Risky Debt Threatens U.K. Recovery, Finance Lobby Says

(Bloomberg) — Seeking to head off a cascade of defaults that promise to set back the economic recovery, Britain’s finance chiefs called for the government to roll over as much as 35 billion pounds ($44 billion) of emergency virus loans.

A “U.K. Recovery Corporation” should be established to set up repayment plans or even take equity stakes in small- and medium-size companies that got taxpayer-backed loans to weather the pandemic, according to recommendations by a panel of executives led by TheCityUK finance lobby. A stopgap is essential to avoid triggering government guarantees that would further strain public finances.

“Businesses are going to struggle to repay,” Adrian Montague, chairman of the group, told reporters in a virtual news conference that was embargoed until Thursday. “We are urging the government to take immediate action to address these issues.”

Chancellor of the Exchequer Rishi Sunak on Wednesday pushed back on some of the recommendations in the report. “I’m not entirely sure it would be sensible for the government to have individual equity stakes necessarily in millions of very small businesses,” Sunak told lawmakers. “I’m not sure that would be particularly practical.”

U.K. businesses could face 100 billion pounds of unsustainable debt by March, of which 35 billion pounds was backed by emergency lending programs for the coronavirus. About 2.3 million businesses will have an emergency loan by then, of which a third are at risk of failure, the report estimates. These businesses employ about 3 million.

Fragile Recovery

The U.K.’s recovery from the pandemic is already looking fragile, with data showing disappointing economic growth in May. Support programs are scheduled to be phased out in coming months and small company owners face mounting rent bills as they brace for Brexit.

The finance group was convened following a March meeting with Bank of England Governor Andrew Bailey, who asked the industry to consider how to handle the emergency loans coming due, Montague said. The group includes Norman Blackwell, chairman of Lloyds Banking Group Plc; John Kingman, chairman of Legal & General Group Plc; and, Omar Ali, managing partner of U.K. financial services at consultancy EY.

The report recommends that borrowers with up to 250,000 pounds in government-backed loans could have their loans converted to a new tax obligation. Slightly larger loans could be converted into longer-term subordinated debt or preference shares.

“We are going to see this corporation — if things pan out as we expect — receiving equity stakes in thousands, probably tens of thousands of businesses,” Montague said.

While billions of pounds in private sector capital could be tapped to support the recovery, the group said it’s unlikely to be deployed fast enough. Private equity firms, insurers, pensions and other investors could step in after the recovery corporation is set up.

(Updates with Sunak comments in fourth paragraph.)

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