COVID-19

UK: Breathing Space Scheme Regulations

 

A draft of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the “Regulations”) was published on July 15, with a view to implementing the scheme in England and Wales. It is anticipated that the Regulations will come into force on May 4, 2021.

Overview

The Regulations propose to provide a debtor (specified as an individual in one of the eligibility criteria) with the opportunity to obtain a moratorium that provides “breathing space,” during which creditor action is prohibited, to allow debtors to engage with a debt adviser in order to seek a sustainable solution to their debt problems with their creditors.

How Can Someone Obtain a Breathing Space Moratorium?

In order to enter a breathing space moratorium, a debtor will first have to access advice from a “debt advice provider,” meaning an FCA-regulated debt adviser or an adviser from another organization that qualifies for an exemption from FCA authorization (such as a local authority).

It is worth noting that for the purposes of the Regulations, the “insolvency exclusion” ordinarily available under FSMA 2000 will not apply to a debt advice provider, thus preventing the application of the exception that removes debt counseling as a regulated activity when undertaken by an insolvency practitioner as an officeholder or in reasonable contemplation of an appointment.

Furthermore, a debtor is excluded from accessing a breathing space moratorium if that individual has entered a breathing space moratorium in the previous 12 months.

When considering whether a breathing space moratorium ought to apply, the debt advice provider must assess whether:

  1. the debtor has sufficient funds or income to discharge or liquidate his debts as they fall due;
  2. it would benefit the debtor to enter into a debt solution (such as bankruptcy, an individual voluntary arrangement or a voluntary debt management plan);
  3. the debtor may be eligible to enter into a debt solution during a moratorium or as soon as reasonably practicable after the moratorium ends; and
  4. the moratorium period is necessary in order for the debt advice provider (i) to assess which debt solution would be appropriate for the debtor, (ii) to advise the debtor on which debt solution would be appropriate or (iii) for a debt solution to be put in place.

What Are the Protections of a Breathing Space Moratorium?

During the breathing space moratorium, the accrual of contractual and default interest is stopped, as well as the incurrence of fees and charges. Creditors are also prevented from taking enforcement action against the debtor. The creditor recovery and enforcement moratorium extends to any contact between the debtor, the creditor or his agent relating to the repayment of debts covered by a breathing space moratorium. A breathing space moratorium will include almost all personal debts with broadly the same set of exclusions as apply in bankruptcy and will cover the business debts of sole traders who have a turnover under £85,000.

Additionally, creditors are barred from the retrospective application of interest and charges should a debtor leave the breathing space moratorium without entering a debt solution.

However, if a debtor falls into arrears on an ongoing liability (such as mortgage payments, rent, insurance premiums, taxes and utility bills) as it falls due to be paid during the breathing space moratorium, he will not be protected from enforcement action or the charging of additional interest, fees and charges on these missed bill payments.

Creditor Notifications

It is proposed that entries and exits of debtors to and from a breathing space moratorium would be recorded through an Insolvency Service-run central portal that will be populated with information supplied by the debt advice provider. Creditors would be informed through this service of any entries and exits.

Additionally, it is proposed that there will be a private register of debtors in the scheme, and individual creditors will have access to a register of those individuals who owe them debts who are in a breathing space moratorium and have been included in the portal. However, creditors will not be able to access details of other debtors on this register.

Mental Health Moratorium

Additionally, an alternative mechanism to a breathing space moratorium will be available to debtors receiving treatment for a mental health crisis. In such cases, a debt advice provider would not carry out a financial assessment, but instead would provide access to a breathing space moratorium on the basis of evidence demonstrating that the debtor is receiving mental health crisis care.

Evidence of such a mental health crisis will be available from social workers, nurses, occupational therapists or clinical psychologists who have specific training in mental health and mental capacity law, are experienced in supporting people in crisis and are usually based in community, crisis or home treatment teams and approved by local authorities.

The mental health moratorium benefits from the same protections as the breathing space moratorium, although it is not fixed at 60 days and instead will continue for however long the individual’s crisis care lasts.

