It is feared that up to 780,000 firms employing three million could go bust in the next year if they cannot defer repayments on government-backed loans. The figures highlight the risks if urgent action to tackle the projected £35bn of unsustainable debt from Covid-19 loans is not taken according to a new report by The CityUK.

The Recapitalisation Group, which was formed by finance industry body TheCityUK, has suggested a UK Recovery Corporation should be formed to turn risky debts into more manageable forms like tax liabilities or shares.

The report, which is being sent to the Treasury and the Bank of England, says ministers should set up a new UK Recovery Corporation to oversee schemes designed to restructure companies’ debts to make them more sustainable.

The report finds that with around three-quarters of this projected unsustainable debt held by firms outside London, a national solution is needed as soon as possible. The rapid response by government and industry has helped companies survive the initial economic impact of the crisis, but as we look forward, it is clear that many businesses will need help to tackle a debt burden that could hold them back or drag them under.

TheCityUK’s report, supported by EY, the UK-based financial and related professional services industry has published a far-reaching set of options for converting, restructuring and repaying this debt to help hundreds of thousands of SMEs get back on their feet, save millions of jobs, protect billions of pounds of taxpayer money, and help power Britain’s economic recovery and future growth. The options, if taken forward, present a real opportunity for the government to leave a lasting positive legacy of regional growth and investment across all parts of the country.Central to the options outlined is the founding of a new government-backed entity, a ‘UK Recovery Corporation’. This would both, issue and hold, and oversee and manage, the unsustainable debt that is already government-guaranteed, in order to support funding on more manageable terms for businesses, and provide a vehicle in which the private sector could invest in over time.

Through the UK Recovery Corporation, viable SMEs would be offered the opportunity to convert their loans into new products allowing them to manage their debt in a more sustainable way and achieved without being put into default. Depending on the size of their debt, they could either access a ‘Business Repayment Plan (BRP)’ to convert unmanageable loans into means-tested tax liabilities, or for larger debts, use ‘Business Recovery Capital (BRC)’ to convert crisis loans into preference shares or long-term subordinated debt. Both products will ensure SMEs do not give up any equity in their business.

Also among the options presented is the creation of a new growth capital fund, or the scaling up of an existing fund, to provide businesses with growth capital to help power business recovery across the country. This will be particularly important in areas outside London, with London having historically dominated SME equity investment. Growth Shares for Business (GSB) will allow SMEs to rebuild cash reserves, invest in working capital and relaunch after the crisis. This growth capital would support the regeneration of local and regional economies and help drive forward the long-term recovery of communities across the UK.

There is a need to act quickly. Businesses currently need to start repaying Government Covid-19 loans in March 2021. But before March, many strong, well-managed UK businesses may come under immense pressure, as the government furlough scheme starts to taper off, rent deferrals come to an end, deferred VAT payments are due in full by 31 March 2021, and operating losses continue to accumulate. The ongoing sustainability of these businesses not only requires liquidity but also adequate recapitalisation.

The options put forward by TheCityUK Recapitalisation Group are the result of intensive work by over 200 financial experts from across 50 financial and related professional services firms, overseen by EY. It has been compiled in consultation with HM Treasury, the Bank of England and the Financial Conduct Authority, as well as business trade associations representing a wide spectrum of business sectors and sizes.

For viable SMEs, TheCityUK Recapitalisation Group proposes two key options which would be managed and held by the UK Recovery Corporation: the BRP and BRC.

  • The Business Repayment Plan (BRP): for small businesses with a Bounce Back Loan Scheme (BBLS) or small Coronavirus Business Interruption Loan Scheme (CBILS) loan under £250,000. These businesses would convert the outstanding loan balance into a tax obligation administered by the UK Recovery Corporation but repaid through the tax system. 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. There may be certain restrictions on the borrower (such as the ability to pay dividends or dispose of assets) to ensure that tax obligations are repaid as a priority.
  • Business Recovery Capital (BRC): for larger businesses with a CBILS loan up to £1m. Businesses would be able to convert their government-guaranteed loan into subordinated debt (an unsecured loan that ranks below others) or preferred share capital (that provide fixed dividends ahead of ordinary shareholders). These are non-voting instruments and, while there may be certain restrictions on borrowers that utilise the instrument, they will not lead to a business owner or founder losing control of their business.

Business growth option:

  • Business Capital Growth Shares (BCGS) could be created and held by a new or adapted growth capital fund. This would be for viable SMEs that have either not taken out debt or are able to repay their debt but nonetheless need growth capital. This would allow them to rebuild cash reserves, invest in working capital and relaunch after the crisis. The growth capital could help support the regeneration of local and regional economies to drive the long-term recovery of communities across the UK.