Extension of Government Support Loans - British Business Bank announce new “undertaking in difficulty” assessment

• United Kingdom

• Banking and finance
• Corporate
• Private equity

29-09-2020

Rishi Sunak confirmed on Thursday 24^th September that the government support loans programme comprising CBILS and CLBILS will be extended until 30 November.  Potentially of more interest and significance was the announcement on Friday 25^th September by the British Business Bank (the administrator of the schemes) of some new flexibility in the assessment of whether an applying business is “undertaking in difficulty” and therefore ineligible for government support under EU state aid regulations.

Access to CBILS and CLBILS for private equity backed businesses has to date been very limited.  Typical private equity deal structures involve the majority of the investment taking the form of loan notes in holding companies, the accounting losses attributable to this debt on the balance sheet of the holding companies results in losses exceeding 50% of their subscribed share capital and as such a categorisation as an “undertaking in difficultly”. 

The potentially significant change is that the British Business Bank have announced that going forward this will be assessed at the time of application for CBILS or CLBILS rather than being based on the position as at 31 December 2019 (originally set to protect against government support being directed towards businesses that were not viable prior to the pandemic).  Private equity businesses will now therefore seemingly have the opportunity to consider a balance sheet restructuring prior to application.  Our expectation is that this may be of particular interest for portfolio businesses in casual dining or hospitality space which will be most impacted by curfews and tightening restrictions.

Any balance sheet restructuring has potential consequences in relation to equity rights and tax.  From a tax perspective, there is likely to be a trade-off between any tax costs associated with a balance sheet restructuring and the benefits of being able to access the CBILS or CLBILS. Potential tax costs could include the loss of future tax deductions associated with current investor loans or corporation tax and withholding tax costs that could arise on replacing loans with equity. These would need to be carefully considered but are expected in many cases to be manageable with appropriate planning and should not be, of themselves, an obstacle to private equity-backed companies seeking to access these important funding schemes.

Eligibility under the “undertaking in difficulty” test will of course not automatically result in an approval for funding by a lender and it remains to be seen what impact changes will have on how accessible the schemes are for private equity backed businesses. 

Our multi-disciplinary private equity team can guide you through the considerations and process.