Minimize Dividends Under Crisis Lending Program, BoE Warns

By Najiyya Budaly
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Law360, London (May 19, 2020, 10:39 AM BST) -- Large companies tapping the Bank of England's special lending program to help them weather the economic crisis created by COVID-19 must show restraint in lining the pockets of shareholders and executives, the central bank said Tuesday.

The Bank of England said that it will put in place extra conditions for companies that want to borrow from it through short-term debt, known as commercial paper.

Businesses that want to use the scheme, known as the Covid corporate financing facility, for more than a year must "show restraint" on dividends and executive pay while the debt is outstanding, the central bank said. This applies to all businesses that want to borrow for a term extending beyond May 2021, the central bank said.

"These commitments are intended to create incentives for, and promote the ability of, businesses to repay their borrowings from the CCFF where they mature after the facility is expected to close," the BoE said in a statement Tuesday.

The program was announced by HM Treasury on March 17 in a package of measures designed to support businesses during the pandemic. Commercial paper is an unsecured, short-term debt instrument issued by a company.

The central bank said that 55 businesses have so far borrowed £18.8 billion ($23 billion). The BoE has also authorized a further £38.8 billion of potential lending to another 68 companies.

To be eligible for the scheme, a business must demonstrate that it was in "sound financial health" at the beginning of March, the BoE said. It must also generate significant revenues in the U.K. or serve a large number of customers.

The Bank of England also said Tuesday that businesses can repay money they borrowed earlier than agreed under the commercial paper.

"This gives businesses greater flexibility to exit the facility in an orderly way where they are able to access alternative sources of funding, for example in capital markets," the BoE said.

In a separate move, the Treasury said Tuesday that it is increasing the maximum loan that it is offering to large businesses from £50 million to £200 million. Companies wanting to borrow more than £50 million will also be subject to restrictions on dividend payments, executive pay and share buybacks during the period of the loan, the government said.

Chancellor Rishi Sunak announced the so-called large business interruption loan scheme in April, in a bid to keep companies with an annual turnover of more than £45 million afloat.

The Treasury has quadrupled the size of the loan available to help ensure that large companies that do not qualify for the Bank of England's corporate financing facility have enough money during the outbreak.

"We're determined to support businesses of all sizes throughout this crisis and our loans and guarantees have already provided over £32 billion to thousands of firms," John Glen, economic secretary to the Treasury, said Tuesday.

Regulators have urged the financial sector to suspend discretionary payments that reward shareholders and directors during the pandemic. Businesses have prioritized preserving cash to protect consumers and help themselves stay afloat.

--Editing by Ed Harris.

For a reprint of this article, please contact reprints@law360.com.

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