Lender options when refinancing CBILs to retain BBB guarantee

This requires careful consideration, but there are tools available to lenders to achieve this.

The trigger for refinancings

The Coronavirus Business Interruption Loan Scheme was launched on 23 March 2020. Whilst loan facilities could be arranged under the scheme for up to six years, many loans were made for three years. It means we are now into ‘refinance season’ for a significant number of CBILS loans.

As at February 2023, around £420,000,000 of CBILS loans were either in default or in arrears, with £120,000,000 of CBILS guarantee claims having already been paid out on by the British Business Bank (BBB). Twelve of the top 25 CBILS lenders had not made a claim under the BBB guarantee, whereas some other lenders had made significant claims. Origination criteria and approach will have played a significant role in this disparity, but the data does indicate that there are likely to be further impairments as the loans made under CBILS work through.

As such, lenders will be considering what tools are available to them to refinance or restructure their CBILS loans as they start to mature.

A fundamental concern for any lender dealing with a CBILS borrower in stress or distress, will be retaining the benefit of the 80% guarantee from the BBB. This imperative will guide the decisions made by a lender. The BBB, in turn, requires lenders in the scheme to deal with borrowers in a ‘business as usual’ fashion, as if the CBILS funds were all on their book and without the benefit of the BBB guarantee. Lenders must pursue recoveries as they ordinarily would and not just take the easy option of claiming under the BBB guarantee. Under the terms of the BBB guarantee, lenders are also required to act in good faith and not do anything to bring the scheme or the BBB into disrepute.

The overriding issue comes when the ‘business as usual’ approach comes up against the BBB guidance or seemingly puts the BBB guarantee at risk, as we explore below.

Forbearance

This is the most common tool used by lenders dealing with struggling borrowers. Extending a termination date, or postponing a repayment instalment, falls squarely within ‘business as usual’. Forbearance, so long as a maximum total tenor of ten years is not exceeded, is also permitted under the CBILS rules, subject to:

• where there is other secured, non-CBILS debt, care being taken to ensure that amendments are not made in a way which would impact the priorities on an insolvency – i.e. a lender should not seek to elevate its non-CBILS debt at the expense of its CBILS debt; and
• ·noting that to the extent interest is capitalised as part of any forbearance, this will not be able to be claimed under the BBB guarantee.

New monies

Often a lender will be asked to provide an element of new money as part of any restructuring. However, any increase in a CBILS facility would count as a new CBILS loan and as the scheme has now closed that option is not available.

A lender may be willing to increase lending under non-scheme facilities but will need to be wary of the change in priority that may result from that. A non-scheme facility that predates a CBILS facility but shares security with the CBILS facility gets priority over the recoveries from that security. However, any increase in that non-scheme facility after the date of the CBILS facility must share recoveries pro rata with the CBILS facility.

Partial write-offs

A lender may deem that a borrower is carrying too much debt but is otherwise a viable business. In such a circumstance, a ‘business as usual’ approach is to write off a portion of the lender’s debt, to strike a balance between minimising a lender’s loss and ensuring that the borrower is not over-burdened with debt service obligations. Some form of equity or potential future upside may be taken in exchange for the write-off.

Notwithstanding the above, write-offs of principal or interest during the life of a CBILS facility are not specifically permitted by the CBILS rules. This is in contrast to the Coronavirus Large Business Interruption Loan Scheme, under which write-offs are permitted in certain circumstances. 

We have, however, acted for a number of lenders where they have made partial debt write-offs, made partial claims under the BBB guarantee, and retained the BBB guarantee for the remainder of the debt. These write-offs have included debt-for-equity or other upside structures. A claim under the BBB guarantee has been made following the write-off, and any future recoveries made will then be shared with the BBB on the 80%-20% basis.

In our experience, the important thing here is early and open engagement with the BBB. Our advisers can either help lenders in their dealings with the BBB, or we have liaised with the BBB directly in some cases. Getting the BBB comfortable with the structure and the process may take time, so be prepared to build this into any transaction timetable.

Restructuring tools

In the ‘business as usual’ world, a forbearance or write-off may not be the preferred solution and the borrower may be seeking to employ other restructuring tools. However, often such tools run up against the strict terms of the BBB guarantee and BBB guidance.

A debt sale, for example, is not permitted and would invalidate the BBB guarantee.

Where the debt burden has become unsustainable, a borrower may pursue a business sale through a pre-pack administration, allowing transition to a new buyer with, hopefully, limited impact on the business from the insolvency.

Part of a pre-pack administration often involves the novation of some secured lender debt from the original borrower to the purchasing vehicle, to part-fund the purchase price of the business sale.

Whilst, under the right circumstances, this may be ‘business as usual’ for a lender, a novation of debt is incompatible with the CBILS rules as the identity of the borrower changes from the original borrowing vehicle to the new purchasing vehicle. 

The new ‘restructuring plan’ introduced under the Corporate Insolvency and Governance Act 2021 is increasingly becoming a tool of choice to restructure debt and repair balance sheets. A compromise of debts can be achieved with the vote of 75% of each applicable class of creditors and any dissenting classes ‘crammed down’ with court approval. 

A CBILS lender may be asked to vote in favour of a restructuring plan and thereby compromise its CBILS debt. A court would only approve a compromise under a restructuring plan where the return to the lender is better than what it would receive in the ‘relevant alternative” – usually an insolvency process – and so nominally it should benefit the lender and the BBB as guarantor. However, it remains to be seen if the BBB would support lenders approving restructuring plans and allow the balance to be claimed under the BBB guarantee. The position may be different where the restructuring plan is imposed on the CBILS lender rather than one the CBILS lender voted for.

Co-written by Fergus O’Doherty of Pinsent Masons.