Energy Markets Financing Scheme (EMFS)

On 7 December 2022, HM Treasury and the Bank of England updated the Market Notice, guarantee template and online Q&A for the Energy Markets Financing Scheme (EMFS). The joint scheme, launched on 17 October, looked to address the extraordinary liquidity requirements faced by energy firms operating in the UK gas and/or electricity markets. The EMFS was designed to support banks to extend additional lending to energy firms to help them to meet margin calls generated by potentially volatile energy prices. As before, conditions and penal pricing are only applied to borrowers upon draw down of the facility.

The application window closed at noon GMT on 27 January 2023.

These updates reflected continued detailed work by HM Treasury and the Bank of England on the design of the scheme as well as technical feedback from Energy Firms and commercial lenders to help ensure the EMFS operates effectively. The main changes made to the EMFS were as follows:

• The eligibility criteria have been updated to:

   1. more explicitly reflect the regulatory regime for Energy Firms located in Northern Ireland; and

   2. add further detail to the definition of “state-owned” firms.

• Loan stops following changes in eligibility:

   1. In the event of a change of control: Where there is a change in control that results in an energy firm becoming ineligible for the EMFS after the issuance of a guarantee, such as a financial institution taking over ownership or significant state ownership, a commercial lender will not be able to advance further loans to that firm under the scheme (“loan stop”).

   2. In the event of a change in credit rating: Further information on HM Treasury ‘s process in the event that an energy firm is downgraded below the minimum credit rating of BB-/Ba3 once a guarantee has been issued has been added to the online Q&A.

• Lender termination of the EMFS guarantee: The EMFS guarantee template has been amended to allow for termination by the commercial lender at any point, subject to a 30 day notification period, rather than at 6 months.
• Fees on early cancellation: In the event of early cancellation of an EMFS guaranteed financing, the commercial lender may choose to waive any remaining commitment fee due, reducing the costs for potential borrowers.
• Fees and credit ‘ratchet’: the EMFS pricing policy has been updated to reflect that the commitment fee and interest rate would be expected to change in line with provisions in the underlying credit facility already in place with a commercial bank or banks, if such changes are needed to reflect commercial practices.
• Lender retention of fees: The Market Notice has been updated to reflect that the portion of EMFS fees that a lender can retain is a maximum cap and not a flat rate.
• Additional minor technical updates: A small number of changes have also been made to the guarantee template where necessary to ensure consistency with the Market Notice.
• Additions to Q&A: Further detail has also been added to the online Q&A to address additional questions raised by energy firms and commercial lenders. This includes further information on the standard of care to be applied by commercial lenders to the additional guaranteed lending that they make under the EMFS (Question E7) as well as a full list of amendments made to the guarantee template.

Energy firms and their commercial lenders can apply to the scheme for a 100% Government guarantee that will apply to an additional tranche of an existing specified credit facility to ensure that commercial lenders have the capacity to support the UK energy sector. 

The scheme has been designed to encourage banks to extend additional lending to energy firms to support their ability to meet margin calls generated by potentially high and volatile energy prices in the following months.

Further information can be found in the news release for the scheme which was published on the gov.uk website.

Energy firms should use the scheme to help fund initial and variation cash margins that arise due to hedging activity in over-the-counter (OTC) and exchange-traded markets. The purpose of the scheme is to reduce the risk of contractual commitments related to the purchase or sale of electricity or gas which is intended for ultimate supply in the UK domestic market.

The Bank and HMT are jointly operating the scheme. The Bank will be performing the initial application screening phase against the scheme’s published eligibility criteria. Applicants do not need to contact HMT directly during the initial phase of the application process which will be handled by the Bank. HMT will then conduct further due diligence before making a decision on whether to issue a guarantee. The Bank will pass on all relevant application information to HMT.

The Bank will prepare and execute guarantees for the agreed additional tranche of an existing specified credit facility as deemed eligible by HMT.

The scheme opened to applications on 17 October 2022 and will close at noon GMT on 27 January 2023. The guarantees provided in the scheme will cover a period of up to 12 months from the date of issuance.

