In what has been one of the most extraordinary days for a peacetime government, the Chancellor of the Exchequer has today announced an ambitious and far-reaching set of measures to mitigate against the Covid-19 shock to the UK economy.
In this brief update, we are focusing in particular on one aspect of the support package that has the potential to provide much needed breathing space to any corporates active in industries that are particularly hit by the current situation, and crucially beyond those sectors promised specific support measures elsewhere in the proposals (such as hospitality, retail, care and aviation).
It has been announced that the Bank of England is to operate on behalf of the Treasury a new Covid-19 Corporate Financing Facility (CCFF).
CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity. The quantum of this facility and certain other measures has for now been set to £330bn, but the Chancellor was clear in that the Government would do 'whatever it takes'.
According to an exchange of letters between the Chancellor and the Governor of the Bank of England released a few hours ago, commercial paper eligible for the scheme will be issued by non-financial companies that make a material contribution to the UK economy and, crucially, that had, prior to being affected by Covid-19, a short or long-term rating of investment grade, or financial health equivalent to an investment grade rating.
It will be very important to see in the coming days specific details around the scheme and in particular the interpretation of the above eligibility criteria for smaller or private companies. This measure has the potential to provide (seemingly) unlimited liquidity on an unsecured basis to a wide universe of corporates and can provide invaluable respite both to companies which are facing imminent liquidity and cashflow insolvency issues, but also to private lenders that have recently been inundated with additional funding requests from their corporate borrower base. The practical challenges of administering this scheme in the timeframe and on the scale necessary to achieve the desired impact are significant.
The EU Commission has confirmed that the application of the State aid rules will need to be considered in the context of many of the measures granted by EU Member States in response to Covid-19. Exactly how will depend upon the measure involved. For example, the Commission has confirmed that general support measures available to all companies will not involve the grant of State aid (e.g. wage subsidies). In contrast, other measures may require clearance, the conditions of which will vary depending on the specific justification for the intervention. In particular, Covid-19 has already been recognized as an "exceptional occurrence" justifying State aid "directly linked" to the event. States will also be able to rely on a number of other bases for clearance of State aid, including for rescue and restructuring. A major development will come in the next days when the EU will publish a Temporary Framework to support the economy in the context of Covid-19. This will enable four types of aid:
- Direct grants and selective tax advantages up to €500,000;
- State guarantees for loans taken by companies from banks;
- Subsidised interest rates; and
- Safeguards for banks that channel support to the real economy.
Treatment by the Commission of State aid notifications related to Covid-19 will be accelerated, being handled in a matter of days, and other procedural facilitation measures have also been put in place.
The Chancellor stated it is not a time for ideology and orthodoxy; but how this bold package of measures interacts within existing legal frameworks is likely to present a significant challenge to companies and their lawyers in the coming hours, days, and beyond. If you would like to speak in more detail about this scheme, please reach out to your usual Ashurst contact.
