an Agent and for the CP to be cleared through the clearing systems, setting up a CP programme of this nature would typically take 4-6 weeks to establish. However, given the objectives of the CCFF this timeframe has been significantly reduced. We are generally seeing CCFF CP programmes being established for the purposes of accessing the CCFF in a timeframe of approximately 2 weeks.

Step 4: Send CCFF application to the Bank

Once a CP programme is in place, apply to the Bank to access the CCFF and send the Bank the required documentation

The Bank requires the following documentation to be provided to it by a company that wishes to use the CCFF:

• Issuer Eligibility Form (for primary or secondary market, as applicable)
• Confidentiality and Undertaking Letter
• Evidence of signing authority
• Full documentation for the CP programme (see requirements above)
• Legal opinion (if applicable)
• Rating agency letters in respect of issuer (where such entity is rated) and the most recent ratings agency report (see requirements above)
• Most recent Annual Report and Accounts for the issuer and its group
• Organogram of the issuer's group including all main holding companies and subsidiaries

Issuer eligibility form – for primary market access

This form requires the issuer to confirm various points and provide certain representations falling into the following categories:

Questions relating to issuer eligibility:

• Nature of UK business activity required to be specified including for example number of UK employees and UK generated revenue; and
• Sector of issuer's UK business activity.
• Details of ultimate holding company of the issuer
• Confirmation as to whether the Issuing entity is a public body/authority

Questions in relation to Ratings Requirements:

• Short term issuer ratings and any associated outlook or watch status, as at 1 March 2020.
• Long term issuer ratings and any associated outlook or watch status, as at 1 March 2020.
• If the issuer has no current credit rating, confirmation of whether it has initiated the process to gain a private long term rating from one of the rating agencies.
• If the issuer has no current credit rating, evidence of the issuer's financial condition prior to 1 March 2020 including any Group support.

Representations to be given by the issuer:

• Issuer to confirm the following in relation to the issuer and its group:
  • There is no financial covenant breach or default continuing under any of the group's financing arrangements, or likely to occur as a result of the CP issuance; and
  • No breach of any borrowing limit of the issuer or its group as a result of the CP issuance.

Questions in relation to CP eligibility criteria:

• Issuer must confirm the following in relation to the CP to be issued:
  • Confirmation of the clearing system into which the CP will be issued;
  • That the CP documentation is is governed by English law and subject to the jurisdiction of the English courts substantially in the form of the ICMA recommended template, and to the extent there are material deviations, provide further information;
  • Confirmation the CPs issued under the programme are not complex i.e. that it is senior, unsubordinated and does not contain any non-standard features such as extendibility;
  • Confirmation whether CP will benefit from a market standard guarantee, governed by English law (along with a supporting legal opinion) from the primary entity of the Issuer's group;
  • Confirmation the CP issued under the programme rank at least pari passu with unsecured and unsubordinated indebtedness of the group; and
  • Names of primary market dealers.

Issuer eligibility form – secondary market

There is a different form to be completed if the issuer wishes to also offer the CP in the secondary market. Eligible Dealers wishing to offer CP to the Bank in the secondary market may be requested to complete this form. This form requires the issuer to confirm various points and provide certain representations falling into the following categories:

Questions relating to issuer eligibility:

• Nature of UK business activity required to be specified including for example number of UK employees and UK generated revenue; 
• Sector of issuer's UK business activity; and
• Details of ultimate holding company of the issuer.

Questions in relation to Ratings Requirements:

• Short term issuer ratings and any associated outlook or watch status, as at 1 March 2020; and
• Long term issuer ratings and any associated outlook or watch status, as at 1 March 2020.

Questions in relation to CP eligibility criteria:

• Issuer must confirm the following in relation to the CP to be issued:

  • Full name of CP programme and date it was set up;
  • Bloomberg ticket/type of programme (e.g. XYZ_ECP) and series if applicable;
  • That the CP documentation is governed by English law and subject to the jurisdiction of the English courts and substantially in the form of the ICMA recommended template, and to the extent there are material deviations, provide further information;
  • The CPs are not complex i.e. that it is senior, unsubordinated and does not contain any non-standard features such as extendibility; and
  • ISINs, currency, issue date and maturity date.