• EMFS Guarantee - Table of changes updated on 7 December 2022 (PDF)

The scheme is open to energy firms that make a material contribution to gas or electricity markets in the UK, and their associated commercial lenders.

Additionally, energy firms must have a long-term credit rating of BB-/Ba3 or above. Where an energy firm does not have a public agency rating, the Bank and HMT will take into account other relevant credit information instead.

Further detailed eligibility criteria are set out in the Market Notice.

Applicants will be required to submit supporting evidence as part of the application process. This submission must include copies of the energy firm’s latest audited financial statements and an organisational chart for the energy firm’s group (if applicable). 

Further information and access to senior management might be required by HMT as part of its due diligence assessment.

If the ownership of the energy firm changes so that the following criteria for exclusion are met, no further loans shall be advanced under the covered EMFS credit facility. If any such further funding is advanced, it will not be covered by the Guarantee. 

Energy firms that are ultimately owned by banks, building societies, insurance companies and other financial sector entities regulated by the Bank or the Financial Conduct Authority will not be eligible. Energy firms within groups that are predominantly active in business subject to financial sector regulation will not be eligible.

An energy firm will not be eligible to participate in the Scheme if state-owned entities, national and/or regional governments and/or municipalities hold, directly or indirectly, more than 25 per cent of its issued securities and/or voting rights, or if such entities exercise direct or indirect control over the energy firm. 

Under Clause 10.6(A)(3) of the EMFS Guarantee Agreement and as set out in the Market Notice, if the Lender becomes aware that the energy firm has fallen below the required rating, no further loans shall be advanced under the credit facility unless agreed by HMT, after a further assessment by the Advisory Committee. This will not invalidate the executed guarantee.

Under the terms of the Guarantee, the Lender must notify the Bank if any of the available sources of information to which they would normally refer to assess credit risk (e.g. rating from either public or private ratings agencies, or commercial lender ratings) indicate that the energy firm no longer has the required credit rating.

The decision as to whether any further funds can be advanced under the covered EMFS facility in these circumstances will be taken by HMT. In all cases where a downgrade below the required credit rating occurs, HMT will make a new credit assessment, unless the energy firm indicates that it does not wish to access further funds from the facility and therefore does not require this assessment. 

Given the rapid pace at which margin calls can occur, HMT will seek to reach a decision at the earliest practicable opportunity following notification to the Bank by the Lender(s) that a loan stop event has occurred. The Advisory Committee will perform a further assessment, which will review the credit risks associated with the drawing of any further funds under the cover of the guarantee. HMT ministers will take the final decision on whether to permit the further advance of funds covered by the EMFS Guarantee to the energy firm, in light of the recommendations of the Advisory Committee.

HMT’s assessment will be made on a case-by-case basis and could result in a number of outcomes, including that the loan stop remains in place for as long as the energy firm’s credit rating is below the minimum credit rating, or that the Lender is permitted to advance further funds covered by the EMFS Guarantee to the energy firm. A decision not to permit the further advance of funds will not invalidate the guarantee on funds already drawn. 

In the event that the loan stop remains in place, or if the energy firm does not wish to access further EMFS funding following the downgrade, the energy firm may wish to request that the Lender terminates the guarantee giving the required 30-day notice. 

In the event that the Lender is permitted to advance further funds under the guaranteed facility, HMT reserves the right to set the pricing of the Commitment Fee and the Interest Margin to reflect the increased credit risk associated with the energy firm. This re-pricing will ensure that the covered EMFS financing will continue to be used only if commercial and competitively priced financing is unavailable. HMT also reserves the right to reduce the value of the covered EMFS financing and / or change the length of the period covered by the EMFS guarantee.

Where HMT and the Bank have consented to further loans being advanced notwithstanding the fact that the energy firm’s credit rating has fallen below the required level, HMT and the Bank maintain the right to enforce a loan stop at their discretion for as long as the energy firm’s credit rating remains below the required level – e.g., in the event that there is further material deterioration in the energy firm’s credit risk.

