COVID corporate financing facility
The purpose of this note is to give details of the proposed COVID corporate financing facility (the CCFF).
What is it?
The COVID corporate financing facility (CCFF) is a scheme to provide financial support to UK businesses by purchasing commercial paper with a maturity of up to one year which is issued by UK companies making a material contribution to the UK economy. The stated intention is to help businesses who are facing cashflow disruption to pay wages and suppliers.
The facility is intended to offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock, and will be open to firms that can demonstrate that they were in sound financial health prior to it. The CCFF will look through temporary impacts on firms’ balance sheets and cash flows by basing eligibility on firms’ credit ratings prior to Covid-19.
Financing for the CCFF will come from central bank reserves.
How will it operate?
The Bank of England (the Bank) will operate the scheme on behalf of HM Treasury through COVID Corporate Financing Facility Limited which will purchase commercial paper during a defined period each business day. The Fund will purchase commercial paper in the primary market via dealers and after issuance from eligible counterparties in the secondary market. It will do so at a minimum spread over reference rates. Further details on pricing are set out in the Notice which is available here.
The Bank will send a written electronic confirmation of each transaction on the day of purchase and purchases will normally settle on a T+2 basis.
For how long will the CCFF be available and when will it be available?
The Bank’s intention is for the CCFF to operate for an initial period of 12 months, to help businesses bridge through COVID 19-related disruption to their cash flows. The Bank will provide 6 months’ notice of the withdrawal of the Facility.
The scheme has been available from 23 March 2020.
The Bank and HM Treasury will keep under review whether to propose any extensions or variations of the CCFF.
Who will be eligible?
The Fund will purchase commercial paper issued by companies (including their finance subsidiaries) that make a material contribution to economic activity in the United Kingdom. UK incorporated companies (including those with an overseas holding company) with a genuine business in the UK, will normally be regarded as meeting this requirement.
Eligibility decisions will take into account a number of different factors. Companies with significant employment in the UK or with their headquarters in the UK will normally be regarded as meeting this requirement. Other relevant factors will include whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK.
Commercial paper issued by non-bank financial companies will in principle be eligible, subject to the Bank being satisfied that the issuer makes a material contribution to corporate financing in the UK. Commercial paper issued by leveraged investment vehicles or from companies within groups that are predominantly banks, investment banks or building societies will not be eligible and nor will commercial paper issued by public bodies or authorities, entities governed by public law or public undertakings. For these purposes a “public undertaking” is an undertaking over which the State or other regional or local authorities may directly or indirectly exercise a dominant influence by virtue of ownership, financial participation or the rules which govern it. Dominant influence will be presumed when the UK or an EU Member State (or regional or local authorities within them) directly or indirectly hold the majority of the subscribed capital, control the majority of the voting rights or can appoint more than half of the administrative, management or supervisory body.
Companies that do not currently issue commercial paper but are capable of doing so will in principle be eligible to utilise the CCFF provided that the securities they issue meet certain criteria.
What are the eligibility criteria?
The Fund will purchase the sterling-denominated commercial paper of eligible issuers if it has the following characteristics:
It must have a maturity of one week to 12 months if issued at issue via a dealer. Drawings can be rolled while the CCFF is open, subject to eligibility.
Where a short term credit rating is available, it must have a minimum short-term credit rating of A-3 / P-3 / F-3 / R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020. Issuers with split ratings where one or more rating is below the minimum are not eligible. The Bank and HMT will consider the eligibly of issuers at the lowest rating that were on negative watch or negative outlook as at 1 March.
Where a short-term credit rating is not available, the Bank will consider whether a long-term credit rating can be used to assess eligibility and pricing, or whether the Bank can assess that the issuer is of equivalent financial strength.
It must be issued directly into Euroclear and/or Clearstream.
If an issuer has more than one rating then all such ratings must be investment grade and if the issuer is downgraded after 1 March 2020 below the minimum credit ratings set out above, the issuer will remain eligible for primary and secondary market purchase in the Facility but this will be subject to HM Treasury approval.
The Bank will not accept commercial paper which has certain non-standard features (eg extendibility, subordination etc).
Securities issued by a finance subsidiary must be guaranteed by their parent company in a form acceptable to the Bank. A copy of the proposed form of guarantee and associated legal opinion are available on the Bank’s website.
