£100 Billion Unsustainable Debt Owed by UK Businesses by Q1 2021: Report

July 18, 2020 Updated: July 19, 2020

As a result of the CCP virus pandemic, UK businesses could have debts of close to 100 billion pounds by the end of the first quarter of 2021 that they are unable to repay, a new report warns.

By March 2021, a predicted 97 billion pounds ($122 billion) to 107 billion pounds ($135 billion) in loans could become unsustainable, according to a report (pdf) by TheCityUK, a group representing UK-based financial and related services.

If measures are not taken to prevent businesses from becoming insolvent over the next 12 to 18 months and defaulting on government-backed loans, the government could be responsible for around 35 billion pounds ($44 billion) of the debt, with public finances incurring a huge cost, TheCityUK warns.

Currently, HM Treasury has guaranteed around 43 billion pounds ($54 billion) of emergency loans to businesses through a number of initiatives and platforms that target businesses of different sizes—the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS), and Coronavirus Large Business Interruption Loan Scheme (CLBILS).

This amount is predicted to grow to up to 123 billion pounds ($154 billion), with around 2.3 million businesses estimated to have received a CBILS or BBLS loan by the end of March 2021 when loan-holders will need to start making repayments. Given the economic conditions, roughly a third of these businesses could struggle to repay, putting an estimated 3 million jobs at risk, TheCityUK report states.

There are regional disparities, with three-quarters of the unsustainable debt estimated to be held by companies outside of London. Conversely, currently three-quarters of equity investment goes to London-based businesses.

Based on the group’s analysis, the private sector, including insurers, pension funds, and private equity firms, is still holding substantial capital, which could be invested in a business recapitalisation scheme.

TheCityUK proposes setting up a government-backed UK Recovery Corporation (URC) to oversee the unsustainable government-guaranteed loan debt. The URC would gradually take on the debts through securitising or transferring the loans, with longer-term repayment options for businesses, and invite the private sector to invest.

The group suggests converting BBLS and small CBILS loans under 250,000 pounds ($314,000) into a tax obligation to be repaid through the tax system. Much like student loans, it would be means-tested, allowing business to only pay what they can afford.

For companies with a larger CBILS loan of up to 1 million pounds ($1.25 million), the group proposes that the loans be converted into longer term subordinated debt or preferred share capital with no voting rights so business owners will not lose control of their business.

“There is a need to move quickly,” the report states. “The Chancellor’s Summer Statement provides welcome stimulus to ease the transition as the furlough other support schemes unwind. Nonetheless we estimate that the need for the proposed options is likely to start to crystallise in late autumn 2020 and increase in early 2021.”

Pressures on businesses will increase as operational losses continue and the government furlough scheme tapers off, rent deferrals come to an end, and deferred VAT payments become due in full by March 31, 2021.

The Bank of England estimated in May that the UK economy could shrink by close to 30 percent this summer and that GDP for the whole of 2020 could fall 14 percent with the unemployment rate hitting 9 percent.

According to KPMG’s outlook (pdf) on the economy released in June, to fight the Chinese Communist Party (CCP) virus and support the economy, the “government’s borrowing for 2020 is expected to reach the highest proportion of GDP in peacetime, at 15.2%, even larger than that seen during the global financial crisis in 2008–9 when borrowing reached 10.2% of GDP.”

Over 200 professionals from 50 firms in the financial industry contributed to TheCityUK report, which was compiled in consultation with HM Treasury, the Bank of England, and the Financial Conduct Authority.