Private equity firms are increasingly concerned that viable but highly-indebted or loss-making British firms, potentially including high-street names, will be ruled out of coronavirus business loan schemes due to European Union state aid rules.
European lobbying groups representing the industry are set to write to the EU this week to try to ensure such firms are still applicable for loans, despite being deemed “undertakings in difficulty”.
The UK’s coronavirus business loan schemes for small, medium and large companies (called CBILS and CLBILS) fall under the EU’s rules about the aid member states can give to companies. EU rules apply to the UK until the Brexit transition period ends in 2021.
The rules say that loans cannot be given to “undertakings in difficulty”. There are various definitions of such firms, one being that they have accumulated losses worth 50 per cent of subscribed share capital.
City figures worry that the definitions of undertakings in difficulty preclude loans from reaching businesses that are viable. It is a particular worry for the private equity industry, which uses a large amount of debt. Figures in EU countries have expressed similar worries.
This week, European private equity lobbying group Invest Europe is set to write to the European Commission to flag the issue on behalf of groups such as the UK lobbying organisation BVCA. The moves were first reported by Sky News.
BVCA has already highlighted the issue to the government, saying: “A large number of successful UK businesses with strong prospects of being able to repay any government-backed loans are technically considered to be an ‘undertaking in difficulty’.”
“This means accredited banks, who are tasked with applying state aid rules for the purposes of CBILS and CLBILS, are unable to lend to these companies under the UK schemes.”
The group has said it hopes the European Commission would alter the rules temporarily so they are “appropriate for businesses that are funded primarily by debt, are investing heavily to grow and are otherwise performing well (save for the current crisis)”.
James Weber, a partner at Shearman and Sterling specialising in state aid law, told City A.M. last week that the UK’s CBILS and CLBILS schemes should be relatively easy to change to deal with the problem.
“Any reasonable amendment notified to the European Commission is very likely to be approved within one to two days,” he said.