Timescales

The protections afforded by a breathing space moratorium last for a period of 60 days, and as noted above, debtors may not access a breathing space moratorium if they have entered a breathing space moratorium in the previous 12 months.

No earlier than 25 days and no later than 35 days after the commencement of the moratorium, the debt advice provider will have to complete a “midway review” to ensure that the debtor is continuing to comply with the ongoing eligibility requirements.

Our Thoughts

The Regulations will offer welcome relief for debtors. Although it is uncertain what the “state of play” will be when the Regulations come into force in May 2021, the ongoing Covid-19 pandemic has led and is likely to continue to lead to a greater number of defaults on debts. While many creditors have been accustomed to providing informal breathing space moratoria to debtors in order to support them in seeking appropriate debt advice, the Regulations introduce greater formality to the process. It is likely that without the introduction of the Regulations, during a period with an uncertain economic outlook, many creditors would have been more reluctant to provide informal breathing space moratoria.

Notwithstanding the above, the Regulations will be particularly relevant when it comes to payday loans and credit cards, where the high rates of interest charged can be very burdensome. With the pausing of interest and default interest under the Regulations, individuals will be offered some respite from such debts.

Finally, in a world where mental health is becoming an increasingly discussed topic, it is a positive step that the Regulations will introduce mechanisms to protect vulnerable individuals in society.

FHFA Extends COVID-19 Related Loan Origination Flexibilities Through August 31

 

On July 9, the Federal Housing Finance Agency (FHFA) announced that several loan origination flexibilities originally set to expire on July 31 will be extended through August 31. These flexibilities include alternative appraisals on purchase and rate term refinance loans; alternative methods for documenting income and verifying employment before loan closing; and expanding the use of power of attorney and remote online notarizations to assist with loan closings. These loan origination flexibilities are intended to ensure borrowers receive continued support during the COVID-19 pandemic. Release.

Federal Housing Administration Makes New Loan Modification Options Available for Homeowners

 

On July 8, the Federal Housing Administration (FHA) announced an expanded array of loss-mitigation tools available to mortgage servicers. These measures require servicers to assess homeowners for multiple loan-modification options before the end of their forbearance period. These new measures are intended to assist homeowners financially impacted by the COVID-19 pandemic. Release.

CFPB Issues Interim Final Rule on Loss Mitigation Options for Homeowners Impacted by COVID-19

 

On June 23, the Consumer Financial Protection Bureau (CFPB) issued an interim final rule that amends Regulation X by temporarily permitting mortgage servicers to offer certain loss mitigation options to borrowers impacted by the COVID-19 pandemic without first obtaining a completed loss mitigation application from the borrower. Release. Interim Final Rule.

UK Government’s COVID-19 Support for Businesses: A First Stocktake Three Months On

 

Since March, governments around the world have implemented unprecedented measures in an attempt to avoid a severe economic downturn as a result of the COVID-19 pandemic. In the United Kingdom, HM Treasury (“Treasury”) has spearheaded these efforts for the government. The UK government’s measures include the Coronavirus Business Interruption Loan Scheme (“CBILS”), the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”), the Bounce Back Loan Scheme (“BBLS”) and the Future Fund Scheme (“Future Fund”, and together the “Schemes”). To date, the UK government has provided £38.36bn worth of support through the Schemes (directly or via guarantees), enabling finance to be provided to 913,265 companies under the Schemes.[1]

Since their inception, the UK government has published data and statistics on the implementation of the Schemes. This enables a first stocktake three months since the launch of the first of the Schemes.

