Some of Britain’s biggest employers face being blocked under European state aid laws from receiving government-guaranteed loans intended to provide a corporate lifeline through the coronavirus pandemic.
Sky News has learnt that bodies representing private equity firms across Europe are mounting a frantic lobbying effort to ask Brussels to amend rules relating to so-called ‘undertakings in difficulty’, which threaten to stop banks lending to thousands of large companies.
City sources said the BVCA, the UK-based lobbying group, and some of its counterparts from across the Continent plan to write to the European Commission this week to highlight the issue.
The problem risks preventing major British companies from being able to access loans of up to £50m – 80% of which would be guaranteed by the government – under the Coronavirus Large Business Interruption Loan Scheme (CLBILS).
EU laws mean that companies deemed to be in financial trouble should not access such programmes, owing to the potential risk of distorting competition.
One definition of an undertaking-in-difficulty applied by the EU captures companies which have accumulated losses equal to or greater than 50% of their subscribed share capital.
Bankers said that that would encompass “hundreds, if not thousands” of businesses which have invested heavily to grow, resulting in up-front losses, or private equity-owned companies with leveraged financing structures.
One described the undertaking-in-difficulty definition as “a technicality” that could harm “successful UK businesses with strong prospects of being able to repay any government-backed loans”.
They added that it had emerged as a problem across a number of other EU countries – but it has caused particular unease in London because of the UK’s exit from the EU.
The BVCA and its counterparts have notified the Treasury and the British Business Bank that it believes the European Commission could modify the application of the undertaking-in-difficulty test “so it is appropriate for businesses that are funded primarily by debt, are investing heavily to grow and are otherwise performing well (save for the current crisis),” according to a briefing document prepared by the lobbying group.
“Any changes made to solve this issue do not need to affect the underlying EU state aid framework, rather they could be as time limited and temporary as the Temporary Framework itself,” it said.
The emergence of the rule as an obstacle to accessing the CLBILS scheme has sparked panic at many of the largest buyout groups operating in London, which over the last 20 years has become one of the biggest global centres for private equity investment.
Major companies which have passed through private equity ownership structures during that time include Boots The Chemist, Debenhams, the AA, Saga, Formula One motor racing and the Slug & Lettuce-owner, Stonegate.
Sources said overturning the undertaking-in-difficulty rule was now the biggest priority for the private equity industry.
“This rule undermines the ability of many banks to lend to high growth businesses employing thousands of people across the UK,” Michael Moore, the BVCA director-general, told Sky News.
“Flexibility has been the name of the game in terms of the COVID response from governments across Europe, and it is needed here, too.”
The private equity industry thought it had overcome the biggest obstacle to its companies’ access to CLBILS when the Treasury agreed to allow businesses majority-owned by buyout firms to utilise it on an individual basis.
An earlier debate had left so-called financial sponsors fearing that the £50m loan cap would apply in aggregate across their portfolio of investee companies.
While some private equity-backed companies, such as the Alton Towers-owner Merlin Entertainments, have been able to secure new funding from debt market investors in recent days, many face an intensifying balance sheet crisis unless they can access CLBILS.
Firms such as Apax Partners, Blackstone, Carlyle, KKR, Permira and TDR Capital have amassed controlling stakes in companies employing tens of thousands of people across each of their portfolios.
Many of their interests are in sectors such as retail and hospitality, which have been particularly badly affected by the COVID-19 pandemic.
Among the household-name companies currently owned by private equity firms in the UK are TDR-backed David Lloyd Leisure and Dr Martens, which has been put up for sale by Permira.
The industry’s attempt to get CLBILS amended is the latest lobbying drive for changes to the government’s emergency loan schemes.
An initiative for companies with a turnover of up to £45m has already been overhauled twice, with a further shift likely on Monday with the announcement of a new scheme for taxpayers to fully underwrite loans of up to £25,000 to micro-businesses.