By Alexander Pelopidas, Partner in Rosling King’s Finance Group.
The latest figures outlining the scale of financial support handed out by the Government under its Coronavirus loan schemes – delivered by the British Business Bank– have escalated the very disconcerting prospects of borrowers defaulting and their lenders have to go to the Government-backed British Business Bank to call on the schemes’ guarantees for payment.
The well-intentioned schemes were rushed into place by the Government as a consequence of the pandemic, to help resolve immediate financial issues. However, it was always going to be hard to assess the long-term impact and the scale of the financial burden such schemes might have on lenders and ultimately the Government-backed British Business Bank.
1,670,939 government-guaranteed loans worth £79.3bn have been provided to businesses struggling as a result of the pandemic. These loans helped support their cash flows during the crisis through the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Broken down, this equates to 1,560,309 BBLs worth £47.36 billion, 109,877 loans worth £26.39 billion through the CBILS and 753 loans worth £5.56 billion through the CLBILS (source: British Business Bank).
What the BBLS and the CBILS provided
The Bounce Back Loan Scheme (BBLS) was aimed at smaller businesses and provided loans of £2,000 to £50,000 and the Coronavirus Business Interruption Loan Scheme (CBILS) offered loans up to £5 million. Launched to help ease financial strain during the pandemic, both closed on 31 March this year (2021). The schemes were administered by the Government-backed British Business Bank which then accredited certain lenders who applied for the schemes.
These schemes promoted lending and access to fast finance, a lifeline to many smaller businesses when the pandemic struck. Under such arrangements, the Government provided a guarantee to the lender for the borrower’s loan repayments, up to 80% in relation to the CBILS and up to the full 100% for the BBLS approach. Interest payments for the first 12 months are covered by the Government and under the CBILS, the Government also covers any fees levied by the lender.
In terms of security, under the BBLS framework and for CBILS facilities of less than £250,000, lenders were not permitted to take personal guarantees. If a personal guarantee is provided in connection with a loan under the CBILS, any recovery under the guarantee will exclude the guarantor’s main home and such recoveries will be capped at 20% of the outstanding balance. The lender may still require other forms of security to be put in place under either scheme and a borrower cannot benefit from both schemes concurrently.
Issues: what will happen if and when borrowers default?
In the event a borrower defaults under the BBLS, the lender is able to claim up to 100% of all amounts due under the facility (less any recoveries) from the Government if it confirms that it believes ‘no further payment is likely’. The lenders must undertake an ‘appropriate recovery process’ in accordance with their existing processes but can put in a claim on the guarantee from the Government prior to completing such a recovery process.
The lender must repay the Government if it subsequently makes any recoveries however, the concern is that the process doesn’t encourage the lender to continue to pursue the borrower or other security provider for the sums owed if they can make a claim under the Government guarantee.
This has far-reaching consequences as this approach may encourage many lenders of BBLS, of which there were 1,560,309 loans provided worth £47.36 billion, to make a claim under the guarantee from the Government, which is ultimately funded by the taxpayer.
It is understood that recoveries under the CBILS are similar; the lender must follow its usual recovery process in a default situation which is in line with the approach for dealing with non-CBILS debt. This will likely involve the lender enforcing its security because a lender may be more inclined to take a full security package in connection with loans under the CBILS rather than BBLS loans as the value is likely to be higher and the Government guarantee is limited to 80% for all CBILS loans.
As in relation to BBLS loans, the lender can put in a claim on its Government guarantee and if the Government has paid out and the lender makes recoveries, then 80% of those recoveries which relate to CBILS debt, should be returned to the British Business Bank.
There is a process for apportionment of enforcement recoveries between CBILS and non-CBILS debt. Recoveries from any security which expressly relates only to the CBILS facility should be applied solely in satisfaction of the CBILS debt. Standard ‘all monies’ security should be applied first towards any prior and/or simultaneous non-CBILS debt and secondly, pro-rated between any CBILS debt and subsequent non-CBILS debt.
Reliance on the Government Guarantee
Fundamentally at the core of the schemes is the reliance on the Government guarantee, which will undoubtedly raise issues around the eligibility of loans made, for example, were lenders’ underwriting processes sufficient? There will also be major concerns around enforcement as it is impossible to gauge how motivated a lender will be to pursue a borrower if the lender can lawfully call on the 100% guarantee for BBLS and 80% guarantee for CBILS. Ultimately given the state of the economy post-pandemic and the termination of broader schemes, such as Furlough under the Coronavirus Job Retention Scheme which ended at the end of September, borrower defaults are expected.
Fraud cases are also inevitable. Reportedly strike-offs of companies from Companies House increased to 39,601 in the first three months of 2021 compared to just 4,695 in the same period in 2020 which means many companies were incorporated but left inactive and could be an indicator that some companies were being set up for nefarious purposes such as CBILS and BBLS loan fraud. Increased powers for insolvency practitioners may be necessary to investigate dishonest directors in these scenarios and lenders can apply to court to restore companies to Companies House to pursue them but this is not ideal.
The next few months to a year will certainly be telling in terms of the true fallout when borrowers predictably, and perhaps unavoidably, default under the Government’s £79.3bn coronavirus loan schemes.
For further information, please contact Alexander Pelopidas or the Partner with whom you usually deal.
This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice.