£36bn of govt-backed loans to turn toxic, report warns

Up to £36bn of government backed business loans issued during the Covid-19 crisis could be unsustainable by early 2021, a City working group has warned.

The Recapitalisation Group, a taskforce led by lobby group TheCityUK and accountants EY, estimated that about £100bn of loans to businesses could be toxic by the end of March. Small and medium sized enterprises (SMEs) will account up to £56bn of the unsustainable loans with about half of the total in the hard-hit property, construction, accommodation and food sectors.

Unsustainable loans from government lending programmes will be £32bn to £36bn based on estimates that up to £123bn of these loans will be made by March 2021, the taskforce said.

The UK government has put in place various programmes to support businesses hit by the Covid-19 lockdown and resulting deep recession in an attempt to stop otherwise viable enterprises from going bust. These range from backing loans of up to £200m to large companies to so-called bounceback loans with a maximum value of £50,000 for smaller enterprises.

The Recapitalisation Group's interim report looked at about 250,000 unlisted companies that are bigger than sole traders or micro businesses. Many rely on bank loans and privately held equity for funding with limited access to financial markets.

"Economic forecasts suggest that over the next 12 to 18 months these businesses will face tougher trading conditions than before Covid-19, making it harder to service both existing debt and any additional debt taken to weather the crisis or restart their business," the report said. "The demands of this debt is likely to compromise the growth and viability of many UK businesses and, as a result, the UK economy."

Options for refinancing unviable loans include swapping debt for equity or to a tax payable out of profits, linking debt repayment to profit, repayment holidays and debt forgiveness.

The group said private equity firms, insurers and pension funds were candidates to provide the needed capital. It has opened the report up for consultation and sent its proposals to the Treasury with a final report scheduled for July.