“Consideration may need to be given” to bailouts from taxpayers “to meet solvency or liquidity requirements,” but only “at the extreme end,” whatever that means.
By Nick Corbishley, for WOLF STREET:
Many struggling businesses in the UK, both large and small, will soon be sitting on debt piles they won’t be able to service as the emergency loans they’ve taken out to survive the lockdown and its aftermath begin to fall due. That’s the stark warning of an “interim report” by the Recapitalisation Group (RCG), a task force assembled by The CityUK, one of the UK’s most powerful financial lobby groups, at the “encouragement” of the Bank of England, to explore ways of recapitalizing small and medium-size enterprises (SMEs) when the inevitable debt defaults begin.
By early next year, non-financial businesses will have between £32 billion and £36 billion of additional debt they cannot repay, the RCG warns in the report. That fresh debt, on top of the distressed business debt that already existed before the crisis, will leave UK businesses with between £97 billion and £107 billion of what the RCG calls “unsustainable debt.”
Around half of that debt will belong to SMEs. Almost all of it will be owed to banks. Although the loans are ostensibly backstopped by the government, some banks, according to The Sunday Times, are beginning to fret that when companies begin to default on their debt, the government backstop will not automatically kick in, leaving the banks holding big losses on their loan books.
The UK government has set up a total of three emergency business loan programs in response to the coronavirus crisis: the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS), and the Coronavirus Large Business Interruption Loan Scheme (CLBILS), each of which covers different segments of the business community.
BBLS is aimed at micro and small businesses, offering facilities of up to £50,000. It is 100% backed by the government. CBILS is tailored to both small and medium sized businesses, offering facilities of up to £5 million, and is 80% backed by the government. CLBILS focuses on large businesses with facilities of up to £200 million and is 70% government guaranteed.
In addition, the Bank of England has launched the Covid Corporate Financing Facility program which provides liquidity to large corporations by exchanging commercial paper for low-interest loans. It has so far lent £16 billion to 53 companies.
But it’s the government’s three loan programs the RCG is interested in. Through these programs, lenders have provided £35 billion in emergency loans to 830,000 businesses. But the RCG expects this to rise to between £111 billion and £123 billion by the second quarter of next year.
Borrowers do not have to repay the principal or interest on those loans for the first 12 months. But in three months’ time the government’s job retention scheme is scheduled to come to an end, meaning companies will have to restart paying the wages of their formerly furloughed workers. That could be a stretch for some companies that have generated virtually no revenues for months on end and will need to use much of their working capital to reinvest to meet pent up new demand. The alternative is to lay some of their workers off, but that itself can be a costly process.
Ironically, it is when the businesses begin to reopen that the strains will probably begin to show, particularly for companies that already had debt and/or cash-flow issues before this crisis began.
“It’s the classic symptom of over-trading,” says Duncan Swift, former president of insolvency trade body R3. “If there is a significant uptake in orders but a weakened capital base, that is when insolvencies will spike. The feeling is that it is three months off.”
In a recent survey of SMEs by the British Banking Resolution Service, 45% of respondents who have taken out a loan from a government business lending scheme say they may not repay it. Some industries are likely to be more exposed than others. According to RCG, the sectors most at risk of non-payment are property (representing 24% of the total estimated unsustainable debt), accommodation & food services (16%) and construction (11%).
To reduce companies’ debt burden, RCG has a number of proposals, including exchanging troubled CBILS (the loans given to mid-sized firms) for preferred stock, which would be subordinate to all existing debt but ahead of existing shareholder loans and common equity; and swapping BBLS (“micro” business loans) for contingent tax instruments. These might function in a similar way to student loans and fall due only when certain payment thresholds are reached.
It also recommends encouraging capital providers, both institutional and retail, to invest in UK businesses, either directly through a mix of debt and equity or indirectly through a third party investment manager or fund (such as an asset manager or Private Equity fund).
It’s far from clear how PE firms, VC firms, and institutional investors would be able to “help out” heavily indebted SMEs. As the authors of the report themselves admit, huge hurdles would have to be overcome and models and regulations retooled for the proposal to have any hope of getting off the ground:
“Unlocking capital from UK insurers, pension funds and PE could present opportunities to support UK SME recapitalisation and merit further consideration. However, unlocking private capital for this purpose and on this scale has not been done before in the UK market. There are significant challenges (e.g. alignment with investors’ risk and return preferences, and regulatory and operational issues) across all investor groups. Therefore substantial changes to the current model and new approaches to overcome existing impediments will be required.”
As efforts are made to straddle those hurdles, the UK Treasury is already working on plans to make it easier for pension funds to invest in PE and VC funds. Pension funds are currently restricted from investing in PE and VC funds due to the high fees they charge.