Can my company be eligible without a credit rating?
Companies who do not have a rating may be able to apply to be eligible for the scheme. The Bank of England website states that such companies should speak to their own bank in the first instance to see if it would consider the company to be equivalent to investment grade. If so the company can apply to the Bank of England who will make its own assessment. Credit Benchmark has provided a credit assessment to the Bank of England of the corporate credit assessments of a number of the UK’s largest banks.
It may also be possible to seek an assessment of credit quality from one of the major rating agencies and the notice of the Bank Of England website states that the Bank of England is currently speaking to the largest rating agencies about this and that they currently envisage accepting the following as suitable evidence of investment grade quality although it may accept the use of other products:
- Moody’s: Long and short term public corporate ratings and private “indicative ratings”.
- Standard & Poor’s: Long and short term public corporate ratings and private “credit assessment”.
- Fitch: Long and short term public corporate ratings and private “credit opinions”.
- DBRS Morningstar: Private credit assessments.
What documentation will be eligible?
The Bank will accept commercial paper with standard features using ICMA market standard documentation and the ICMA is making its materials on commercial paper to non-members. To speed up the process, The Bank will accept simplified versions of the documentation based on ICMA standards and these are available to view on the Bank’s website. Potential users are encouraged to use the simplified versions of the documents. Other versions may be considered but the Bank will not accept certain features such as extendibility or subordination.
How is the CCFF priced?
For primary market purchases, the Bank will purchase commercial paper at a spread above a reference rate based on the current sterling overnight index as at 9.45 on each day of operation.
For secondary market purchases, the Bank will purchase commercial paper at the lower of amortised cost from the issue price and the price determined as above. The Bank will apply a fee of 5 basis points for the use of the secondary market purchase facility. This will be subject to review and payable separately.
As at 23 March the spreads were as follows:
- A1 / P1 / F1 / R1: 20 basis points.
- A2 / P2 / F2 / R2: 40 basis points.
- A3 / P3 / F3 / R3: 60 basis points.
How can issuers take advantage of the CCFF?
The Bank will require issuers who wish to take advantage of the CCFF to contact the Bank directly, to discuss its eligibility and to provide the necessary documentation at applications@bankofengland.co.uk. The Bank will require issuers to sign a confidentiality agreement.
The Bank recognises that some corporates who may wish to use this scheme are not regular counterparties of the Bank and so to facilitate use has made available via its website a guide to accessing the CCFF.
Eligible counterparties must confirm the eligibility of specific securities with the Bank prior to offering them for sale, using the template that will be published. Confirmation of eligibility will be provided bilaterally to the counterparty submitting the request. When the Bank confirms their eligibility before 16:00, securities will be eligible for sale to the Fund from the following business day.
The Notice states that the names of issuers and securities purchased or eligible will not be disclosed publicly and that the Bank, the Fund and HM Treasury reserve the right at its sole discretion to deem any security ineligible for any reason (including deeming as ineligible securities which may have previously been purchased).
Eligible Counterparties
The Fund will purchase eligible commercial paper in the primary market from dealers acting as principal and will also purchase it in the secondary market from eligible institutions. Counterparties must meet certain criteria including being authorised for the purposes of the Financial Services and Markets Act 2000.
Will there be any limits?
Purchases of eligible commercial paper in the primary markets may be limited by issuer. Any such limits applying to individual issuers will be made available, on request, to the issuer only.
The minimum size of an individual security from an individual company is £1,000,000 and offers should normally be rounded to the nearest £100,000. The maximum amount will depend on credit rating but the website gives an indication of pre-approved limits as follows:
- A1 / P1 / F1 / R1: Up to £1,000,000,000.
- A2 / P2 / F2 / R2: Up to £600,000,000.
- A3 / P3 / F3 / R3: Up to £300,000,000.
Where two or more issuers are part of the same group, an aggregate limit may be applied within which any limits applying to the individual issuers are wholly or partly fungible.
Simmons & Simmons has significant experience in advising dealers and issuers on the establishment and update of commercial paper programmes and how they tie in with issuers’ wider corporate treasury function. For further information, please reach out to the contacts listed on this page or your usual Simmons & Simmons contact.
