Energy firms using £40bn loan scheme barred from issuing dividends

Energy companies making use of the government’s £40 billion loan scheme will be barred from paying dividends to shareholders and discretionary bonuses to executives.

The Energy Markets Financing Scheme, which was launched by the Treasury and the Bank of England this week, is intended to provide liquidity to energy companies facing large margin calls on their hedging activity as a result of volatility in wholesale energy markets.

The scheme offers government guarantees for extensions to existing credit facilities and is now open to applications from suppliers, generators and gas shippers until 27 January 2023.

The conditions of the scheme bar participating companies from issuing dividends, conducting share buybacks, returning equity, paying discretionary bonuses or making changes to senior management pay packages.

They also require UK-listed firms to disclose whether they have a net zero transition plan, and if so, submit it to the Treasury within six months of drawdown or before the termination of the guarantee, whichever is sooner. All participating companies are required to submit “proportionate climate-related financial information” within the same time limit.

To access the scheme, companies must be licenced by Ofgem and be at least one of the following:

• A domestic energy retailer with more than 750,000 domestic meter points
• A commercial electricity retailer that supplies more than 1 million MWh per month
• A small business gas supplier with more than 4,800 small non-domestic supply points
• A large business gas supplier that supplies more than 2 million MWh per year
• A gas shipper with annual demand of more than 0.45 billion cubic metres
• An electricity generator with a de-rated capacity of more than 500MW

They must also have a minimum long-term issuer credit rating, or equivalent, of BB-/Ba3 from at least of the major credit rating agencies. Firms with split ratings, where one or more rating below the minimum will not be eligible.

They will also be ineligible if state-owned entities or national governments directly or indirectly own more than 25% of their shares or exercise direct or indirect control over the company.

The loan guarantees are limited to one per firm. They will cover a period of up to twelve months from the date of issuance but can be terminated early at the half-way point.

When a sufficient number of guarantees have been issued, and no earlier than the end of 2022, the Bank of England and the Treasury will have the right to begin publishing the names of companies that have been granted a loan guarantee. If energy market become less volatile, then from June 2023 they may begin periodic disclosure of significant drawdowns.

According to the notice, the scheme has a commercial entry fee but “penal pricing” upon drawdown to ensure it is only used if other sources of financing are unavailable.

Participating energy companies will be liable to pay three different fees that vary according to their credit rating: an arrangement fee, expressed as a percentage of the agreed credit limit, which will be payable once eligibility and the credit limit have been confirmed; a commitment fee, which will be charged on the amount that remains undrawn once a guarantee has been issued; and a scheme interest rate, which will be payable on the amount drawn and comprises a benchmark rate (SONIA) plus an interest margin. Lenders will receive set amounts of all three fees.

Commenting on the launch on Monday (17 October), new chancellor of the exchequer Jeremy Hunt said: “A resilient energy market is vital as we all grapple with the consequences of Putin’s horrifying invasion of Ukraine and his decision to weaponise Russia’s energy reserves.

“Today we are continuing to act to ensure the market itself is secure, significantly reducing any risk of market failure.”

Governor of the Bank of England, Andrew Bailey, said: “The volatility in energy markets we have seen in recent months, caused by Russia’s invasion of Ukraine, has resulted in a number of energy firms facing extraordinary liquidity requirements.

“This scheme will provide short-term financial support for these firms so they can weather this period, while also supporting the wider resilience of energy markets in the UK.”

The scheme was announced by the prime minister Liz Truss last month alongside the Energy Price Guarantee to limit households energy bills, which Hunt revealed on Monday would be brought to an early end in April to allow the government to introduce more targeted support.