News & Analysis

Private equity-backed companies can now access emergency funding under the UK government's new COVID-19 loan program, but industry critics argue that the support does not go far enough.

The new plan, due to launch Monday, expands on a previous program—the Coronavirus Business Interruption Loan Scheme—by removing a limitation on companies generating revenue of more than £45 million (around $56 million). PE portfolio companies typically did not qualify for loans in the original initiative, as lenders were consolidating turnover across the firms' portfolios. Private-equity backed businesses also had to look at funding alternatives before being allowed to apply.

In the funding program, the government gives an 80% guarantee on each loan offer by selected lenders through the state-owned British Business Bank, rather than lending directly​​​​. Eligible businesses can apply for up to £25 million of financing, while those with over £250 million in turnover can borrow up to £50 million. Jim Shaw, partner at UK law firm Shaw & Co., which advises PE clients, said the program asks lenders to take a substantial risk and many will be uncomfortable lending to some businesses under the existing criteria.

"The UK government is trying to skim through this with the least cost possible to itself," Shaw said. "[The program] is a political whitewash to cover up that they're not willing to put the UK's balance sheet on the line and pick up the cost that is needed to support the economy."

In order for the small and medium-sized businesses to receive the support they need, Shaw believes that the UK needs to guarantee the entire loan to alleviate the credit risk to lenders—like in the US, where the Federal Reserve launched a $2.3 trillion lending program, which covers the entirety of loans to such companies. In the US, however, some have argued the program is more open to exploitation.

For his part, Patrick Magee, chief commercial officer at the British Business Bank, said that PE-owned businesses are particularly vulnerable because they typically carry higher levels of debt. If the companies get into distress, lenders will be constrained from extending more finance and shareholders, who are even more exposed, will be unlikely to put in more capital. That is why the government is need to share the risk.

"We're putting a catalyst in there to make the lenders step forward, and that allows for a more constructive discussion between the equity shareholders and the debt holders to say we can come to a situation here where we can provide capital and the appropriate mix," he said.

Although the original program was launched in March, just 6,020 loans worth a combined £1.1 billion had been provided as of April 13, despite nearly 28,500 formal applications. Magee put the delay down to banks' thorough due diligence processes, but some think that it's not fit for purpose.

Shaw maintains that many companies that were viable before the COVID-19 crisis will be stranded because they are too much of a risk under the current climate. He noted that under that new loan plan, businesses are more likely to get funding because they're able to provide more collateral and security.

He added: "As is the irony of lending. If you need money, you can never get it, and if you don’t, you can. And nothing is changing."

Featured image via Dan Kitwood/Getty Images News