Tsunami of “Unsustainable” Business Loans to Hit Banks, City of London Grandees Warn

“Consideration may need to be given” to bailouts from taxpayers “to meet solvency or liquidity requirements,” but only “at the extreme end,” whatever that means.

Many struggling businesses in the UK, both large and small, will soon be sitting on debt piles they won’t be able to service as the emergency loans they’ve taken out to survive the lockdown and its aftermath begin to fall due. That’s the stark warning of an “interim report” by the Recapitalisation Group (RCG), a task force assembled by The CityUK, one of the UK’s most powerful financial lobby groups, at the “encouragement” of the Bank of England, to explore ways of recapitalizing small and medium-size enterprises (SMEs) when the inevitable debt defaults begin.

By early next year, non-financial businesses will have between £32 billion and £36 billion of additional debt they cannot repay, the RCG warns in the report. That fresh debt, on top of the distressed business debt that already existed before the crisis, will leave UK businesses with between £97 billion and £107 billion of what the RCG calls “unsustainable debt.”

Around half of that debt will belong to SMEs. Almost all of it will be owed to banks. Although the loans are ostensibly backstopped by the government, some banks, according to The Sunday Times, are beginning to fret that when companies begin to default on their debt, the government backstop will not automatically kick in, leaving the banks holding big losses on their loan books.

The UK government has set up a total of three emergency business loan programs in response to the coronavirus crisis: the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS), and the Coronavirus Large Business Interruption Loan Scheme (CLBILS), each of which covers different segments of the business community.

BBLS is aimed at micro and small businesses, offering facilities of up to £50,000. It is 100% backed by the government. CBILS is tailored to both small and medium sized businesses, offering facilities of up to £5 million, and is 80% backed by the government. CLBILS focuses on large businesses with facilities of up to £200 million and is 70% government guaranteed.

In addition, the Bank of England has launched the Covid Corporate Financing Facility program which provides liquidity to large corporations by exchanging commercial paper for low-interest loans. It has so far lent £16 billion to 53 companies.

But it’s the government’s three loan programs the RCG is interested in. Through these programs, lenders have provided £35 billion in emergency loans to 830,000 businesses. But the RCG expects this to rise to between £111 billion and £123 billion by the second quarter of next year.

Borrowers do not have to repay the principal or interest on those loans for the first 12 months. But in three months’ time the government’s job retention scheme is scheduled to come to an end, meaning companies will have to restart paying the wages of their formerly furloughed workers. That could be a stretch for some companies that have generated virtually no revenues for months on end and will need to use much of their working capital to reinvest to meet pent up new demand. The alternative is to lay some of their workers off, but that itself can be a costly process.

Continue reading the article on Wolf Street

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