Allen & Overy (A&O) has advised the Treasury on a £20bn 'credit-easing' scheme that is set to provide cheaper borrowing for UK companies.

The National Loan Guarantee Scheme (NLGS) is aimed at making cheaper lending available to small and medium-sized enterprises (SMEs) and has also handed roles to Clifford Chance (CC) and Linklaters.

The initiative, which was announced today (20 March), forms a major strand of Chancellor George Osborne's 2012 budget that is to be unveiled in full tomorrow (21 March).

A&O City capital markets partner Geoff Fuller and senior associate Tom Constance acted for the Treasury and Debt Management Office (DMO) in drafting and creating the scheme.

CC took roles for two of the four banks that have signed up to the scheme so far, with Linklaters advising Royal Bank of Scotland (RBS) and CC taking the advisory role for both Barclays and Lloyds. It is understood that CC deployed Chinese walls to separate its two teams. It is currently unclear who is advising the remaining signatory bank, Santander.

CC London head David Bickerton advised Lloyds, while Linklaters City capital markets partner Richard Levy advised RBS.

Under the terms of the scheme, the Government will step in as guarantor to the lending banks, enabling them to raise money more cheaply, which is then expected to be passed on as loans to small and medium-sized business. The scheme is part of a high-profile attempt to channel more credit to small businesses.

The scheme will total £20bn worth of loans that the Government will guarantee, and will be rolled out in four six-month stages – the first tranche of which will be for £5bn. The banks signing up to the scheme have agreed on prescriptive conditions to use part of the 'discount' it gains from launching Government-backed bond issues to lend to SMEs with around 1% lower interest rates projected, while also paying a fee to the Government for putting up the guarantee. The Government guarantees will only kick in in the event of a loan default.

One City capital markets partner commented: "This has been described as a Government subsidy but that is not quite right. It is a clever scheme because in an ideal scenario the Government will not front any of the bill but are just lending their credit rating to the banks, which can raise money more cheaply as a result."

It comes after Legal Week reported last week that A&O is also in line to pick up a high-profile advisory role if the Government pushes ahead with proposals to launch a 100-year sovereign bond issue to take advantage of Britain's historically low interest rates.

The magic circle firm is established as primary capital markets adviser to the DMO, which would be charged with testing market appetite for the new gilts.

Aside from its regular role for DMO, A&O is also a member of the four-firm panel operated by UK Financial Investments – the body which manages the Government's stakes in UK banks.