More than £46 billion has been lent or approved since March 2020 under the three loan schemes backed by the UK government – the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme, and the Bounce Back Loan Scheme – and more than £30 billion of VAT has been deferred by the government.
Many companies and business will struggle to repay this debt: much will become unsustainable.
Dealing with the debt
In a 148 page report out today, TheCityUK, an industry body representing UK-based financial and related professional services, estimates that by March 2021 there could be around £100 billion of unsustainable debt held by UK businesses, and that around £35 billion of that could come from the government-backed loan schemes. A large proportion of that debt is held by SMEs.
TheCityUK paper – written by its 'Recapitalisation Group' – suggests options and mechanisms for dealing with this potentially huge build-up of corporate debt whilst minimising the impact on the provider of most of this debt, the UK taxpayer.
A 'toolbox of options' held by a new 'UK Recovery Corporation'
The principal institutional mechanism suggested by TheCityUK is the establishment of a new government 'UK Recovery Corporation'. That body – and the analogy is to historical precedents such as the old Industrial and Commercial Finance Corporation, which became 3i, or the German KfW – would administer, or issue and hold, three principal options:
A 'Business Repayment Plan' (BRP) would convert Bounce Back and Coronavirus Business Interruption Loan Scheme debt into a tax obligation, administered by HMRC and repaid through the tax system. In the words of the paper, this 'would be means-tested, ensuring businesses only pay what they can afford, which could be calculated based on taxable profits or another measure of business recovery'.
A 'Business Recovery Capital' (BRC) option would convert government-guaranteed loans into subordinated debt or into preferred share capital. As the paper explains, these 'are non-voting instruments and, whilst there may be restrictions on businesses, they will not lead to a business owner or founder losing control of their business'.
A 'Growth Shares for Business' (GSB) option would offer a mix of instruments, including preference shares, to 'provide growth capital to rebuild cash reserves, invest in working capital and relaunch after the crisis'.
It is a long and detailed paper
TheCityUK paper makes many recommendations on how each of these options could work, and sets out the various policy considerations which have influenced the development of the options. Those include the need to manage taxpayer exposure, conduct issues, timing, European State aid rules, and broad implementation goals.
- Cover how the new UK Recovery Corporation could be established, structured, funded and operated.
- Set out how the BRP, BRC and GSB options would work, including the businesses at which each option is targeted and the 'illustrative attributes' of each option – Figure 14 at page 46 of the paper is a useful summary.
- Focus principally on SMEs which have accessed one of the government-backed lending schemes, but also cover how the BRP and the BRC could be extended to support borrowers which may be struggling with non-scheme debt.
The paper discusses how businesses would access the BRP, BRC and GSB options through an application to their existing lender, and contains flow chart suggesting how that application processes could work.
The need for speed
The concluding section of TheCityUK's paper lists recommended next steps, many of which will need decisions by government.
Having described the likely rapid build-up of potentially unsustainable debt, an overarching recommendation is that:
'The need for the solutions is likely to start to crystallise in late autumn 2020, and increase in early 2021, necessitating a near term implementation solution. We will need to continue to move quickly. To achieve this, decisive action is now required to conclude the solution design and quickly move towards a market launch of the solutions.'
Will the UK see the creation of a 'new 3i' in the form of a UK Recovery Corporation? Once industry participants have absorbed the detail of the paper, attention will turn to the government's response. Yesterday, the Chancellor did not appear entirely enthusiastic about one of the options presented by the paper, with the Financial Times reporting that he told the Treasury select committee that he is 'not entirely sure it would be sensible for the government to have individual equity stakes in millions of very small businesses'.