A prominent UK lender has refused to bankroll an acquisition in the country’s early years sector until the target business can prove its financial performance is “in line with pre-Covid-19 levels” – signalling a potential credit crunch in coming months. 

This publication has learnt that Lloyds Banking Group has refused to lend money to a prospective buyer of a UK nursery group because the bank does not yet know the severity of the financial impact that Covid-19 will have on childcare providers. 

The bank has said it would not lend money to a suitor for a UK nursery group until it sees an evaluation of the target’s performance during the three months after lockdown measures are lifted. UK nurseries, along with schools, were ordered by government to close indefinitely on 20 March as part of wider measures intended to contain the spread of the new coronavirus. 

In a letter seen by this publication, a banker from Lloyds told a prospective buyer of a UK nursery group “that CBIL [Coronavirus Business Interruption Scheme] has replaced EFG [Enterprise Finance Guarantee] at the current time and as this request is to refinance the existing debt and also support purchase of a new nursery business… it does not fall within the parameters of a Covid-19 support facility. 

“In the circumstances as CBIL support is not appropriate, we are unable to proceed formally at this time.”

The banker goes on to say that “although we are unable to finalise formal support/funding at this time, our view to support the business with its application in the future remains positive, so agreement, in principle, is given subject to” a number of conditions, including “minimum three months' MI [management information] to confirm existing and target business is performing in line with pre-Covid-19 levels”. 

Valuations of nursery targets “will not, of course, be instructed until the above have been confirmed to the satisfaction of credit with management information to be provided and commented on by the valuer”, the banker wrote. 

Other conditions outlined in the letter stipulate that “there are no further cashflow/working capital requirements in respect of Covid-19”. 

The bank’s response signals an unwillingness to lend until several months after social distancing measures are relaxed – indicating that credit may be difficult to obtain, even once nurseries and other business are legally permitted to re-open.

Lloyds had not responded to a request for comment at the time of publication. 

With no end currently in sight to nationwide lockdowns in the UK, banks’ diminishing appetite to fund acquisitions during this period of economic tumult could exacerbate what is poised to be the biggest dip in M&A activity in more than a decade. Sources from UK-based private equity funds and advisory houses have told this publication that deal flow in the education sector has all but dried up in recent weeks, as buyers cannot carry out thorough due diligence and are unwilling to deploy capital amid extremely high levels of uncertainty. 

One source said he had heard that other UK lenders, including HSBC and the Royal Bank of Scotland, had set out similar measures to prospective investors in UK nurseries. 

“Banks don’t currently have the resources to provide mainstream lending because they’re all focused on CBILS [Coronavirus Business Interruption Loan Scheme],” the source said. “They are giving indication [to buyers] that they’re looking to offer support, but they want to see three months’ trading figures, post-lockdown, that demonstrate the business is where it was pre-Covid-19.

“We know that some banks will not instruct valuations until they see these figures.” 

Earlier this week, this publication reported that private equity-owned education businesses in the UK could be denied access to government-backed crisis funds, which have been made available to small- and medium-sized businesses to help them through this prolonged period of economic inactivity. 

Date published: 15 April 2020

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