UK Government Schemes

Each Scheme targets businesses of different sizes and, as such, provides differing levels of UK government-backed support. The Treasury launched:

  • CBILS on March 23. CBILS is available to small and medium enterprises (“SMEs”) with an annual turnover of no more than £45 million. Under CBILS, the UK government provides the relevant accredited lender with a partial guarantee (80%) in respect of the outstanding balance of the relevant facility (subject to an overall cap per lender). Any facility provided under CBILS is up to a maximum amount of £5m.
  • CLBILS on April 20. CBILS is available to businesses with annual turnover of more than £45 million. Facilities of up to £25m are available, via accredited lenders, for businesses with an annual turnover between £45m and £250m. Facilities of up to £200m (in respect of term loans and revolving credit facilities) and £50m (in invoice finance and asset finance facilities) are available to businesses with an annual turnover of more than £250m.[2]
  • BBLS on May 4. BBLS provides loans, through accredited lenders, of between £2,000 and up to 25% of the borrower’s turnover, up to a maximum of £50,000. There are no turnover requirements, but BBLS is targeted at SMEs.
  • The Future Fund on May 20. The Future Fund adopts a different approach to the rest of the Schemes. It is targeted at innovative UK companies with good potential that typically rely on equity investment—i.e., it is more in line with start-up and venture capital financing mechanisms. The Future Fund is an investor-lead Scheme, and the UK government will match the third-party investment (with a minimum of £125,000, up to a maximum of £5m). Such UK government matching investment is by way of subscribing for convertible loan notes issued by the relevant company.

Taking Stock

Nearly three months on, the Schemes have received over one million applications and supported hundreds of thousands of business across the UK.

As of June 14, CBILS had supported a total of 49,247 facilities out of a total of 96,492 applications, equaling an application success rate of 51%. The value of the accepted applications amounts to £10.11bn, averaging just over £205,290 per debt facility.

In contrast, the CLBILS aimed at large corporations has backed facilities in the value of £1.77bn for a total of 279 successful applicants. This totals just over £6.3m per applicant on average. The success rate for CLBILS has so far been lower than that for CBILS: only around 42% of applicants have been approved.

BBLS boasts by far the greatest number of successful applicants: 863,584 small businesses have been able to secure funding through the Scheme. This high number also translates into a high success rate: Just short of 82% of applicants have had their applications approved. Dispensing a total of £26.34bn, businesses have on average obtained £30,500 in finance.

Funding obtained under the Future Fund Scheme has so far totaled £146m. The money has gone to 155 successful companies out of a total of 577 applicants, who have received an average of approximately 940,000. This amounts to a success rate of just under 27%.[3]

Comparing two metrics reveals notable differences between the Schemes:

1. Success rate: Successful applications under BBLS are by far the highest proportion with 82%, eclipsing the other Schemes. In comparison, the Future Fund has provided finance to just 27% of applicants. CBILS and CLBILS have application success rates of 51% and 42%, respectively, sitting in between the two other Schemes.

While the UK government has not published further analysis of these discrepancies, the varying success rates no doubt indicate the more stringent application criteria and more thorough scrutiny, cultivating a more selective application processes for the larger debt facilities (as opposed to the lower facility size and shorter maturity of BBLS loans). 

2. Approved amounts: The average amount of £30,500 granted under BBLS is considerably closer to the UK government’s cap of £50,000 than that of other Schemes. In contrast, the other three Schemes’ average facilities come in significantly below the maximum amount available under those Schemes. CBILS applicants’ average funding of £205,290 sits against a cap of £5m, whereas the average CLBILS facility of £6.3m pales against an available maximum of £25m or up to £200m, depending on the size of the business (although noting the £200m cap was only increased to that amount, from £50m, on May 19). The Future Fund’s average disbursement of £940,000 is somewhat closer to the £5m cap.

As the UK government has not released detailed application statistics, it remains speculative whether lower levels of support to a larger number of businesses has been prioritized, or whether companies are applying for lower amounts of finance than anticipated. Equally, the UK government-imposed caps may have also been designed to meet all eventualities, acting as a ceiling with substantial buffer, rather than suggesting an expectation that most companies would apply for funding close to the respective caps. That said, the low average size of a CLBILS facility of £6.3m is very surprising given that the maximum facility size was increased to £200m cap (from £50m) on May 19 following discussions between the UK government, lenders and business groups.

