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Lenders and borrowers are considering the effect of the COVID-19 Pandemic on funding arrangements. What should they look out for and what pragmatic steps could they take?
On 11 March 2020, the UK Government delivered its Budget for 2020 which contained the first of a number of measures addressing the impact of the COVID-19 pandemic on businesses. This included focused support for impacted SMEs: 'business interruption' loans, the abolition of business rates for retail, leisure and hospitality sectors with a rateable value below £51,000 and a refund for sick pay payments of two weeks for firms with fewer than 250 staff.
Since then further substantial measures have been introduced most notably the Coronavirus Job Retention Scheme, which has paid out on claims totalling more than £25.5 billion as of 28 June 2020, and the five Government-backed funding schemes in the Covid Corporate Financing Facility, the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme, the Future Fund and the popular 100%- backed Bounce Back Loans for the smallest businesses.
Separately we have seen the creation of ‘support funds’ by certain clearing banks to support customers' liquidity. The Bank of England has also announced that interest rates would be cut from 0.75% to 0.25% and then cut again to 0.1%, in addition to a further £100bn of stimulus to take its bond-buying target from £645bn to £745bn for 2020.
It remains to be seen how successful these responses might prove for affected businesses in the medium and longer term as they maintain a stable balance sheet and manage liquidity whilst the consequences of the pandemic remain uncertain. Larger firms exposed to the effects of the pandemic will also have to take note of the Government's policy and be prepared to seek out equity and other support from stakeholders to help bridge to a period of improved economic stability. A collaborative, swift and open approach will of course be advisable as potential solutions are considered.
As such, both lenders and borrowers will be concerned with their financing arrangements, which are typically not designed to accommodate such steep drops in demand or widespread market disruption. Below we address some key concerns from both the borrower and lender perspective and pose some pragmatic suggestions for next steps that might be considered.
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