Former Chancellor George Osborne suggested another possible option in a chat with the FT last week: just “write off some loans.”
The RCG agrees, conceding that “consideration may need to be given to grants offered by the government” — which would be free money from taxpayers — “to meet solvency or liquidity requirements,” but only “at the extreme end,” whatever that means. By Nick Corbishley, for WOLF STREET.
Foreign Companies welcome. US Tax dodgers that didn’t qualify in the US, no problem. Read... The 53 Companies Bailed Out by the Bank of England: Johnson Controls, Carnival, PACCAR, Honda, Toyota, BASF, Bayer…
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One step further towards the Sovereign debt crisis.
In the UK we still have around 15-20% of the workforce furloughed until it runs out in Sept/Oct.
My wife is furloughed until the end of September ( self employed) and she is getting around£2500 a month. Even she thinks it’s ridiculous especially when you can do another job for extra cash and of you do go back to your job early you can keep the money.
So we have the ridiculous situation where a key worker has to go to work where they are at risk from the virus and get £250 a week. Then you have 20% of the population sitting on their arse getting £500 a week.
Who will ever bother saving for the future al when money is this easy?
It is a way to get money into the pockets of people without looking like the state is giving money away “undeservingly”. The expectation is that people will spend that money and so create movement in the the economy. I think they are right.
So, it’s basically universal basic income? Should make an interesting economics experiment.
central banksters will just have to print more pound sterling
I think what is not said clear enough is that “£500 a week” will last a quarter or too before becoming “£50 a week”.
Better save it wisely.
Madness? What else would you suggest to do?
As the Irish say about road directions
“Well, I wouldn’t start from here..”
In the US, the Atlantic Magazine reports that banksters may soon need bailouts as I had predicted. This happened before in 2008-2010.
In the US, we should create a bankruptcy-like procedure for banks and financial entities, so their crooked owners lose ownership and their creditors become the new owners if they need bailouts — as happens with legitimate companies in a bankruptcy Chapter 11. Crooks should not profit from government bailouts of essential institutions: the institutions are essential (e.g., the banks); the crooks who gambled away the institutions funds for their own profit are NOT essential. E.g., they can be ordered to give convertible bonds convertible to 999% of the shares of their financial entities.
The convertible bonds would be given by the financial institutions in exchange for the government bailouts that they will soon be demanding and which the “Federal” Reserve has given (over a trillion dollars) and which the treasury will probably soon also give.
“Now is not the time to stop contributing to your 401K” John Byrne, Alternet Finance.
In this article, he cites a Fidelity chart. In the mid-90s or so, where I worked the president and all others with Fidelity accounts took a bath.
Mr. Richter, do you have any thoughts on this? thanks
My company halted 401k matching contributions.
thanks, that’s interesting.
My company halted 401k contributions in 2008 after the blow up, and were not restored for several years. Big international corporation. It’s what they do when they can see it coming.
Probably depends on your job-security and liquidity preference during a time of great uncertainty. Generally a 401(K) should have at least a 10% match to cover the tax on any early withdrawals. Otherwise, if you still have a paycheck, have your payroll system do a direct deposit to your now-free investment account and go from there. They’ve got your ETFs, DRiPs, TIPs, bonds..
I stopped doing that 10 years ago :)
Retirement is not a consideration.
re: ‘It’s far from clear how PE firms, VC firms, and institutional investors would be able to “help out” heavily indebted SMEs.’
I don’t think E firms, VC firms, and institutional investors are in business to ‘help out’ anybody except themselves.
Using working folks retirement as fodder to fund bailouts…This is a perfect solution and many here comment we can’t bailout working folk retirements, so they get flush into poverty … because that would be wrong gotta save it all for the rich: “UK Treasury is already working on plans to make it easier for pension funds to invest in PE and VC funds. Pension funds are currently restricted from investing in PE and VC funds due to the high fees they charge.”
“UK Treasury is already working on plans to make it easier for pension funds to invest in PE and VC funds. ”
The volcano god is hungry again…
High management fees and ZIRP or NIRP Fed policies. Just the ticket for retiree pension funds. The easiest way to rob a bank is to own one.
Just thinking this morning how the police look forward to their fantastic pension benefits and how totally unsustainable the cities have to keep them topped up over the decades…
Something will soon happen as people move away from the cities.
The value of those pensions will most likely be inflated away. That’s the only way the government deals with debt.
I agree…but I don’t think the G ever anticipated the level of transparency created by the internet.
When you survive and thrive by fraud, you need the darkness.
Seems that the police and firefighters are ahead of you on that. Their pensions are linked to the CPI.
