CLBILS: new restructuring aspects explained

Announced by the UK Government on 2 April, the Coronavirus Large Business Interruption Loan Scheme ("CLBILS") was billed as the support package for the so-called "squeezed middle" - UK companies that are too small to access the COVID Corporate Financing Facility ("CCFF"), but too big to apply for a loan under the Coronavirus Business Interruption Scheme ("CBILS"). Since launch however, only £359 million of CLBILS loans have been advanced, suggesting relatively few companies have been able to take advantage of the scheme. In an effort to improve the accessibility of the CLBILS scheme and in response to concerns raised by participating lenders, the UK government has announced a number of changes to the CLBILS regime alongside the expansion of the scheme to allow borrowers to access loans up to £200 million (so called "Jumbo CLBILS").

One new area which we expect will be of significant interest to prospective and current CLBILS accredited lenders is the changes introduced to assist lenders should a CLBILS facility require restructuring or otherwise become distressed. In particular, participating lenders have been concerned about the requirement to exhaust their rights of recovery against a borrower before the government-backed guarantee (the "Scheme Guarantee") can be called, ostensibly preventing (or at least restricting) many of the traditional methods, tools and processes available to responsible lenders when their borrowers enter financial difficulty. The changes seek to address this – but what issues will lenders face should the debt have to be restructured in the future?

CLBILS and restructuring – what's new?

The latest guidelines from the British Business Bank highlight the following changes which relate to a future restructuring of a CLBILS facility and apply to CLBILS of all sizes and will therefore be important to market participants currently originating and structuring CLBILS loans:

"The Restructuring Standard" – underpinning the restructuring-led changes to the CLBILS scheme is the idea that lenders should take decisions in connection with a restructuring or potential restructuring in accordance with "the Restructuring Standard", i.e. in the same way as they would act if the relevant loan was not subject to the CLBILS regime. In essence, that entails acting:

• in accordance with the lender's usual recovery and servicing standards;
• with regard to the standards of a reasonable and prudent lending bank (ignoring the impact of the Scheme Guarantee but taking into account the security supporting the loan); and
• with the intent that such action is taken to mitigate the risk of loss and/or reduce the extent of loss relative to an insolvency proceeding.

All of the following matters should be considered subject to this overarching duty.

Permitted Variations – this change is intended to give participating lenders confidence that they can take certain decisions without jeopardising the continuation of the Scheme Guarantee. Provided that any such decisions are taken in accordance with the Restructuring Standard, lenders can agree variations to a CLBILS facility in connection with a restructuring or potential restructuring provided that the following conditions continue to be met:

• maximum maturity is not extended beyond 6 years from the initial drawdown;
• the amendment or variation does not result in the relevant facility becoming more subordinated than at origination; and
• the outstanding balance of the facility does not increase as a result of any such variation (save for interest and default interest accruing, compounding and/or capitalising in the manner provided in the facility documentation).

It should be noted that further fees may be charged by lenders in connection with any restructuring or Permitted Variation proposed in line with the Restructuring Standard, but such fees will not be covered by the Scheme Guarantee.

Permitted New Scheme Facility – if a new loan liability comes into existence as a result of the release or waiver of principal, interest or fees in connection with a restructuring of a CLBILS loan, the lender can elect to have this new liability covered by the Scheme Guarantee. This will be available to a lender provided the terms of that new liability also comply with the matters set out in Permitted Variations above.

Scheme Guarantee Claims – claims under the Scheme Guarantee can now be made in the following circumstances:

• a one-time claim following a failure to pay by the borrower under a CLBILS loan (after this claim is made, no further claims can be made under the Scheme Guarantee); and
• a claim for a crystallised loss arising from a permanent release or waiver of principal, interest or fees (including as a result of a debt for equity swap or similar) as a result of a borrower restructuring. The gateway to such a claim under the Scheme Guarantee is that two or more creditors of the borrower have also taken similar action or an independent opinion is provided to the effect that such action is necessary to avoid insolvency or borrower non-payment. In assessing the amount of any "loss" for the purposes of a claim, regard will be had to the fair value of any non-cash assets received in lieu of such waiver or release of principal, interest or fees. More than one claim may be made under this limb and a claim under this limb does not prohibit a later claim for borrower non-payment.

