Ask the Analyst Q4 2020

Will the refinancing of a sponsor’s governmental support loan impact the strength of the covenant?

The UK Government has set up multiple financial support schemes including loans on better than market rates and, in the case of Coronavirus Business Interruption Loans (CBILS), the Government pays the finance costs and fees for the first twelve months.

But when these loans mature and become due, sponsors may find themselves unable to repay the loan and retain enough liquidity to withstand ongoing shocks. If sponsors can refinance their loans, new terms may be less favourable, with higher financing costs reducing ongoing profitability.

Although these loans have provided invaluable support to UK businesses, the long-term implications are yet to be observed and cannot easily be avoided. The challenges surrounding refinancing could exacerbate ongoing challenges for sponsors that are still experiencing unfavourable trading conditions arising from COVID-19.

Prashan Vicneswaran, Analyst

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