COVID-19 insights - impact on lending and asset-backed securities

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A summary of the key discussions below:

SMCR/ regulatory

• PRA and FCA have provided guidance on application of SMCR during this period of crisis. The guidance is slightly different in emphasis as between the two regulators, with the FCA taking a marginally more flexible approach.
• For dual-regulated firms, PRA still requires significantly changed SoRs to be re-submitted, albeit with some tolerance around any delay. For solo-regulated firms, FCA does not require re-submission of SoRs for temporary changes caused by the crisis.
• FCA will permit extension of 12-week rule to 36 weeks for solo-regulated firms. For dual-regulated firms, PRA and FCA will see how 12-week period works and will make further provision if necessary.
• Regulated entities should not assume that their unregulated activities will be free of regulatory scrutiny. The regulators have indicated their interest in such activities and certain rules apply also to unregulated business of regulated firms eg. FCA Principles 3, 4 and 11, PRA Fundamental Rules 5 and 6, SMCR individual code of conduct (COCON 2).
• High-quality governance is important for regulated firms at this time. The PRA’s Dear CEO letter placed emphasis on effective governance. Good record-keeping of decision-making and accurate and timely management information are important tools.

Asset backed finance

• Originators/servicers generally implementing guidance by way of temporary concessions rather than a more formal amendment process (particularly for CCA assets);
• Regard should be had to any restrictions on payment holidays/deferrals in eligibility criteria and the terms thereof, in particular, whether the focus is on borrower “rights” to require a holiday/deferral rather than lender flexibility to grant;
• Whether servicers can implement guidance without lender consent – note that the guidance is not legally binding but the underlying regulatory rules are.
• In the absence of anything specific in the securitisation transaction documents to the contrary, lenders/borrowers generally agreeing that CoVid affected loans will not (as a result of CoVid only) be treated as in arrears or in default for the purposes of the borrowing base or financial covenants
• If a default occurs under the securitisation position (which is usually unregulated lending), regulated lenders still need to have regard to the statements of regulators regarding general conduct of business matters.

Real estate finance

• Although most commercial lending in the UK is unregulated, the clear message we have heard from the UK government and regulators (particularly the PRA’s Dear CEO letter) is that banks will be expected to show willingness to maintain and extend lending despite the uncertain economic circumstances. Contractual rights in loan agreements should be considered in that context.
• We have seen some expedited new lending deals to address urgent liquidity needs but on the whole transaction volumes have dipped since the start of the lockdown, with most lenders focusing on managing their existing loan books and responding to requests for waivers and amendments, particularly in relation to compliance with financial covenants
• For real estate deals, cashflow from rental income for impacted businesses is the primary concern, noting the impact of the commercial lease forfeiture moratorium and the industry calls for further government relief for payment of rent for businesses receiving little or no turnover during the lockdown.