You assume they will be moving away from the cities. I think the reverse will happen. You don’t see a soul if you work from home and live out of nowhere. And people are social animals. They will find a way to still see people every day and that is much easier in the city. Also food delivery etc. is much easier in an urban environment
Capitalization vs GDP, June 2020:
I suspect when the bottom is sensed buying will commence. Until then, life is full of risk and unknowns, even for investors and banks. If the banks and different funds are expecting bailouts from the Govt, why then are regular folks supposed to accept bugger all beyond a few groceries and a limited payment relief window.
“My good is your good, (honest)”, says the bank CEO. “Without our sound banking system, where would you be”?
“Uh, holding up with no rent, food, or job”.
It is always important to remember that although the person behind the banker’s desk is nice, his/hers first priority is to make a profit for the bank, if the customer manages to make a profit too, well, sh*t happens …
“Have you ever worked in a slaughterhouse?”
“No, I worked in a bank–there are similarities.”
“Smokin’ Seventeen”, Janet Evanovitch
More proof that wealth-building isn’t for the hoi polloi.
They aren’t proposing that the VC and PE looters get special legal loopholes written to “help” the large-cap firm where the banks have the most exposure at 30% of total financing.
They want to “help” medium, small and micro enterprises by taking ownership! I’m shocked. Shocked, I tell you. Note that banks have 0% risk in the small and micro arena. But they are still “fretting” about it. Oh, the horrors of being made whole without grabbing more monopolistic power.
We can’t have that!
The refusal to let zombies die… must be kept alive at all costs!
Delete “zombies”, insert “royals and loyals”. One should never underestimate the British will to survive. They will run every kind of experiment needed to keep whole. If all else fails they can undermine the rest of the world when and where needed. Bear in mind, they are the founders of this game and know how to play every move to their advantage while getting you to thank them for it. More than mere words is “Clever Boy”!
I think Gorbachev’s quote was ‘You English are cleverclogs’.
Not sure it was wholely a compliment..
Or, when U.S. invaded Iraq in 2003, certain factions said “here come the professionals” it was a comment of recognitian of doom
England isn’t a world power anymore though. Now that they are no longer a part of the EU, all they are is a financial hub. But, they could easily lose that, and chances are they will. In the modern world, being a tiny country is much better for being a financial hub. Being a financial hub, usually, comes at the expense of the regular economy and citizens. The UK is just too populated to be an ideal financial hub, while also, not being significant enough in the world to be a financial hub like NYC. NYC gets its significance from being a part of the largest economy. Once automaton greatly reduces the head count needed at financial organizations London is screwed, as most will probably relocate to a smaller country, into the EU, or elsewhere.
I’ve been reading about the demise of London as a financial hub for years. The last supposed nail in the coffin was leaving the EU. Constant scare mongering by banks that they would leave Britain and go to an EU country if we voted to leave, and then again if we did leave. They were bluffing, they stayed.
It’s obvious there is more at play than we know – significant concessions I expect. Britain has also become a tax haven.
Give it a few years Mike. England only left early this year and a pandemic was already underway. Until they left, nobody was sure if they would leave. After the pandemic is over, alot of global supply chains will be reconfigured and with it maybe the financial hierarchy as well.
Ya we got three schemes, ya that’s the ticket, schemes -that’s right come on sign up for a great investment. Ya, that;s the ticket!
Without endorsing or condemning the ‘schemes’ it’s possible not all Americans know that this is a word with different meanings or connotations in UK English and US English.
A close translation for ‘scheme’ in the UK is ‘plan’.
Even to my ears ( joint UK Can cit) it sounded odd when the gov said it would offer funds to unemployed youth with a ‘scheme’. This meant a legal business.
I was thought about-different countries, different meanings possibility. Happens with things in different parts of the US too ie- “soda vs tonic” etc….
However, couldn’t resist doing the old Saturday Night Live shtick with the weasel salesman.
The whole sketchy scheme has a large no win probability; except for the businesses, and even that is not really a win.
It’s under a big “W”, seriously
Ya gotta say it–it don’t make any difference!
ANYONE who has not seen “It’s a Mad,Mad,Mad,Mad World” recently or ever is cheating themselves. Watch it!
When Jonathon Winters meets up with Silvers and gets bilked…and when he destroys that service station.
Holy crap–what a movie
That was a good one, but Trading Places was better.
Trading Places was an equal experience, I will give you that, but not better
Re: Mad, Mad World, I was the lifeguard at the hotel where most of the cast and crew stayed. One day I saw Mickey Rooney returning after a shoot with two friends I didn’t recognize. I asked for his autograph and he said “Sure, son, but you’ll also want one from my two buddies, Sid Caesar and Buddy Hackett.” Wow! Rooney’s estate was valued at hundreds of millions when he died, yet he died poor and abused.
My all-time favorite for a business-related comedy is “Hudsucker Proxy,” (1994) from the Coen brothers.
This is dire. We all know insolvencies are coming.
