COVID-19 has been in the UK for at least six months and its influence doesn’t appear to be waning anytime soon. The average Jo(e) will no doubt have experienced a change in attitudes towards facial coverings and working from home, but financial professionals have also witnessed a fundamental change in the lending economy.

Many lenders have faced a difficult choice — do they become part of one (or more) of the Government-backed schemes, committing to setup costs whilst not knowing with any certainty when those schemes will end? Or do they try their luck outside of the schemes, avoiding those immediate costs but running the risk of government-guaranteed loans crowding-them-out of the market?

Both a borrower and a lender be

The UK Government’s response to the crisis was to launch three schemes to support business lending, all of which operate through ‘Accredited Lenders’ i.e. banks or non-banks that have been approved by the British Business Bank (BBB).

All schemes are ‘true’ government guarantees — although operated through the BBB, the guarantor is actually the Secretary of State for Business, Energy and Industrial Strategy. Facility limits are granted, and can be extended soon after they’ve been filled:

• BBLS (Bounce Back Loan Scheme)
  The definition of ‘fast cash’, with 100% government-guaranteed principal and interest payments and no credit checks needed for borrowers. If you think you need the money, you can have it. If you realise at a later date that you never had any hope of repaying the loan, tough; these loans are not subject to the usual consumer protection laws, nevertheless by opting for this loan, you won’t risk losing your home or your car and you won’t have to provide a personal guarantee.
• CBILS (Coronavirus Business Interruption Loan Scheme)
  This is for profitable businesses who are capable of passing the lender’s credit checks, and are merely struggling with cash flow as a result of COVID-19. The government guarantees 80% of the principal payments under a shared loss arrangement (80:20), and also pays the first twelve months of interest payments and fees (essentially as a kind of grant) on behalf of the borrower. These payments have been labelled ‘Business Interruption Payments’, and together with the guarantee, they are intended to help lenders continue to lend at rates that are as close to pre-crisis levels as possible. Not just restricted to SME term loans, the scheme also covers additional loan types such as invoice financing and asset finance. Cars can be repossessed under CBILS but personal guarantees are only applied to larger loans.
• CLBILS (Coronavirus Large Business Interruption Loan Scheme)
  The CLBILS has the same intention as the CBILS, but it’s for larger businesses and has a slightly different execution. Here, there are no Business Interruption Payments, but the Government does extend its 80% guarantee to also cover the interest repayments and even the originator’s fees.

Overview of schemes launched by the UK government in response to COVID-19

This (almost) Sceptred Isle

So why are these schemes all different? Much of it appears to be down to European competition & state intervention rules rather than a strategic decision. The lack of Business Interruption Payments in CLBILS for instance is likely because of grant restrictions; the degree and structure of all of these guarantee schemes had to be approved by the European Commission (EC), which explains why they are broadly similar across European nations.

You may be wondering why the EC has any influence on UK policy at all. Surely the UK has Brexited? One thing to remember, is that even though the UK is no longer a member of the EU, it does still have to abide by all relevant rules during the transition period (and doesn’t actually have any elected officials in Brussels to argue its case).

It’s probably no coincidence that the transition period ends on New Year’s Eve — the same end date presently allowable by the EC for all of the emergency government support schemes. Even though the three UK schemes are currently and confusingly due to end on different dates (in fact, in different months), these are widely expected to be extended until at least the end of the year, in line with the EC rules.

Many will be watching keenly as the trade negotiations progress, since any changes to the UK schemes in the new year will surely depend upon any conditions imposed by the new trade agreement. At the very least though, we should see a return to the old EFG scheme (Enterprise Finance Guarantee). Under that scheme, there were no Business Interruption Payments, but the Government did still provide a 75% guarantee for principal payments on individual loans.

Shall I compare thee to a Summer’s day?

The former scheme certainly had its critics, though not necessarily because of the level of the guarantee. Many lenders who participated in or considered participating in that scheme have complained to us about the sluggishness of the approval process and the lack of automation and connectivity in the reporting process.

At the same time, the BBB also didn’t exactly welcome non-bank lenders with open arms — they explicitly forbade P2P and marketplace lenders from participating in the EFG scheme, citing concerns over retail investors being commingled with institutional investors.

Times have certainly changed… The BBB has made concerted efforts to ramp up the number of non-bank accredited lenders, including the previously ostracised P2P lenders (they just have to provide evidence they can keep retail monies distinctly separate — a reasonable compromise). The BBB clearly appears to recognise the systemic importance of the non-banks and the need to urgently deploy capital to businesses in need.

And those P2P lenders, initially not keen to participate have discovered that the BBB are working around the clock to improve their systems and connectivity. A new system capable of integrating with bank systems is expected imminently, and expectations are that APIs will follow at a later date.

What’s mine is yours, and what’s yours can also be yours

While the scheme is much improved, but we’ve found that many lenders still approach the process with some trepidation. Guarantees ostensibly can’t be transferred, yet if an institutional investor can’t receive the economic benefits of the guarantee, it entirely prevents the lender from accessing any funding.

The good news is, whilst it may be particularly complex to securitise these investment opportunities, it certainly is possible. CrossLend is actually working with a number of Accredited Lenders to this end, securitising their origination and passing it on to institutional investors in the form of a tradeable note.

Investors see this to some extent as an opportunistic trade. With 6 year gilts currently yielding less than zero, government-guaranteed investments with yields quite far above zero become all the more interesting.

Money can still be a good soldier

So, what does this mean for the future of lending? Can banks and non-banks still write loans if they’re not part of these schemes? They certainly can, but this changes the dynamics of the market…

The BBLS provides an instant GBP 50k in cash to businesses without any checks (aside from identity or AML checks). For businesses facing extremely urgent cash flow issues, the scheme offering immediate cash would naturally be their first port of call. However, they can only participate in one scheme… You can’t have both a BBLS loan and a CBILS loan… You can transfer into the CBILS scheme, but you have to use your CBILS loan to refinance your BBLS loan too.

All of this makes it a question of numbers. Logically-speaking, if you need less than GBP 50k, you would always try to go through the BBLS scheme; if you need a little more than GBP 50k, you’ll probably go through BBLS and top it up with another loan from a lender independent of these schemes; as the amount begins to go up, it starts to make more and more sense to refinance under CBILS or CLBILS.

Finally, there’s also the human element… Not every lender is a member of every scheme. Many borrowers’ first instincts will be to attempt to take out loans with the lenders with whom they already have an existing relationship.