Considering a CLBILS loan? Intercreditor aspects to be aware of

Considering a CLBILS loan? Intercreditor aspects to be aware of

What help is available for start-ups and SMEs whilst the world is on hold tackling COVID-19?

The Coronavirus Large Business Interruption Loan Scheme (CLBILS) is a new loan guarantee scheme managed by the British Business Bank (BBB) on behalf of the UK Government. CLBILS was designed to support the financing of large businesses (those with a turnover in excess of £45 million) affected by the COVID-19 pandemic. The scheme was launched on 20 April 2020. 

Loans under CLBILS are backed by a guarantee from the Secretary of State for Business, Energy and Industrial Strategy in favour of the relevant accredited lender, which guarantees the payment of 80% of all amounts due (net of any recoveries) under the facility. The borrower remains fully liable to repay the lender all amounts due under the facility. However, any recoveries made by the lender following a claim under the guarantee must be repaid on an 80/20 basis, with 80% being repaid to the government.

Further details in respect of the scheme, including eligibility criteria can be found here. Members of the Loan Market Association (LMA) may wish to refer to the LMA’s Note on Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Intercreditor Considerations, dated 25 June 2020. The note introduces the CLBILS and identifies some intercreditor considerations, some of which we also touch on below.

What should you bear in mind when considering a CLBILS loan?

General points

CLBILS may be used to support new lending and to refinance existing debt – and may be used in connection with both secured and unsecured facilities.

Any loan under CLBILS must rank at least pari passu (meaning side by side or on an equal footing) with any other senior obligations (including senior secured obligations) of the borrower. Subject to certain specific exemptions, the facility must share in all security taken by any existing lender from the borrower or, where the borrower is a financing vehicle, any member of the borrower's group.

Can the borrower enter into a CLBILS loan?

As with any financing, both the lender and the borrower will need to check whether the borrower is permitted to incur indebtedness under a CLBILS loan and whether any consents are required from any existing lender. Usually a borrower (or its lawyers) can confirm the position by reviewing any existing finance documents previously entered into between that borrower, any obligors and any existing lender, including any “Permitted Financial Indebtedness” and “Permitted Security” concepts. 

At one end of the spectrum, if the CLBILS loan is unsecured and the borrower is permitted to incur the indebtedness, there may be no need to obtain consent from any existing lender. 

At the other end of the spectrum, a CLBILS loan might be slotted into a complex pre-existing secured financing platform. In such a case, any existing lender would need to be willing to accept a dilution (albeit on a temporary basis) to their own security and there may be terms attached to this consent. In this scenario, the terms are generally agreed and documented between the lenders in an intercreditor agreement. 

What should be included in the intercreditor agreement?

The detail of such agreement is usually commercially driven. However, key aspects we have observed in practice when dealing with CLBILS loans may include:

  • “Financing Vehicle”: considering whether a borrower is a “Financing Vehicle” as defined in the CLBILS loan facility documentation.  If so, the accredited lender must share in any security given by the members of the borrower’s group. It is important to note that there is a requirement for all security enforcement proceeds to be distributed to the accredited lender on a pari passu basis to the liabilities owed to any existing lender at all times.
  • Security package: understanding what is comprised in the new and/or existing security package to analyse how the accredited lender benefits from pari passu transaction security. The borrower may have granted a range of security packages in connection with different financial arrangements. It is important to note that the relevant accredited lender must continue to benefit from a pari passu share of all relevant transaction security granted in the future – which may be addressed by an undertaking in the intercreditor agreement.
  • Subordination: considering whether there will be any subordination of intra-group obligations owed by the borrower or by members of the borrower’s group to the CLBILS loan obligations (i.e. whether any group debt would rank after the CLBILS debt).
  • Commercial aspects: agreeing the commercial terms of any intercreditor agreement, such as:
    • when each lender can be repaid or prepaid prior to a default occurring
    • when each facility can be cancelled (in whole or in part) prior to a default occurring
    • what rights each lender has to block new drawings, declare a default and/or accelerate the facilities after a default. Note that existing finance documents may already address these points, and/or different (even overriding) regimes may need to be set out in the intercreditor agreement
    • when each lender can enforce its security interests and whose consent is required
    • when each lender can amend or waive the terms of their finance documents (subject to certain terms that may not be amended under the CLBILS terms) and whose consent is required and
    • the inclusion of any CLBILS-specific requirements, such as allowing the lender to recover amounts under the guarantee from the UK government without the requirement to share such amounts with other creditors

Jonathan Porteous, head of banking and finance at Stevens & Bolton LLP, comments: 

“Intercreditor arrangements can be complex and all parties will usually wish to carefully consider their position, with appropriate legal advice. In our experience, the impact of COVID-19 on a borrower means that it may need urgent access to a CLBILS loan to reduce the risk of financial difficulty and/or potential defaults under any existing financing arrangements. Early engagement (to the extent required) with any existing lender is key to ensure an agreement is reached and documented as soon as possible. There is no time to lose.” 

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