The British Business Bank has recently changed its guidance on dates when an ‘undertaking in difficulty’ test for businesses is assessed. This may prove to be a lifeline for struggling companies in the retail and hospitality sectors, which are most likely to suffer as a result of new COVID-19 restrictions.
As the retail and hospitality sector attempts to come to terms with changing consumer trends, new local lockdown restrictions, and national restrictions on opening times will undoubtedly have a significant impact on already struggling businesses.
In his Winter Economy Plan, Chancellor, Rishi Sunak, outlined a package of new measures aimed at providing support to businesses and employees as we approach the winter months, and face a period of extended restrictions. Included in this was the extension of the £58bn government loans programme until the end of November, as well as greater flexibility over repaying loans.
Many private equity-backed groups in the hospitality and retail sectors, have up until now been largely ineligible for government support through the Coronavirus Business Interruption Loan Scheme (CBILS) or the Coronavirus Large Business Interruption Loan Scheme (CLBILS), due to EU state aid regulations making any businesses categorised as an ‘undertaking in difficulty’ ineligible.
To be classed as an ‘undertaking in difficulty’, businesses may have accumulated losses greater than half of their subscribed share capital. The debt-heavy financial model of many private equity deal structures, where the majority of investment takes the form of loan notes in holding companies, means that they often come under this category. This model leads to reduced tax bills, but large debts, which are repaid when the business is sold.
Changes in ‘undertaking in difficulty’ guidance
However, the British Business Bank has recently changed its guidance on dates when an ‘undertaking in difficulty’ test for businesses is assessed. This technical change may prove to be a lifeline for struggling companies in the retail and hospitality sectors, which are most likely to suffer as a result of new restrictions.
To be eligible to apply for the above funding schemes, businesses previously had to demonstrate that they were not an ‘undertaking in difficulty’ as of 31 December 2019, originally put in place to ensure government support was not directed to unviable business before the pandemic.
The new guidance means that businesses will have to undertake the test on the date of the application, so previously ineligible businesses, that were classed as an ‘undertaking in difficulty’ as of 31 December 2019, may now be eligible to apply. This change gives private equity businesses the opportunity to restructure their finances, in order to become eligible.
Whilst this change could have a significant impact in theory, it remains to be seen whether loan schemes become more accessible for private equity backed businesses in reality.
Opportunities for private equity restructuring
As the impact of the COVID-19 pandemic continues, and more businesses begin to feel its effects, private equity backed-companies should think about the actions they can take to protect and support retention of value, other than short-term funding options, which may not be available to all.
Key actions include:
- Utilising available sources of liquidity – By creating opportunities to free up working capital, and using undrawn borrowing facilities where available.
- Engaging with existing lenders – Opening a dialogue with lenders prior to a cash shortfall will give you more options. Producing forecasts when engaging with lenders to ensure the viability of your business is key.
- Considering opportunities to invest – There is an opportunity to invest in businesses that have been impacted by the COVID-19 pandemic which have been unable to refinance, and bolt-on acquisitions may increase the value of portfolio companies.
Here to help
As restrictions are tightened further, the impact of the COVID-19 pandemic continues to place significant pressure on many businesses and individuals, particularly those within the retail and hospitality industry.
Seeking advice from the right advisors at the right time, sourcing the right support for your business, and optimising the resources available to you are all key components in future-proofing your business.
If you have any questions regarding how the changes to this guidance may affect your business, or would like to speak with a member of our specialist retail and hospitality team, please do not hesitate to get in touch. To find out more about the support that’s currently available, including key support dates that you must be aware of, you can also visit our COVID-19 support hub.