Ben Barbanel, Head of Debt Finance at OakNorth Bank, talks to Business Leader about the UK’s economic outlook, business lending and what we can learn from recessions past.
What has OakNorth Bank’s response been to the COVID-19 crisis?
“This crisis looks like it’s going to be even worse than the financial crisis of 2008. There will be many businesses that were strong, profitable, healthy businesses before the pandemic which will now be struggling to survive. We are trying to find ways to support these businesses and help them through this extremely difficult time, as well as those who have been positively impacted by the lockdown and are looking for debt finance to grow.
“We are therefore hosting Credit Committees morning, noon and night, as well as on weekends, to try and get capital to the businesses that need it as quickly as possible.
“We’ve held around 150 Credit Committees since the UK lockdown began in March, approving around £100m in new loans every month, including c.£140m of CBILS and CLBILS loans. These have been for a range of things – a hotel refurbishment, a fund buy out, the acquisition of 131 retirement units across the UK, a nursery acquisition, etc. So we’re clearly still finding strong businesses to lend to across a multitude of sectors and regions.
What are the criteria you’re looking for from a business applying for a CBILS or CLBILS loan? Are you offering BBL loans?
“In terms of our criteria for both CBILS and CLBILS loans, you need to be a UK based business with a group turnover of no more than £45m and have a borrowing proposal which, were it not for the COVID pandemic, would be considered viable and for which the provision of finance will enable trading out of any short-to-medium term difficulty.
“Key features to understand for our CBILS loans is that these are loans from £500,000 to £5m, with spread repayments from one to six years. Furthermore, in order to support businesses’ cash flow issues, arrangement fees and the first 12 months interest will be paid by the government as a “Business Interruption Payment”.
“For CLBILS loans, this is where businesses can apply for a loan between £500,000 and £50m, with spread repayments of loans from three months to three years. The schemes currently runs to the 20th October 2020.”
Any lessons that you learned during the ’08 crisis that you can apply now?
“The 2008 recession was very different to this crisis: it predominantly only impacted banks and the property sector, there was unemployment but not like the levels we’re expecting following the end of the furlough scheme and it didn’t impact certain countries. Unfortunately, we’re going to see a lot of good businesses go under as a result of this crisis.
“I guess one of the few positives is that a crisis can force businesses to think more creatively: for example, one of our clients, LEON responded to the crisis by turning their sites into mini-supermarkets and selling food from its supply chain directly from their website. It can also create new opportunities – whether that’s through M&A, acquiring sites at a discount, increasing market share because some of your competitors go out of business, etc. We’ve seen that with a number of the businesses we’ve lent to in this period who are seeing it as an opportunity to grow.”
What is your COVID Vulnerability Rating Framework? How does it work?
“In January when COVID-19 began to emerge in Europe, the first step OakNorth Bank took was to look at the potential for international supply chain disruption from China. We then developed what we call the “COVID vulnerability rating (CVR) Framework” which enables us to undertake portfolio diagnostics to rate loans from one-five based on their vulnerability to the new economic environment, with one being least vulnerable, and five being most vulnerable.
“The ratings are based on multiple factors including liquidity, debt capacity, funding gap and profitability, and can be dynamically customized to reflect the lender’s credit risk criteria and appetite. The Framework incorporates over 130 proprietary subsector-specific COVID-19 stress scenarios with regional overlays, incorporating assumptions for impacts on key financial metrics such as revenue, operating costs, working capital and capex.”
How has COVID-19 impacted OakNorth’s approach to business lending?
“During these unprecedented times, it’s important as a lender to continue to support viable British businesses and provide flexible debt finance packages. That means adapting our bespoke lending approach such as changing to virtual credit committees and video site inspections, to ensure drawdowns continue to be made on time.
“We have continued with our speedy approach to new business lending – from first contact with the borrower, we’ve been able to approve and complete deals within a few weeks.
“An example of this is in development deals where we structure facilities which provide some equity release to the borrower from sales, as opposed to making the developer wait until the last unit is sold and the bank is repaid in full – this helps the borrower reinvest the money into a potential new property transaction.”
Any sectors you’re particularly keen to lend to right now? Any you’re a bit more weary of lending to?
“Our lending criteria hasn’t changed despite the current crisis – we remain sector and region agnostic and as long as a business is profitable, has a strong and experienced management team, and realistic projections for the future, we’re keen to speak to them.
“Some of the sectors we’re lending quite a bit to at the moment are: retirement living / care homes, nurseries and resi development.”
How has the pandemic affected the debt finance market?
“In every crisis / unprecedented situation (such as the Brexit vote) that I’ve experienced, the reaction from banks has been the same – i.e. they temporarily retrench from the SMB lending market. However, given the number of government-backed schemes, it’s not been the same this time and banks are clearly lending. However, I don’t know how much lending they’d be doing if it weren’t for the fact that the government is taking all or the majority of the credit risk…”