During the pandemic period, the UK government (through the British Business Bank) agreed to match funding of up to £5m for appropriate innovative businesses through a convertible loan note. These “Future Fund” investments were generally structured as a three year loan which converted into equity on the next major fundraising, IPO or exit for the business. For those companies who did not complete one of these conversion events, the Future Fund has the choice to convert the debt or demand repayment at the end of the term. The Future Fund is entitled to a 100% Redemption Premium. As, generally, these are three year terms, those loans are falling due now. For most businesses who have not had a conversion event, the re-payment of the loan, plus redemption penalty, is not possible.
What options are available?
One option is to request an extension. The Future Fund will agree an extension of up to two years. They require a number of standard form documents to be completed and uploaded with an extension request. These include a solvency statement, which, for many businesses in this predicament, may not be possible. And even if a solvency statement can be given, the Future Fund may not agree to the extension.
In that situation the company should consider if restructuring could offer a way forward
One possibility may be a pre-pack. This involves the company volunteering to go into administration. An insolvency practitioner will be appointed as administrator and will be empowered to sell company assets. With a pre-pack, the purchase of assets will usually be negotiated in advance and be ready to be executed immediately on the administrators’ appointment. The buyer is often a new vehicle established by founders and/or major stakeholders of the company. The Future Fund, along with other unsecured creditors and shareholders, have no right to participate in the buying vehicle unless the sponsors of the new vehicle agreed to include them.
There are a number of regulations to work through. The buy-in of secured creditors and the agreement of counter-parties to key contracts may be required, as well as the need for some marketing of the business to potential buyers and extensive disclosure requirements. However, this is often a way to keep the business alive.
Another possibility is a company voluntary arrangement or "CVA". This is essentially a deal between the company and its creditors to either pay late, pay a proportion of debts, or change payment terms, which binds all creditors if approved by 75% of creditors by value. Again, there are complexities to this but this route may be attractive, particularly where it is not viable to move all key contracts and rights into a new company, as would happen with a pre-pack.
There are other approaches which may better suit particular businesses which we would be happy to discuss with you.
Please contact Jeremy Whiteson if you would like to speak through these in more detail.