Another reason why the CLBILS facility size and/or acceptance rates may be low is that, notwithstanding the Chancellor clarifying that CLBILS could be accessed by private equity-owned companies, it has been reported[4] that private equity-owned companies are still prevented from accessing CLBILS (for example, Hawksmoor, of which the majority is owned by Graphite). The rationale for these refusals is that such private equity-owned companies do not meet the CLBILS criteria, and particularly that they were an “undertaking in difficulty” as of December 31, 2019 (this requirement effectively comes from EU state-aid rules). Private Equity firms often fail this test, even if they are operating successfully and are in no financial difficulty, because they tend to be highly leveraged.[5]

Alternative Lenders

In line with the unprecedented scale of economic support, the UK government has also adopted innovative approaches to lending by approving alternative lenders as part of its COVID-19 Schemes. Alternative lending used in this context (i.e., not including true direct lending/alternative credit funds) tends to mean peer-to-peer lending, but it can also include finance from challenger banks, using technology to connect loan investors and borrowers on online platforms. Borrowers turning to these types of alternative lending providers often struggle to secure funding from traditional lending institutions, such as banks. Such loans typically have higher interest rates, a lower duration and are often unsecured.[6] Emerging in the UK in 2005, the practice gained traction in the aftermath of the financial crisis as a lifeline for SMEs and has since increased its market share consistently.

Amid the COVID-19 pandemic in May, the British Business Bank approved four fintechs as part of CBILS to lend money: Assetz Capital, Atom Bank, Ebury and Fleximise.[7] Other approved alternative lenders include Funding Circle, a dedicated SME peer-to-peer lending platform, and Starling Bank, a leading challenger bank.[8] BBLS has accredited a more limited number of alternative lenders, including Starling Bank and Tide, a challenger bank focused on offering banking services to SMEs.[9] The lenders accredited to provide finance to large corporations under the CLBILS remain, to date, traditional lenders, such as Barclays, NatWest or Santander.[10]

The UK government’s move to approve such alternative lenders and fintech companies may illustrate a broader readiness to engage with a budding group of innovative businesses within the lending sector. Such alternative lenders have long constituted a lifeline to SMEs, which may be unable to access funding through traditional avenues.[11] In the current COVID-19 environment, such lenders may become increasingly important to keep SMEs afloat, inside and outside of the UK government-guaranteed Schemes.

We noted in “COVID-19 UK: Finance – Large Business Loan Scheme launched and available to PE owned and large companies – Insight” that it will be interesting to see whether direct lending/alternative credit funds will look to become accredited lenders under CLBILS to take advantage of the UK government guarantee, given that these types of lenders are used to, and are well positioned to, structure and provide bespoke financing solutions. However, as outlined above, to date direct lending/alternative credit funds have not seemed to want to be become accredited lenders.

Concluding Thoughts

Unprecedented challenges often call for unprecedented responses. The UK government’s readiness to pour significant amounts of money into Schemes supporting various segments of the economy has been critical to the survival of many businesses. As updated figures are published over the next months, it will become increasingly evident whether the UK economy’s need for UK government-supported debt facilities will grow, subside or remain steady; how much finance businesses continue to require; and how successful their applications are. The ultimate stocktake of these Schemes, however, is likely still some time away, once the medium- to long-term economic effects of the pandemic crystalize.


