Bank Of England Sets Out Rules For COVID Recovery Loans

By Lucia Osborne-Crowley
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Law360, London (April 6, 2021, 12:12 PM BST) -- The Bank of England has published regulatory guidance for businesses on the status of the loans they take out under the government's COVID-19 recovery scheme, which offers up to £10 million ($13.8 million) per company until the end of 2021.

The central bank said that some loans under the recovery scheme, launched on Tuesday, will be eligible for classification as "unfunded credit protection." This is a category of liability under the domestic Capital Requirements Regulation, which recognizes that the loan is guaranteed by the government.

But the BoE warned that lenders should still consider individual creditworthiness when handing out loans.

"In the continuing extraordinary situation brought about by COVID-19, it remains challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms' loan underwriting processes," the BoE said. "Given that, we continue to expect lenders to use their judgment on what information is required to make credit decisions."

Lenders should consider factors including the performance of the business before the COVID-19 outbreak, the central bank said. They should also consider how the company will repay the loan and the general prospects for the sector in which the business operates once the effects of the pandemic have receded.

The classification of the COVID-19 recovery loans will have an impact on the amount of capital that companies seeking support  will be obliged to hold under the Capital Requirements Regulation. The rules are derived from European law known as CRD IV, a package that establishes how much capital banks must keep on their books to prevent failure during times of economic stress.

The regulation specifies how businesses should calculate their level of credit risk — the likelihood that they will default on the loans in their portfolio. Their level of credit risk then affects how much capital they must hold in their coffers to comply with the overall capital buffer rules.

HM Treasury announced the new COVID-19 recovery loan scheme, which offers companies up to £10 million to repair their business in the wake of the pandemic, on March 3. The government guarantees 80% of each loan handed out under the scheme.

The government announced in February its Pay As You Grow scheme, a program that adds flexibility to its COVID-19 loans, such as allowing companies an extra six months to repay their debt. It also gives businesses the option to extend the life of their loans from six to 10 years.

Chancellor of the Exchequer Rishi Sunak said the new program will offer 1.4 million businesses the option to tailor the repayments of emergency loans they took out during the COVID-19 outbreak, according to their circumstances.

Another program, the Coronavirus Business Interruption Loan Scheme, took off in March 2020 and is designed for small and midsized businesses.

But many companies look likely to struggle to repay their loans. A report by a technology solutions company in February found that fewer than two-thirds of small and midsized enterprises — 63% — have confidence in their ability to repay government COVID-19 support loans.

--Additional reporting by Irene Madongo. Editing by Joe Millis.

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