COVID emergency loans: refinancing risks for lenders
Wednesday April 7, 2021
The refinancing of loans poses serious questions and reputational risk
The end of March represents an important milestone in the business narrative of the COVID-19 pandemic. Not only have most firms now marked a full year of their employees working from home, but the end of March marked the deadline for businesses to secure emergency loans via the government’s support schemes.
While the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) are to be replaced by a new ‘Recovery Loan Scheme’ announced in the Chancellor’s latest Budget, the deadline marks the end of access to the support that has been available from the existing schemes.
Although the schemes were launched at an impressive speed, the challenges are beginning to unfold one year later. Many big-name firms, grocery retailers in particular, have already been able to pay back some of the support they’ve received, particularly in relation to business rates relief. However, the vast majority of firms are now being asked to start servicing debts they wouldn’t have previously factored into their financial strategy, while still in recovery mode.
Following a year of political rhetoric championing the government’s role in preserving jobs and industries, lenders find themselves in the precarious position of having to encourage businesses to meet their (recently extended) repayment schedules.
A concern for lenders will be how their security packages interact with the CBILS or BBLS loans. While there were restrictions on enhancing security when those facilities were put in place, in many cases lenders already had ‘all monies’ personal guarantees and debentures in place, which would technically apply to the emergency facilities.
The realities of schemes being ‘government-backed’ should come into consideration as well. Banks are essentially at the coalface and have assumed the majority of the financial risk. Activating government guarantees is very much an action of last resort, and something that is yet to be extensively put into practice.
A previous government-backed scheme required lenders to exhaust all other avenues of enforcement prior to calling on the government, which included calling in any personal guarantees, and it remains to be seen whether the government will take the same approach here.
The resulting position leaves lenders in a difficult position, weighing up the potential financial damage of inaction against the reputational risk of negative press.
The position is further complicated where there is a credit balance held in a current account when a business fails – does the lender apply their right to set those funds off against the COVID loans or older non-COVID facilities. Prior to the pandemic, set-off would generally apply to the oldest liability but that could lead to situations where lenders are left with questionable security.
Care also needs to be taken where lenders encourage firms to refinance. The process of replacing COVID loans where securities are questionable with more stringent standard facilities carries some risk to lenders if it is not properly managed, and it will be important for lenders to be able to evidence that they have made the position clear to borrowers.
The key risk, if lenders specifically exclude COVID loans from any refinance package is that this could put their ability to make a claim under the government guarantee at risk.
As government support packages start to fall away, the sheer scale of additional debt now being carried by firms from COVID loans (c£70 billion overall) and VAT deferrals indicates that many will begin to default on their repayments – particularly if HMRC enforces its position as creditor-in-chief.
As it stands, there are no clear-cut answers as to which direction lenders should take and, indeed, how the situation will evolve. Essentially, all parties have been put under strain, having put their best foot forward in challenging circumstances. The speed at which the emergency measures were put in place has been impressive and there is no doubt that it has supported the economy – however, the wider implications of those measures is now becoming more evident.
Lenders will no doubt be looking to the British Banking Association for guidance and it will be important for restructuring professionals to be fully engaged in the discussion as it will impact how recoveries in any formal process are allocated. In the meantime, lenders should fully document any decisions made regarding these sorts of facilities, taking professional advice as appropriate. Similarly, company directors wishing to understand their level of exposure may wish to seek clarity from their facility providers to the extent they intend to rely on securities that were already in place.