The Government has announced a new scheme to issue convertible loan note to UK innovative companies which are facing financial difficulties as a result of the Coronavirus.  Some of the key features of the headline terms announced are: 

Eligibility: The applicant should be an unlisted UK registered company that has raised at least £250,000 in aggregate from private investors in the last five years and have a substantive economic presence in the UK. It is intended to support businesses that are unable to access the Coronavirus Business Interruption Loan Scheme; 

Loan size: The minimum convertible loan size from the Government will be £125,000 and the maximum loan size will be £5,000,000; 

Security and matched funding: The convertible loan is expected to be unsecured and shall constitute no more than 50% of the total bridge funding being provided to the company by the Government and the matched investors in aggregate; 

Use of funds: The convertible loans can only be used for working capital purposes and cannot be used to repay existing borrowings, pay dividends or bonuses, or pay any advisory or placement fees for arranging the loans; 

Interest rate: The convertible loans shall have a minimum interest rate of 8%, but to the extent that a higher rate is agreed with matched investors, the Government will be entitled to that higher rate too.  The interest is to be paid at the maturity of the loan; 

Conversion:  The convertible loan shall automatically convert into equity with a minimum conversion discount of 20% at the company’s next qualifying funding round.  Where a higher discount rate is agreed with matched funders, the Government will also adopt that higher discount rate.  Where a company undergoes a sale or IPO, the convertible loan shall either convert into equity applying the discount rate or the convertible loan shall be repaid with a redemption premium of 100% of the original convertible loan, whichever is higher; 

Term: The convertible loan shall mature after a maximum of 36 months.  On maturity, the convertible loan shall be repaid either i) as principal, together with a premium calculated as 100% of the principal; or ii) convert into equity adopting the conversion discount rate above at a price set by the most recent funding round; 

Most favoured terms: In the event that the company issues subsequent convertible loans on more favourable terms, those terms shall apply to the Government’s convertible loan; 

Negative pledge:  The company shall not be permitted to create any indebtedness that is senior to the Government’s convertible loan other than bona fide senior indebtedness from a person that is not an existing shareholder or matched investor. 

The scheme is expected to be launched in May 2020 and further details should be released before then.  Should you have any questions in respect of the scheme, please contact your engagement partner. 

Should you have any queries or questions in respect of the above or if any assistance can be provided with regards to helping you benefit from this government scheme, please reach out to your usual Arnold Hill & Co contact or one of our one of our partners below.

Justin Moore – 020 7306 9104
Reuben Fevrier – 020 7306 9105
Tim Straw – 020 7306 9103
Lucy J Duncan – 020 7306 9102
Stephanie Clegg – 020 7306 9107
Leanne Konopka – 020 7306 9117
Main Contact Number – 0207 306 9100