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Tapering furlough scheme prompts decision time for pandemic-hit corporates

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The coronavirus job retention scheme (CJRS) starts to taper this week, which will prompt employers that receive funding to quantify their long-term workforce size as the UK slowly emerges from its third extended national lockdown.

Under the taper, employers will need to pay 10% of the wages for furloughed staff, with the CJRS still providing a grant to cover up 70% of wages, capped at £2,187.50 per month. The scheme is scheduled to expire at the end of September, with employers paying 20% of employee salaries in the final two months, reducing the grant to 60% of wages (capped at £1,875 per month).

The CJRS has been a cornerstone government policy to steer the UK economy through the Covid-19 health and economic crisis. Since its launch in April 2020, the CJRS has provided £65.9 billion to directly support 11.6m employees across 1.3m employers, as at June 14 2021. The utilisation of CJRS has been trending down since furloughed employees last peaked in January at 5.1 million, aligned to the UK’s third national lockdown.

Some industry bodies have called on the Chancellor to extend the furlough scheme, but this seems unlikely. The case for an extension is anchored to the emergence of the new Covid-19 Delta variant, which has caused a 58.7% spike in weekly new cases to 104,052.

Sajid Javid, the new health secretary, favours reopening the UK economy as soon as possible as he feels it is a position that looks to be supported by the data, as a relatively optimistic picture is emerging from this Delta variant. While new cases have started to trend up again, the hospitalisation rate and the number of deaths, which are lagging indicators, remain very low. Over the coming weeks, if this data trend continues, it would support the view that vaccines have helped break the link between new cases, hospitalisation and deaths. This would, in turn, support the government’s priority to complete the staged reopening of the UK economy on July 19. The risk to this outlook is the emergence of a vaccine-resilient variant; however,  there is no evidence of one yet and as long as this remains the case, national lockdowns will no longer be required.

The business sector, therefore, looks to be close to the point where all employers must again be self-sustaining. Some UK companies that recovered quickly have voluntarily reimbursed HM Revenue & Customs (HMRC) as much as £709m in CJRS grants, according to a Financial Times freedom of information (FOI) request published in mid-June. Although this dwarfs the £64bn spent by the Treasury, we expect shareholders and corporate governance bodies to press performing corporates to follow this best practice over the remainder of the year. But there are many businesses, particularly in hard-hit sectors such as retail, leisure and hospitality, which will continue to struggle. The government has extended non-spending support by granting a nine-month moratorium extension on evictions to tenants for non-payment of commercial rent. This remains a controversial policy that gains the support of struggling tenants but is challenged by landlords. Critics say allowing struggling tenants to build up a further nine months of rent arrears ultimately protects zombie companies from taking action to deal with longer term underperformance.

The truth lies somewhere in the middle. For tenants breathing a sigh of relief that the moratorium on evictions is extended and perhaps holding out for another CJRS extension, this is probably a sign that a more fundamental corporate restructuring may be necessary. The British Retail Consortium (BRC) said the extension would prevent a “feared a wave of legal action by landlords”. The time, however, is fast approaching for companies to become self-reliant and not to bank on government support for survival.

UK company insolvencies have remained at artificially low levels since the onset of the pandemic, driven by government measures to support businesses. These include temporary restrictions on the use of statutory demands and winding-up petitions (a precursor to compulsory liquidations), and the various government loan schemes. Monthly total insolvencies increased to a 2021 high in May, at 1,011, although this remains 25% lower than May 2019, before the pandemic, according to Insolvency Service data. However, rates of business insolvencies are likely to revert to increase over the medium and long term. Unfortunately, many corporates are likely to be unable to regain their footing in the post-pandemic economy. The unwinding of government support will compel many businesses to enter into insolvency proceedings. Corporates burdened by higher leverage, lower revenues and reduced government support will pose liquidity challenges to balance sheets, which is expected to lead to spikes in insolvencies, loan defaults and potential non-performing loans over the coming quarters. Boards can also consider restructuring or funding options that maybe available to avoid the potential adverse consequences of formal insolvency.

If you would like to speak to our team about your liquidity options across refinancing, corporate restructuring and raising new equity, please do get in touch. We also support property owners in dealing with restructuring and refinancing proposals put to them from their tenants, our team can assist.

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