M&A funding through the Coronavirus Business Interruption Loan Scheme (CBILS)
The current climate
Late 2019/Early 2020, liquidity in the M&A market was strong, uncertainty created by the general election was on the decline; whilst the value of both UK domestic and outward mergers was up by £1.1b in comparison to Q1 of 2019. However, as COVID-19 spread and fear began to grip the market, numerous M&A deals were shelved or placed on hold, until the market showed signs of recuperation. Those delayed deals will soon face the added detriment of a greater focus on due diligence and how the target continued to operate throughout the crisis.
Much like the “big shorts” of the 2008 financial crisis, there are a small few who are looking to turn the current adversity into an opportunity. As the value of many businesses decline, opportunities for potentially profitable M&A’s rise. Conversely business owners looking to increase the value of their companies can do so by demonstrating their resilience in the current market. A company that can show their versatility and aptitude with regard to their handling of the pandemic will hold a powerful bargaining chip when negotiating a sale price.
As of the 21st of June, £10.53b worth of loans through the CBILS have been approved according to the Treasury. The government backs the loans, paying all interest and accompanying fees for the first 12 months allowing smaller businesses to stave off the uncertainty of borrowing in a downturn. Approved lenders can provide up to £5million in the form of overdrafts, invoice finance, asset finance and regular term loans with repayment terms of up to six years.
Though the CBILS is government backed, the borrower still remains liable for all the debt incurred but with any facilities below £250,000 not requiring a personal guarantee. As for those above the threshold, the requirement of a personal guarantee is at the discretion of the lender. Debt recovery is capped at 20% of the outstanding balance in relation to the CBIL plus the business assets of the company acquiring the facility.
There seems to be growing fear amongst bankers that the number of CBIL’s being approved is increasing the risk of problem borrowers being accepted. The view being that the heightened borrowing will lead to thousands of bad debts needing to be reclaimed resulting in some lobby institutions calling on the government to permit swaps on the debt for equity in the borrowing company. Nonetheless there seems to be no signs of this stopping; the total number of CBILS applications is just shy of 100,000, with more than half being approved. The average value of the approved CBILS is just over £185,000.
Is my company eligible for a CBIL?
CBIL funding is only available to SME’s or small medium-sized enterprises, i.e. companies whose turnover is no more than £45million. This turnover must be generated from at least 50% of the company’s trading activity.
A key requirement of a CBIL application is that the lender views the borrowing proposal as being viable under normal circumstances i.e. pre-COVID-19. Essentially the lender asks: Would we accept this application based on our standard eligibility and due diligence criteria even if there was no pandemic?
The lender must also believe that the providing of a facility will allow the business to continue to trade through the short/medium-term difficulty resulting from COVID-19. The view being that once the dust of Coronavirus settles, the business will be in a financial position to pay off the debt.
Information you will likely need to provide includes:
- The amount you wish to borrow
- The length that this will cover you for
- The viable business plan (purpose)
- Forecasts (factoring in the current climate, some banks will require monthly forecasts)
- Most recently filed statutory accounts
- Management accounts for 2019 and 2020
- The assets and liabilities of the business
- Current debtors and creditors
- A self-certification that your business has been impacted by COVID-19
The general terms of the CBILS (though this can vary from lender to lender)
- The interest rates tend to range from 1.5%-12%, though regional lenders have quoted as high as 18%
- These rates can be fixed or variable
- The first 12 months of interest on the CBIL and any arrangement fees will be paid for by the UK government as a Business Interruption Payment
- No upfront costs and lower initial repayments
- Repayments can be made at any time with no early repayment fee
- After the first 12 months, the borrower is liable for any interest or fees on the CBIL
- The borrower remains liable for repayment of 100% of the borrowing
- Term of the loan varies from six months to six years
- Some lenders only offer CBIL’s to existing customers
What can I use CBIL finance for?
