Thu 07/16/2020 12:07 PM
Relevant Document:
TheCityUK Report July 16

Unsustainable corporate debt in the U.K. could top £100 billion by the first quarter of 2021, with over half attributable to loans to small and medium-sized companies, according to new research by financial industry group TheCityUK.

Economic forecasts suggest that, over the next 12 to 18 months, businesses will face tougher trading conditions than they saw before the Covid-19 pandemic, making it harder to service existing debt and any additional borrowing undertaken during the crisis, the group said.

The figures form part of a report released today by TheCityUK’s Recapitalisation Group, supported by EY, which discusses how the private sector can help mitigate the effects of the debt load. It also proposes the creation of a new entity, the UK Recovery Corporation, that would issue funding on more manageable terms for business and establish a vehicle through which the private sector can invest to help clear the government’s existing loan commitments.


Between £32 billion and £36 billion of financing supplied by the government’s Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS) - which are expected to have collectively issued £111 billion to £123 billion by next March - will become unsustainable, according to the report.


The report estimated that about 2.3 million businesses, employing about 3 million people, will have a CBILS or BBLS loan by the end of March 2021 and that roughly one-third of these businesses could struggle to repay their government loans. More than half of these unsustainable loans have been taken on by businesses in the property, construction and hospitality sectors, the research suggested. A detailed sector breakdown is below:


The group has suggested that private equity groups, insurers and pension funds could play an enhanced role in the recapitalization process, though this would involve a “significant realignment of risk and return dynamics and substantial operational and regulatory challenges.”

In contrast to the scale of demand for recapitalization, the volume of SME equity finance is low, at under £10 billion a year, the paper said. Only about 2% of U.K. SME equity investment is allocated to rescue and turnaround with the majority focused on growth capital, it noted.

Yesterday, Chancellor of the Exchequer Rishi Sunak told the House of Commons Treasury Select Committee that the government was not considering bailouts and equity investments into business in response to the report.

“It’s not something government should get into the business and habit of doing,” Sunak said after Conservative MP Julie Marson suggested it was “unrealistic” that the private sector would be willing to invest on the scale necessary to offset the risk posed by the unsustainable debt pile.

“I think the bar for that kind of intervention is very high … Government is always the last resort person who can do that, now and historically, but it should be exceptionally rare; it should only be in situations where a company has some strategic value, has a long-term viable future, and indeed the existing equity holders and creditors have shared in the burden,” Sunak said.

To date, the government has guaranteed about £43 billion of lending via the CBILS, CLBILS and BBLS and deferred more than £30 billion in VAT, the group said. “Without further action, however, many of these businesses will struggle to repay the debt which has been guaranteed by the Government and pay taxes deferred,” it added.

The report calls for the conversion of BBLS and small CBILS debt into a tax obligation, administered by HMRC and repaid through the tax system, under the heading of the Business Repayment Plan (BRP); the conversion of government-guaranteed loans into subordinated debt and preferred share capital, referred to as Business Recovery Capital (BRC); and the creation of new instruments, including preference shares, to provide growth capital to rebuild cash reserves, invest in working capital and relaunch after the crisis, under the heading Growth Shares for Business (GSB). The proposed UK Recovery Corporation would administer the new obligations created through these conversions and hold and administer the new instruments, taking on the obligations on behalf of the government of its loan guarantees in the process.

A schematic of the processes envisaged in the proposals is below:

“Our discussions with investors suggest that the principal investor supplying seed funding for the UK Recovery Corporation at launch is most likely to be the UK Government,” the paper said, proposing that initial funding would be through the contribution of the government’s guarantee exposures converted into business recovery capital.

“There are precedents in the UK and overseas for governments seeding new institutions to support economic recovery, as well as facilitating private sector support,” it continued. “3i (in its original form as ICFC), UK Asset Resolution and KfW are but three, and we believe a new UK Recovery Corporation with these objectives could put the UK in the best possible position to recover quickly and confidently from the damage Covid-19 is causing to the economy.”

The proposals are the result of consultations with 200 financial experts from across 50 financial and related professional services firms, led by TheCityUK’s Leadership Council Chairman Adrian Montague and overseen by EY. The report was compiled in consultation with the U.K. Treasury, the Bank of England and the Financial Conduct Authority, as well as business trade associations representing a wide spectrum of businesses, sectors and sizes.
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