Many large UK companies have proved too risky for the BoE's commercial paper program - the problem - they don't have the investment grade ratings required to access the scheme. As we reported last week - the scope of CBILS and CLBILS are already being extended from Monday with increases in the maximum size of available loans (£50m) and the removal of revenue thresholds for companies to access them.
It looks like things could now be about to go a lot further.
How do you magically turn loans with a High Yield risk profile into something with an Investment Grade profile? The answer is Securitization.
Sky News today reported that the UK Chancellor is considering securitising a portfolio of government backed loans to companies that are non-investment grade. Individual loans made under this scheme could be up to £200m per Company.
This monster government backed CLO could reach the tens of billions in total size - we're christening it the 'Corona Loan Obligation'.
This would not be the first time that governments have reached for securitisation as a crisis response. The EU's sovereign bailout funds created during the Eurozone crisis (the EFSF and its successor the ESM) are essentially SPVs that look a lot like a traditional securitisation - albeit with government guarantees.
Indeed, the new €500bn coronavirus rescue package agreed by the EU is largely being administered via the ESM. Crucially, this package is at the sovereign level, with funds being made available to member states. What the UK is considering is different - loans directly to corporates.
Nothing is decided yet, with the UK's plan currently under consultation. Key questions remain around the requirements for access to the scheme including restrictions on the use of proceeds.
While a core component of access to sovereign bailout funds like the IMF and ESM is that countries reform their finances in exchange for support, it isn't clear to us that such conditions for access are completely appropriate here.
Many companies in financial difficulty due to coronavirus are in that position through no 'fault' of their own - unlike the years of unsustainable deficits and profligate spending by periphery countries at the heart of the Eurozone crisis.
With the Fed's decision to purchase fallen angels & HY ETFs, the ECB is also under some pressure to increase its support for companies at the riskier end of the credit spectrum. Perhaps a monster EU 'CLO' scheme along the same lines as the UK's plans could be in the pipeline....