Many private equity backed businesses found themselves denied access to the UK government’s CBIL Scheme as a result of their high levels of debt. Following the recent EU changes in State Aid Law relating to the ‘undertaking in difficulty’ test for businesses, the British Business Bank (which administers the CBIL Scheme) has amended the criteria for its Coronavirus Business Interruption Loan Schemes allowing previously ineligible businesses an opportunity to restructure their balance sheets and qualify for funding.
To be eligible for the CBIL schemes, it was previously a requirement - under EU State aid law – that businesses could demonstrate that they were not an ‘undertaking in difficulty’ as at 31 December 2019. This definition captured, amongst others, businesses which had accumulated losses greater than 50% of their subscribed share capital. The new guidance permits the ‘undertaking in difficulty’ assessment to be determined at the date of application for the schemes.
This change gives businesses which were previously ‘undertakings in difficulty’ at 31 December 2019 the option to restructure their finances before application e.g. by converting their debt to equity so they may become eligible for the schemes.
This of particular relevance to many private equity owned businesses. The financial model of many private equity sponsors typically involves the recovery at the earliest opportunity of part of the cost of their investment. That refinancing process will in turn commonly see the investee incurring significant debt. Those increased debt levels subsequently led to businesses reporting losses – and so constituting an ‘undertaking in difficulty’ - even when their trading performance was strong. The hospitality sector has been a particular favourite of the private equity industry in recent years. Given the impact of COVID restrictions on the sector private equity businesses could benefit significantly from these changes to the CBIL scheme criteria.