Scheme Lender Fee – from the third anniversary of drawdown, the fee payable by lenders participating in CLBILS will increase from 100bps per annum to 200bps per annum if a Permitted Variation is effected that extends the term of a CLBILS facility beyond three years. This increase will be covered by the Scheme Guarantee.

What do we think?

The changes summarised above represent useful progress on matters that many CLBILS accredited lenders (and indeed, would-be accredited lenders) have been grappling with since the CLBILS scheme was launched. It will now be possible to propose and agree consensual restructuring solutions (within the parameters of the Permitted Variations) that do not force a participating lender to take precipitous action against a borrower merely in order to preserve the Scheme Guarantee. These matters are particularly important given lenders may be unwilling or unable the trade out of their participation in a CLBILS loan advanced to a borrower that becomes distressed.¹

While the changes are welcomed, lenders should consider the following as some initial "food for thought":

• where a CLBILS loan exists alongside other senior/senior secured debt, the restraints placed on the CLBILS lender will make the negotiation of any proposed restructuring more challenging. The risk that any action taken may invalidate the Scheme Guarantee will weigh heavily on the minds of CLBILS lenders and care should be taken to justify the approach used;
• the inability (or perceived inability) of a CLBILS lender to take certain action may take it "off the table" for the senior lender group as a whole (depending, in part, on the proportion of CLBILS debt to non-CLBILS debt);

• the need to act in accordance with the (inherently subjective) Restructuring Standard may mean that, even as between CLBILS lenders to the same borrower, lenders may consider themselves bound to take differing approaches or constrained from taking steps that may, in a capital structure without CLBILS debt, be considered necessary or attractive;
• the limitations embedded in the Permitted Variations framework – in particular that no restructuring can result in the further subordination of the CLBILS loan – may severely limit the availability of many traditional restructuring solutions which often feature new super-senior interim financing as a bridge to a long term solution;
• lenders originating a CLBILS loan should pay particular attention to the thresholds for consent contained in the CLBILS facility agreement and in any intercreditor arrangement and take advice on their potential impact should a restructuring become necessary. At origination, we would suggest that lenders entrench as "all lender" matters those terms which go to compliance with the CLBILS regime; and
• the existence of CLBILS lenders in the capital structure of the Borrower may warrant further consideration as regards class composition should a UK scheme of arrangement be proposed as part of any restructuring solution (although this would be fact dependent).

It is fair to say this is only the beginning of the discussion around the challenges of structuring and, if required, restructuring CLBILS lending. Where a borrower has a pre-existing, multi-layered capital structure and intercreditor arrangements, a potentially complex restructuring may be inevitable where the borrower becomes distressed. The presence of CLBILS in that capital structure will surely only add to that complexity and may create the need for a bespoke approach to restructuring.

At Ashurst, we have market-leading experience advising clients on all aspects of the emergency loan schemes available to businesses navigating the impact of COVID-19; and remain at the forefront of utilising tools and processes in multilateral restructurings - including the new weaponry contained in the Corporate Insolvency and Governance Bill 2020. If you would like to know more, please reach out to any of the contacts listed below or your usual Ashurst contact.

1. It should be noted that, in a recent change to the CLBILS documentation, lenders participating in a CLBILS facility can now transfer their position (subject to the terms of the relevant facility agreement) if the relevant borrower becomes distressed provided it has not claimed on the Scheme Guarantee and it notifies the Secretary of State for Business, Energy and Industrial Strategy prior to effecting such transfer. The Scheme Guarantee will cease to apply to that facility following such transfer.