What constitutes a viable borrowing proposal is ultimately up to the lender, though in general accepted applications have related to:
- Paying employees
- Buying stock or inventory
- Managing cash flow
- Purchasing or leasing property
- Purchasing or renting equipment/machinery
- Research and development (though the business must carry out a commercial activity)
- Expanding an existing business
- Buying a business (including goodwill)
Can I use a CBIL to finance M&A?
Ultimately the decision is up to the lender and whether the proposal you are presenting is viable. Many high streets banks have explicitly confirmed they will consider acquisitions. The HSBC guidance provides that the loan must be used for an eligible purpose related to COVID-19, listing a number of examples that include, “Buying a business (including goodwill)”. Further to this, the Metro Bank eligibility self-assessment poses this question:
- Is the main reason for seeking finance to support investment, increase working capital, fund business growth or acquisitions?
Therefore, acquisitions and by virtue mergers fall within the viable proposal bracket and a business owner could seek CBIL funding with the intention of creating/expanding their current group. This current lull allows businesses to perform a sort of housekeeping through tidying up their current corporate structure and adopting new companies into their group.
An added bonus is that potential borrowers will be able to use this opportunity to establish trust with a lender, provided of course they do not default.
How will due diligence be affected?
Potential buyers will want to assess the ‘true’ value of the business, taking into consideration the financial impact of COVID-19. If the seller is forthcoming as to how their business has been affected, then the buyer can formulate a valuation based on the last 12 months of earnings. This new valuation will need to incorporate a number of things:
- Lost revenue that is unlikely to be made up with future demand.
- Any Bounce Back Loan Scheme (BBLS), CBILS, Coronavirus Large Business Interruption Loan Scheme (CLBILS) or other form of facility taken in response to COVID-19?
- Any costs not normally incurred e.g. the setting up of remote-working technology, redundancy packages, outsourcing of otherwise regular functions?
- How have other businesses in which the company relies on been affected?
- How have competing businesses performed in the target company’s sector?
A seller should expect a greater focus on due diligence than what would otherwise normally be expected and should prepare for a longer time frame than normal, as parties face new types of challenges like conducting virtual due diligence. Though firms are beginning to re-populate their offices, social distancing and staff working remotely will not hasten the situation.
Some COVID-19 due diligence points to consider:
- Steps will need to be taken to ensure that physical inspection of properties and/or assets have been carried out.
- If a company has laid off staff, they will need to show the impact this has had on the business, were these staff members key workers or highly skilled?
- Where staff have been furloughed, was this conducted in the appropriate manner and thus will not incur liability from HMRC further down the line?
- An examination of the state of the market, whether there will be customers in the first place, whether there will be suppliers and if so, will their prices have been negatively affected as a result of COVID-19.
- Forecasting uncertainties as it is likely for a number of industries that 2020 and 2021 forecasts will be invalidated because of the pandemic. Candid projections for the business and the sector as a whole will be a necessity.
- Did the company take out insurance to cover risks arising from COVID-19?
- How have government restrictions/guidelines impacted/are impacting the business and/or its suppliers?
- What current/future contractual obligations does the business owe to suppliers and can they be met?
With over 50,000 CBIL’s being approved, the funding proposals and the facilities granted vary vastly from business to business. There is no prohibition for using CBIL’s to fund an M&A, with some lenders outright listing M&As as viable proposals and business owners can make serious use of the opportunities that the CBILS presents to emerge from the pandemic with a bolstered corporate group, taking advantage of generally lower valued businesses. Those looking to partake in an M&A will need to ensure enhanced due diligence is conducted, with a greater focus on the ‘correct’ market value of the business.
The value of a business in the current/future market will depend greatly on its ability to cope with COVID-19. The general consensus is that in the post Coronavirus market, we will see a surge in the number of distressed businesses looking for funding and buyers. Whilst acquirers sit on substantial unspent capital, looking to snap up a bargain. Popular opinion dictates that the current market favours buyers; that said a seller can transfer their ability to perform well in the pandemic, into real business value.