Government must tackle £35bn corporate debt crisis, warn City bosses
The government must take urgent action to prevent a wave of defaults on £35bn of corporate debt taken on during coronavirus wreaking havoc in the economy, a new report backed by some of the City’s biggest names has said.
Policymakers should create a “UK Recovery Corporation” to turn risky debts into more manageable forms like tax liabilities or shares, said the Recapitalistion Group formed by finance industry body The City UK.
Businesses up and down the UK have borrowed around £45bn through government-backed schemes. And they have deferred more than £30bn in VAT to ease the financial pain during the coronavirus pandemic, the report said.
Combined with pre-coronavirus borrowing, The City UK estimates UK firms could hold £100bn of unsustainable debt by March 2021. That is when repayments of Covid loans first become due.
But “hundreds of thousands of businesses across the UK” will come under severe pressure before then, said Omar Ali, EY partner and one of the report’s key organisers. They will be hit by the winding down of government support such as the job retention scheme, he said.
“That is why taking action now is vital,” Ali said. He said the report’s proposals would help firms “get back onto a stable footing as we emerge from the pandemic, and will ultimately support the UK’s economic recovery”.
New entity would tackle bad corporate debt
The report said the government should quickly set up a new UK Recovery Corporation.
It would oversee three different schemes to try to restructure companies’ debts to make them more sustainable. Eventually it would attract private capital to invest in some of the programmes. These schemes would be:
- Business repayment plan, which would convert government-backed bounce-back loans and coronavirus business interruption loans into a tax obligation. This would allow the smallest firms who had taken out loans under £250,000 to pay their debts back via the tax system over a sustainable period.
- Business recovery capital, which would turn government-back loans into “subordinated debt” (an unsecured loan that ranks below others) or into “preference shares” that provide fixed dividends ahead of ordinary shareholders. It is aimed at medium-sized or large companies.
- Growth shares for business (GSB) would allow equity investment in firms with good growth prospects. It is a scheme for firms of all sizes.
The Recapitalistion Group’s report said these schemes would give firms vital breathing space. And they would “create the conditions needed for the private sector to invest” in parts like the preference shares further down the line.
Yet the group is clear that the scale of the debt problem is currently so big that the state must take the first steps. Only government can “issue funding on new, more manageable terms for businesses”.
It argued that the proposed solutions would stem a wave of defaults that would be hugely costly for the government. Under the bounce back loan scheme, for example, the government has backed 100 per cent of the lending.
City grandees from Lloyds Bank, Citigroup, Schroders, Legal & General, and Canada Corporation backed the report.
Around 3m jobs under threat
The City UK appealed to the government’s agenda of “levelling up” the UK’s regions economically. It warned that firms outside London hold nearly three-quarters of the roughly £100bn of unsustainable corporate debt.
The report’s authors played down the chances of a credit crunch, however. They stressed that banks are much stronger than they were in 2008.
Yet they said that around 770,000 firms across Britain could struggle to repay their loans. This could threaten as many as 3m jobs.
Much would still have to be worked out with the government and banks, the report admitted. The government would likely need to legislate to convert Treasury-backed debt into other forms of capital, for example.
The Recovery Corporation would also need robust systems to deal with disputes. And it would need rules to decide when firms should be allowed to enter into one of the schemes.
A Treasury spokesperson said the report was “a useful contribution to discussions on how businesses can be best supported through this difficult time”.