Coronavirus: City calls for new body to clear £35bn crisis debt burden

12 July 2020, 21:31 | Updated: 13 July 2020, 01:22

The government should establish a "UK Recovery Corporation" to help tackle a £35bn state-backed debt burden accumulated by British businesses during the coronavirus crisis, a panel of top City figures will say this week.

Sky News has exclusively obtained the principal recommendations of the Recapitalisation Group (RCG) - overseen by TheCityUK lobbying organisation - which will call for the new entity to be set up urgently in order to address the mounting crisis facing millions of companies.

Sources said the RCG's final report, which is due to be published within days, is expected to support the creation of three new types of capital instrument to help debt-laden businesses.

These would all be administered by the UK Recovery Corporation (UKRC) which, according to the panel, would issue funding on more manageable terms for SMEs and provide a vehicle in which private sector institutions could invest in order to gradually reduce the government's exposure.

One source said the UKRC would, if implemented, have separate governance, and in many ways replicate the role of UK Financial Investments, which was set up in 2008 to manage taxpayers' interests in Lloyds Banking Group, Royal Bank of Scotland and other stricken lenders.

Since Rishi Sunak, the chancellor, set up emergency lending programmes including the Coronavirus Business Interruption Loan Scheme and Bounce Back Loan Scheme in the spring, more than £40bn of wholly or partially state-backed government loans have been issued.

The first of the RCG's proposed new instruments, called the Covid Business Repayment Plan, would convert tens of billions of pounds of loans issued under the BBLS, along with smaller CBILS loans, into a tax obligation.

These obligations would be administered by the UKRC but repaid through the tax system on a means-tested basis similar to that applied to the repayment of student loans.

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The second mechanism, called Covid Business Recovery Capital, would convert government-guaranteed loans into subordinated debt or preferred share capital agreements, but without voting rights attached to them.

A source said that primary legislation might be required to pave the way for the first two forms of instrument to be introduced.

The third mechanism, dubbed Covid Business Growth Shares, would consist of different instruments such as preference shares, ensuring the provision of growth capital to allow companies to replenish their cash reserves and invest in working capital.

The report will be the most significant document published to date on the subject of how to alleviate a financing crisis that looms large for huge numbers of business-owners, with the government's job retention scheme starting to taper off from next month.

One banking source said the RCG's final report was likely to be welcomed by Mr Sunak and Andrew Bailey, the Bank of England governor, who have been kept closely informed about its progress.

One source said the RCG now estimated that roughly one-third of the approximately two million businesses which have taken on a CBILS or BBLS loan during the crisis could struggle to repay their new borrowings, leaving them on the brink of collapse.

In its interim report last month, the group said that roughly £35bn of the £100bn of unsustainable debt that it expects will be held by SMEs by next March will have been generated by the government's own coronavirus lending initiatives.

One City insider said the RCG's final recommendations would be a "measured and sensible" way to transfer the wall of taxpayer-guaranteed business debt into more sustainable solutions that would help to mitigate the additional strain on the battered public finances.

"If left unresolved, these levels of unsustainable debt could inhibit employment, research and development, investment and ultimately a smooth economic recovery back to growth," the RCG said in a letter to Mr Bailey in May.

The grandees' panel includes includes Sir Adrian Montague, the former chairman of Aviva, Lord Blackwell, the outgoing chairman of Lloyds Banking Group, Peter Harrison, chief executive of the asset management giant Schroders, Sir John Kingman, chairman of Legal & General, and Catherine McGuinness, policy chair at the City of London Corporation.

"The economic lockdown created by the pandemic has required unprecedented interventions," TheCityUK chief executive, Miles Celic, said during the early phase of the group's work.

"Businesses have been put into suspended animation until they can safely reopen.

"This was absolutely the right thing to do, but it means the job is not yet done.

"The economy will need to be reawakened as part of its process of recovery."

TheCityUK could not be reached for comment on Sunday night.