Coronavirus: Firms 'won’t repay £36bn debt' from taxpayer loan schemes

6 June 2020, 18:29 | Updated: 7 June 2020, 12:35

British companies could be saddled with unsustainable taxpayer-guaranteed loans of up to £36bn as they try to survive the coronavirus pandemic, a report from a panel of business leaders will warn next week.

Sky News has learnt that a group set up to work out how to recapitalise swathes of UK plc in the wake of the crisis will suggest that emergency schemes launched by the Treasury could result in the vast bad debt burden accruing in 2021.

The report from TheCityUK's Recapitalisation Group, which is chaired by the former Aviva chairman Sir Adrian Montague, will include a new overall estimate of between £97bn and £107bn of bad debt being on the balance sheets of British companies.

It will suggest that a range of options, including debt-for-equity swaps and a contingent tax liability model based on the Student Loans Company, will be required to alleviate the enormous debt mountain if the UK economy is to recover swiftly.

The report will reinforce the vast cost to the state of propping up the economy during the COVID-19 crisis.

One source said the group's interim report, which will be published on Monday, would show that Private Non-Financial Corporations held between £83bn and £91bn of unsustainable borrowing going into the COVID-19 crisis.

Another £32bn-£36bn has been added to that total by government-guaranteed loans from the Coronavirus Business Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme and the Bounce Back Loan Scheme (BBLS), the report is expected to say.

The first two of those schemes have the first 80pc of their losses guaranteed by the government, with the remaining 20pc covered by private sector lenders.

Under the BBLS, the loans are made by private sector institutions, but the loans are 100pc guaranteed by the state.

In addition to the government schemes, between £11bn and £13bn of debt which might not be able to be repaid has been taken on in the form of private lending.

The grandees' panel also calculates that between £29bn and £33bn could be offset from the total through a range of measures, leaving an overall debt burden of between £97bn and £107bn that would not be repaid.

"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 Recapitalisation Group said in a letter to Andrew Bailey, the Bank of England governor, last month.

The report is expected to recommend a series of different models, with loans to the smallest companies likely to be targeted through a model that would see them repaid through the tax system.

Figures published by the Treasury this week showed that banks had approved £31.3bn of loans to 745,000 businesses since the three schemes were launched.

The grandees' panel includes Catherine McGuinness, policy chair at the City of London Corporation; James Palmer, chair and senior partner of the legal giant Herbert Smith Freehills; Schroders' chief executive Peter Harrison; and Nikhil Rathi, chief executive of the London Stock Exchange.

Sir Adrian's involvement is logical because of his former job as chairman of 3i Group, the listed private equity investor that was created after the Second World War - under a different name - to back small and medium-sized companies that could not access public equity markets.

Other measures being considered by the panel of grandees include structures such as preferred equity or common equity and warrants to help alleviate companies' debt burden.

"The economic lockdown created by the pandemic has required unprecedented interventions," TheCityUK chief executive, Miles Celic, said last month.

"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."

The Recapitalisation Group's final report is expected to be published in the summer.

TheCityUK declined to comment on Saturday.