There is a joint application process which is shared between the energy firm and their commercial lender. Energy firms should initially discuss an application with their commercial lender before proceeding with completing the application form.

The application forms are available on this web page in the “Documentation” section.  There are three application forms:

• Form 1. This should be completed by the energy firm and should include details of the lending facility for which a guarantee is being requested.

Energy firms should also submit a signed copy of the Confidentiality and Undertaking Agreement (also available in the “Documentation” section of this web page) when submitting Form 1, as well as copies of the energy firm’s latest financial statements and an organisational chart for the energy firm’s group (where applicable). 

Evidence of authority of the signatory to sign on behalf of the applicant also needs to be submitted along with the Confidentiality and Undertaking Agreement. Please refer to the EMFS Signatory Guidance document for further details.

• Form 2. This should be completed by the commercial lender on behalf of its energy firm client. It can be completed while the energy firm is completing Form 1.

The commercial lender does not necessarily need to share Form 2 with the energy firm upon submission of the form to the Bank if they would prefer to submit the information confidentially.

• Form 3. This is a one-time form for completion by the commercial lender to enable them to participate in the EMFS scheme and can be submitted in advance of Form 1 or Form 2. The commercial lender should complete this form in addition to Form 2 if they have not already submitted a Form 3 to the Bank during previous correspondence. 

This form binds the lender to the Bank of England’s disclosure policy during the application phase and enables collection of operational information and contact details.

All application forms should be submitted to EMFS-Applications@bankofengland.co.uk. The Bank will acknowledge receipt of the application after having received all of the relevant forms and supporting documentation from both the energy firm and the lender. You should e-mail EMFS-Applications@bankofengland.co.uk if you have not received confirmation of receipt after one working day. 

You do not need to submit all of the application forms in the same e-mail but they should be submitted on the same day where possible (with the exception of Form 3 which can be submitted in advance by the commercial lender). 

We will only start processing an application once all forms have been received.

We would consider any lending facility which meets the stated eligibility criteria, including syndicated lending facilities. Note that in respect of syndicated lending facilities, we would expect to only engage with a nominated lead commercial lender during the application process. The Bank will only guarantee one credit facility per energy firm. 

The scheme is aimed at guaranteeing a new tranche of existing lending via an existing Revolving Credit Facility (RCF) or economically equivalent facility. If a commercial lender wanted to replicate an existing facility on identical terms and have it qualify for the EMFS, this would have to be subject to further discussion with the Bank and HMT around why a new facility altogether is needed rather than simply a new tranche of an existing RCF with the energy firm in question. 

The Bank will only guarantee one credit facility per energy firm.

HMT have an indicative list of the information that they may require as part of their assessment process.

We will start processing an application once all three application forms have been received.  

Initially, the Bank will screen the application to ensure that it meets the stated eligibility criteria.  HMT will then undertake a more detailed review of the application. 

If HMT agrees to issue a guarantee for a lending facility, then the Bank will prepare a draft guarantee which would need to be signed by the commercial lender, and the Bank would also request payment of the Arrangement Fee. HMT will request that the energy firm submits a signed Direct Letter of Undertaking.

Once all documentation has been signed to the Bank’s satisfaction and the Arrangement Fee paid, then the Bank will issue a fully executed guarantee to the commercial lender.

The application process requires submission of information by both the energy firm and the commercial lender. 

The commercial lender is responsible for submitting application Form 2 and Form 3 (if not already submitted). 

The Bank will liaise with the commercial lender where appropriate during the remainder of the application process. In respect of syndicated arrangements, the Bank will only liaise directly with a nominated syndicate lead which would provide information about the lending facility on behalf of the other syndicate members in line with existing market practice.

Completion of the application process is contingent upon payment of the Arrangement Fee to the Bank by the energy firm. The Bank must receive this fee via a payment from the relevant commercial lender.

At the end of the application process, once all documentation has been submitted to the satisfaction of the Bank and the Arrangement Fee has been paid in full, a single, fully executed guarantee will be issued to the commercial lender or lenders.

