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Attention turns to fate of state-guaranteed coronavirus loans

UK Treasury

Lenders have already issued almost £43bn to more than one million UK-based businesses through government-backed schemes in the three months to the end of June, according to official data from the Treasury.

More than 967,000 approved loans, worth almost £30bn, have been issued to the UK’s small businesses under the light touch Bounce Back Loan Scheme (BBLS), with the government guaranteeing 100% of up to £50,000 and paying the loan’s fixed rate of 2.5% in the first year. The bulk of the remaining issued debt comprises over 52,000 facilities under the Coronavirus Business Interruption Loan Scheme (CBILS) worth £11 billion. This combined debt issuance over the second quarter, inclusive of a further £2.3bn in large CBILS loans, reflects more than 14 times higher than the quarterly average over the past five years, according to UK Finance. It underscores the unprecedented demand for business finance, but has also raised concerns over the ability of these businesses to service these loans. Simply put, many are already sounding the alarm for a wave of CBILS and BBLS defaults.

The predicament many of these businesses faced, particularly smaller firms, was unenviable. Many felt trapped and had to choose from a menu of bad options.
These loans were, in essence, an emergency short-term liquidity solution which provided the possibility of survival, in addition to any existing bank debt.

As the economy precariously reopens, two sectors of the urban market will continue to be under distress.

First, in the ancillary service sector (for example, food retail, restaurants, bars, gyms, and leisure venues), particularly in the city centre business districts. The chance of survival of these types of businesses will depend on the degree to which the office-based workforce returns to city-based business premises. However, such recovery scenarios are in turn dependent on balancing the tension between two normally aligned societal priorities: public health and local economy revival/survival. It is a reminder of the mutual reliance between segments of business ecosystems. Some less resilient businesses which have been unable to transition to online-only work will be among those having to endure depressed service demand for longer, compounding economic pain in the already weaker parts of the business ecosystem.

These problems will come into sharper focus in early autumn, as it becomes clearer to what extent the UK economy has to grapple with a significant second wave of Covid-19. In the absence of a major second wave, the government’s priority will pivot to pushing for a rapid opening of the economy and the government may even pressurise employers to call their employees back to the office to help revive decimated urban service sectors. But if a second wave manifests, locally or nationally, the government will be forced to prioritise public health over the economy, which could spell the death knell for many service sector companies.

Second, companies with already leveraged capital structures will similarly struggle in the early phases of the post-lockdown economy, with their prospects for survival affected by, among other things, returning client demand (itself a function of cascading supply chain of mutual dependence) and successful consensual lender negotiations.

Both segments of the economy will struggle to repay their CBILS and BBLS loans, and the market is already speculating that many businesses could default. Companies will find it difficult to service their various layers of debt in an environment where returning demand is likely to be limited and normal running costs (e.g. rent, salaries, suppliers, etc.) still have to be met. Of course, if the economic recovery is strong, this scenario could be averted. But if the economic bounce-back is prolonged and slower, and more U- or W-shaped, businesses might logically prioritise pre-existing bank debt first. What does that mean for CBILS and BBLS loans? In the second part of this article, we will consider the possible scenarios for the state-guaranteed coronavirus loans.

No decisions have perfect outcomes for UK businesses. If your business, or portfolio company is directly impacted by any of the challenges discussed above and you would like to talk through your strategic options, please do get in touch. We have a number of experts in our advisory and restructuring teams who can assist and we offer an initial free consultation.

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