Undertaking and Confidentiality Letter

• To be provided by the issuer addressed to the Governor and Company of the Bank of England..
• In a standard form provided on the Bank of England's website.
• The issuer is required to provide representations that certain events have not occurred and are continuing both in respect of itself and its parent (and any guarantor of the CP) including insolvency, insolvency proceedings, the issuer's inability to, or its intention not to, perform any of its obligations under the Documentation (the Documentation being the Undertaking and Confidentiality Letter, the Market Notice, the Operating Procedures and the Issuer Eligibility Form) and the issuer ceasing to meet the applicable issuer eligibility criteria. In relation to the parent and any guarantor of any CP, the occurrence of any cross default (i.e. any event of default, default termination, acceleration event or termination event, however so described) is also included. The issuer must provide disclosure to the Bank in relation to if it is unable to give these representations to the Bank as a result of the COVID-19 outbreak. The issuer also has an ongoing obligation to notify the Bank if any of the described events occur.
• The issuer is also required to notify the Bank if:
  • There is any proposed change relating to it that may result in the applicable issuer eligibility criteria no longer being met, then the issuer must notify the Bank in advance; and
  • It grants any security interest to secure any financial indebtedness or if any member of the group incurs or allows to remain outstanding any guarantee in respect of the Issuer's financial indebtedness unless the CPs purchased by the Bank, as agent for the CCFF Fund, benefit equally and rateably from such security interest..
• All representations to be given by the issuer in the Confidentiality and Undertaking Letter will be repeated on the date of any transaction with the CCFF.
• Issuers are responsible for the Bank's costs in connection with the CCFF. Clause 7.3 may need to be clarified as it currently seems to suggest that the issuer is required to indemnify the Bank for all of the Banks costs in connection with the CCFF. .
• There is a requirement to keep confidential all information given to it by the other party, which includes, without limitation, access to and participation in the CCFF, details of any transaction and any decision by either party to enter into or not to enter into any transaction or to terminate any transaction or any part of any transaction. Other than in the circumstances detailed in the specified exceptions, this information must not be disclosed.
• The Bank is free to amend any of the documentation including the terms of the Confidentiality and Undertaking letter from time to time.

Guarantee and legal opinion

The issuer will be required to ensure that the primary entity in its group provides a guarantee if:

• the CP will be issued by an entity other than the primary entity in its group; and
• the issuer is not rated as investment grade by Fitch Ratings, Moody's or S&P.

If a guarantee has been provided as a part of a CP programme, it will need to be:

• English law governed and on standard market terms, accompanied by a legal opinion.

The Bank provides a pro forma of such Guarantee document and form of Legal opinion in connection with the Guarantee addressed to the Bank, HMT and CCFFL on its website.

Evidence of signing authorities

• These must comply with the Bank of England Guidance which can be found here.

Step 5: admission to CCFF and obtaining funds

Once the Bank of England confirms eligibility, securities can be eligible for sale the following day

Where the Bank confirms eligibility of a participant before 16:00, securities will be eligible for sale to the CCFF Fund from the following day. Purchase operations will take place every day. The facility will be priced on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock.

According to the Notice, limits will be available to the issuer and eligible Dealers acting as principal on behalf of the issuer only. This may be an aggregate limit where there are multiple issuers in one group. Issuers are free, should they wish, to share limits with the dealer(s) acting as principal on behalf of the issuer only. The maximum pre-approved limits on borrowings for issuers under the CCFF are as follows:

However, these indicative limits may be adjusted down for any particular issuer at the Bank and HMT's discretion. The Bank provide an example that the limit may be adjusted downwards in circumstances where the limits exceed 50% of the applicant issuer's average revenues over recent years.

The expectation is that settlement will take place in line with standard market practice for ECP CP. Further details regarding settlement mechanics can be found on the Bank of England's website. The CCFF Operations Procedures provide further details of the settlement procedure. In terms of duration of the scheme, the CCFF Operating Procedures indicate that the CCFF will close to new counterparties on 31 December 2020. The Bank intends to close the CCFF to new purchases from 23 March 2021.

Other points to consider

• Will the commercial paper constitute "Permitted Financial Indebtedness" within the terms of the existing debt documents of the relevant group or issuer?
• If the issuer has intercreditor and security arrangements in place, what arrangements (if any) will be required with respect to ranking and securing obligations under the commercial paper?
• Will the group or issuer be able to satisfy the ratings requirements or otherwise demonstrate financial strength?

How can Ashurst help?

The CCFF will form part of the Bank's broader Sterling Monetary Framework, such as the Term Funding Scheme (formerly the Funding for Lending Scheme) and the Discount Window Facility. Ashurst has widespread experience of advising clients on access to this and similar schemes – please contact any of your usual Ashurst contacts or the contacts below for further information.

Ashurst has significant experience in establishing and advising in respect of CP programmes.

We are happy to discuss the CCFF or any other HM Government schemes (or other sources of liquidity) that may be available to corporates and other specialist borrowers, whether or not falling within the eligibility criteria described above.