Progress through the application process is contingent upon payment of the Arrangement Fee to the Bank by the energy firm. This must be received from an account at the commercial lender. A guarantee cannot be issued until the Arrangement Fee has been received by the Bank.

The size of the Arrangement Fee is linked to the value of the guarantee being extended. The fee is set at 20bps of the maximum value of the guarantee being extended.

The processing time for an application will be dependent on the information supplied by applicants and the amount of time required to assess this, both within the Bank and by HMT. Normally we would expect this process to take a matter of weeks, subject to timely and accurate submission of information from applicants. 

Firms who have been found to be ineligible on the basis of their materiality within the market (i.e. the first stage of screening) or because they think that the credit threshold has been misapplied, should direct their query to the Bank. If an appeal has substantive merit, the Bank and HMT may consider further. We cannot yet commit to a timeframe in which appeals will be reviewed.

The Bank will issue a fully executed guarantee to a commercial lender (or the nominated lead lender of a syndicated lending arrangement) once the Bank and HMT are both satisfied that all requirements of the application process have been met and the relevant fees have been paid. The terms of the guarantee would apply to all members of the syndicate.

The deadline for submitting an application is noon GMT on 27 January 2023.

The amount of additional credit guaranteed would be considered on a case-by-case basis. Energy firms will need to propose the value to be guaranteed in their application form and provide supporting justification as part of the due diligence process. The Bank will only guarantee one credit facility per energy firm.

There are three fees payable by energy firms for participation in the EMFS:

The Arrangement Fee is payable once the Bank and HMT confirm that a guarantee will be issued to an applicant (following successful conclusion of the due diligence phase of the process) but before the guarantee is executed by the Bank, and is a one-off payment required in order to receive the guarantee. The Arrangement Fee is expressed as a percentage of the credit limit agreed by HMT.

The Commitment Fee will be charged on the amount that remains undrawn from the additional guaranteed tranche of the credit facility. The Commitment Fee will accrue on a daily basis from the first business day following the day the guarantee is executed and will be payable on a quarterly basis in arrears. 

The Scheme Interest Rate will be charged on the amount drawn from the additional guaranteed tranche of the credit facility. The Scheme Interest Rate is composed of the Benchmark Rate (SONIA) plus the Interest Margin. Interest will accrue on a daily basis from the first day the credit is drawn and will be payable on a quarterly basis in arrears.

The Commitment Fee and the Interest Margin will vary depending on the credit rating of the energy firm on application and are expressed below in basis points of the relevant underlying value outlined below:

The pricing of the scheme has been designed to incorporate the costs of the commercial lenders, the Bank and HMT. As such, commercial lenders should not impose additional fees on energy firms to those outlined above for the additional guaranteed tranche of the credit facility. 

Commercial lenders are permitted to retain proportion of the Arrangement Fee, Commitment Fee and Scheme Interest Rate in order to cover their costs, up to a maximum of:

Energy firms should liaise with the commercial lenders to arrange fee payments. Any fee amounts payable to the Bank should be made from an account at the commercial lender. The Bank will issue guidance on payment formatting and standard settlement instructions in due course.

Reflecting that the scheme represents public sector support, energy firms will be expected to agree to certain conditions if they wish to participate in the scheme. These conditions are summarised in the Market Notice and are also set out in more detail in the Direct Letter of Undertaking in the Documentation section of this page.

These conditions will apply from the time the additional tranche of the credit facility is drawn down and for 12 months or until the end of 2023, whichever is sooner, except for the environmental disclosure requirements, which must be met within six months of the date the first loan is advanced under the EMFS facility.

HMT will require energy firms to submit a signed Direct Letter of Undertaking, committing the energy firm to the conditions of the letter, during the due diligence phase and before a guarantee is issued by the Bank.

If a guarantee is terminated, with all balances and fees having been paid in full, the conditions of the Direct Letter of Undertaking will cease to apply from the date of termination, except for the environmental disclosure requirements, which must be met within six months of the date the first loan is advanced under the EMFS facility.