[1] UK government, ‘HM Treasury coronavirus (COVID-19) business loan scheme statistics’, June 16, 2002, <https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics#history>.
[2] Companies that borrow more than £50 million through CLBILS are subject to certain restrictions. These restrictions include: (i) no dividend payments to be made other than those that have already been declared; (ii) no share buybacks; and (iii) no cash bonuses, or pay raises, to senior management and/or directors except in certain limited and specific cases.
[3] All figures from UK government, ‘HM Treasury coronavirus (COVID-19) business loan scheme statistics’, June 16, 2002, <https://www.gov.uk/government/collections/hm-treasury-coronavirus-covid-19-business-loan-scheme-statistics#history>.
[4] “Private equity-owned companies miss out on bailout loans”, Financial Times, May 19, 2020.
[5] Please see a future “Insight” to be published on https://covid19.orrick.com/UK/ for further discussion on this topic.
[6] Kenneth Michlitsch, ‘An introduction to alternative lending’, Morgan Stanley Insights, May 20, 2020, <https://www.morganstanley.com/im/en-us/financial-advisor/insights/investment-insights/an-introduction-to-alternative-lending.html>; Funding Circle, ‘What is alternative lending’, February 26, 2019, <https://www.fundingcircle.com/us/resources/alternative-lending/>.
[7] Victor Chatenay, ‘Four new alt lenders have been accredited under the Coronavirus Business Interruption Loan Scheme’, Business Insider, May 11, 2020, <https://www.businessinsider.com/four-alt-lenders-approved-for-cbils-2020-5?r=DE&IR=T>.
[8] British Business Bank, ‘CBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/>, accessed June 20, 2020.
[9] British Business Bank, ‘CLBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/bounce-back-loans/current-accredited-lenders-and-partners/>, accessed June 20, 2020.
[10] British Business Bank, ‘CLBILS – current accredited lenders and partners’, <https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/clbils/current-accredited-lenders-and-partners-2/>, accessed June 20, 2020.
[11] SME Finance Forum, ‘MSME finance gap’, <https://www.smefinanceforum.org/data-sites/msme-finance-gap>, accessed June 20, 2020. 

Federal Reserve Board Announces Expansion in the Number and Type of Entities Eligible to Directly Use Its Municipal Liquidity Facility

 

On June 3, the Federal Reserve Board announced an expansion in the number and type of entities eligible to directly use its Municipal Liquidity Facility (MLF). Under the new terms, all U.S. states will be able to have at least two cities or counties eligible to directly issue notes to the MLF, regardless of population. Governors of each state will also be able to designate two issuers in their jurisdictions whose revenues are generally derived from operating government activities to be eligible to directly use the facility. Release.

CFTC: Interim Final Rule – Uncleared Swaps Margin – Proposed Rule: CPO Registration Exemption

 

On May 28, the Commodity Futures Trading Commission (CFTC) approved an interim rule to grant an extension of the compliance schedule for initial margin requirements for uncleared swaps in response to operational challenges certain entities are facing due to the COVID-19 pandemic. The CFTC also approved a proposed rule that amends regulation 3.10(c)(3), which provides an exemption from registration as a CPO for certain persons located outside the U.S. who are operating offshore commodity pools that are neither offered nor sold to U.S. participants. Release.

FHFA Extends Loan Processing Flexibilities for Fannie Mae and Freddie Mac Customers

 

On May 5, the Federal Housing Finance Agency (“FHFA”) extended loan origination flexibilities offered by Fannie Mae and Freddie Mac until at least June 30th. The extended flexibilities aim to help borrowers during the COVID-19 pandemic by facilitating loan closings and include: (1) alternative appraisals on purchase and rate term refinance loans; (2) alternative methods for verifying employment; and (3) expanding the use of power of attorney and remote online notarizations. Release.

Rating Agency Developments

 

On April 3, Moody’s published its Operating Company Securitizations. Methodology.

On April 3, KBRA published a report titled CMBS: Coronavirus (COVID-19): Multifamily Update – Bracing for Forbearance. Report.

On April 2, KBRA published a report titled Structured Credit: Coronavirus (COVID-19): KBRA U.S. BSL CLO Rating Sensitivity Analysis. Report.

On April 1, DBRS Morningstar published its U.S. Residential Mortgage-Backed Securities Model and Ratings. Methodology.

On March 31, DBRS Morningstar published its U.S. ABS General Ratings. Methodology.

SEC Announces Temporary Relief and Assistance to Market Participants

 

On March 26, the SEC announced temporary measures to assist market participants in response to COVID-19. The actions include i) temporary relief from Form ID notarization requirements through July 1, ii) extended filing deadlines for certain reports and forms required under Regulation A and Regulation Crowdfunding issuers, and iii) a temporary exemption, subject to certain conditions, for required filings for municipal advisors through June 30. Release