Energy firms are not permitted to reapply to the scheme after they have terminated a guarantee extended under the scheme.

Energy firms should liaise with their commercial lenders to discuss arrangements for ongoing fee and interest payments. Your commercial lender will set out the timing, amount payable and payment instructions for these fees.

The commercial lender is responsible for payment of fees and interest to the Bank. The Arrangement Fee is payable to the Bank as part of the application process. The Commitment Fee and Scheme Interest is payable to the Bank on a quarterly basis in arrears on 1 January, 1 April, 1 July and 1 October (or the following working day if this day falls on a weekend or bank holiday).

The Bank will provide details of its standard settlement instructions and guidance on payment formatting in due course.

As set out in the terms of the guarantee, commercial lenders will need to submit ongoing data on the usage of each covered EMFS facility via the Schedule 5 (monthly report) form.

In the first instance, you should liaise with your commercial lender.

You should initially inform the Bank if an energy firm has defaulted on its obligations by e-mailing details to EMFS-Applications@bankofengland.co.uk. The Bank will then liaise with HMT to arrange payment of funds on any valid claims within 30 days.

No earlier than 31 December 2022, and only when a sufficient number of guarantees have been issued, the Bank and HMT reserve the right to publish on the EMFS website the names of energy firms who have or have had an additional tranche of a credit facility guaranteed by the Bank. The Bank will give participants at least one week’s notice prior to the first publication.

If UK electricity and gas markets have become less volatile and the risk of margin calls has reduced, then from June 2023 the Bank and HMT may agree to begin periodic disclosure of any significant usage of additional tranches of credit facilities guaranteed by the Bank. Any disclosure would be triggered by average utilisation greater than 10% of the agreed credit limit over a two-week period. If the Bank and HMT judge that the relevant markets have become stable, the Bank will inform participants sufficiently far in advance that they can manage usage of the credit facility and the disclosure implications as they see fit. HMT and the Bank also reserve the right to publish such information in the last three months of the scheme. 

Aggregated and anonymised information on, for example, the total number and size of additional guaranteed tranches of credit facilities and scheme usage will also periodically be made public after 31 December 2022, where doing so does not allow specific energy firms to be identified.

Energy firms are permitted to disclose their participation in the scheme at their own discretion after a guarantee issued under the scheme has been executed.

Clause 2 (Standard of Care) of the Guarantee Agreement applies once the covered EMFS facility and the guarantee are in place.  Accordingly, once the guarantee is in place the lender is expected to:

1. always act in good faith towards the Bank and HMT;
2. in relation to the covered EMFS facility, the borrower or the guarantee comply with its own applicable general policies and procedures relating to similar financings;
3. act as a prudent lender in respect of the covered EMFS facility as if it did not have the benefit of the guarantee; and
4. take reasonable steps to
• minimise losses covered by the guarantee and
• maximise recoveries following a payment under the guarantee.

Obligations on lenders regarding the purpose of the facility with the energy firm and use of funds are set out in the template EMFS Guarantee under clause 4 of the Agreement Supplement.

The energy firm can request that their lender terminates the guarantee early, subject to a 30-day notice period and subject to the terms of the guarantee and any arrangements between the energy firm and the commercial lender. If you wish to terminate a guarantee before the stated end-date, then please contact EMFS-Applications@bankofengland.co.uk. Termination would be contingent upon the payment of any outstanding fees or interest.

A Cancellation Fee may be payable subject to the terms of any arrangement between the energy firm and the commercial lender on the underlying credit facility. Where a Cancellation Fee is payable and has not been waived by the commercial lender, the fee will be equal to the value of the outstanding Commitment Fee that would have been payable, at the then applying Commitment Fee rate, if the additional tranche had remained undrawn until the end of the guarantee’s coverage, as defined in the guarantee.

Energy firms will not be able to reapply to the scheme once the guarantee has been terminated.

Guarantees are valid for a period of up to twelve months from the date of issuance of the guarantee.