But the pain of this is going to drive some to madness.
Beyond the inevitably of the results of an economic shutdown for a quarter of a year, so far, there is an inevitable human cost.
Let’s hope it doesn’t become accompanied by totally unnecessary shaming, dignity stripping, by different parts of our respective societies.
Oh, boy, human cost. Nothing personal, Tim. I am betting you are sincere. But Human Cost is part of the equation. It’s energy. To be consumed. THAT is the crime.
How many of us, consciously from birth, AGREE to have our energy subverted to purposes we have not agreed to? It’s time to be conscious and wonder about what our personal energy is being spent on.
True, I agree.
But as human beings there is more to us that putting a price on every molecule we inhale or exhale.
That is why I reference that ephemeral thing, dignity. I don’t do so to sound poetic, read intellectually superior, because I’m not, frankly, a poet or intellectually superior.
Oddly enough, dignity and sensible dialogue may become important currencies in their own right. Maybe in economic terms, certainly in sanity maintenance, as they may enable some to keep flexibly thinking when others just stop dead and rage.
Tim, I emphasize “conciousness”. How many of us choose what we ultimately want, that at the point of death we will be happy that we chose?
‘This is dire’
It sure is!
We are gonna find out what would have happened in 2008 if the Central Banks had not kicked the can.
They are still kicking it, but very soon the can is going to get kicked into a wall, and then the Central Banks will be left kicking the brick wall.
I suspect there will not be much in the way of dignity on display after Powell howls in pain having stubbed his toe….
Enjoy the calm.
Tim said: “Let’s hope it doesn’t become accompanied by totally unnecessary shaming, dignity stripping, by different parts of our respective societies.”
If it’s shaming the fED and Banksters,,,,,,,,,,, and social welfare receiving PE firms, Hedge Funds, etc ,,,,,,,,,, why not?
and how about Buffet?, Clinton, Bush, Obama, Geithner and numerous other sellouts of America’s working class ,,,,,,,,,, why not?
and Romney ,,,,,,,, why not?
“Let’s hope it doesn’t become accompanied by totally unnecessary shaming, dignity stripping, by different parts of our respective societies.”
You mean this will be the very first serious crisis in history without pain?
But wait, we all could start tweeting #DignityForAll once a day, that shoud be a game changer.
Um-serviceable debt is what brings down every bubble. There comes a point when people realize that asset prices, inflated by debt driven bubbles, simply are not worth the price they have been driven to…
But the Powers That Be will spare no expense to save themselves. Whether they can or not this time is the question. Wait and see. Which reminds me. I finally got my $1200 from the Feds. Now I can pay my quarterly estimated taxes with it. You see, they’re just saving themselves.
So you got $1,200 of tax forgiveness that I did not get. What are you complaining about?
“Um-“???? Have you been watching that Alice in Wonderland remake? Well, this is about England (plus) so it must be an appropriate useage after all.
debt is never unservicable when you can digitize money and distribute it to service the “debt.” The assets are overpriced largely because buyers prefer the asset to the cash which they perceive is rapidly losing value beyond the premium they pay for the asset.
The FED are thieves that prey on workers and savers. and the unconnected young. their goal is enslavement; wagesalve or debtslave – take your pick.
Feels like USA is the cleanest dirty shirt in the laundry….once again – but not by much.
Not sure how you came by this conclusions, we added trillions to the Fed’s balance sheet in a pretty short period of time to backstop businesses that would have failed.
Retail bankruptcies are up there i.e. see JC Penney etc.
Not really. It is not how much debt you have added but what your debt/GDP ratio is. Adding 20% of GDP as debt with a GDP that is the same as before Covid is probably better than loosing 20% of GDP. Especially as debt is nominal.
char – I know you remember the times when less than $1 of debt resulted in more than $1 of GDP growth. Then it took $2 of debt for $1 of growth. Then $3. We are heading for $5 debt for $1 of GDP growth. Some folks say this growth of debt is exponential.
I disagree, a system can be exponentially stable only within a certain range of inputs. There is no upper bound to the size of debt creation. The credit money system is asymptotic and includes infinite debt. The creation of corresponding GDP is resource limited. Eventually the system oscillates and blows up.
The government is so desperate that they want to tie the solvent to the drowning insolvent!
That way both drown!
From a macro viewpoint the solvent are already tied to the insolvent.
They would drown anyway
Fed Chair Powell: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.” Powell says he’s making the credit flow (apparently weather it wants to or not) in order to HELP ME. Except I don’t use credit. So Mr Powell how you gonna help ME?
Jerome needs to grow a pair and say, you know what, I think I’m gonna raise rates by about 2%.
imagine what they’ll do for Wall Street.
That would be awesome.
Well, I’m mainly hoping that since I’m sitting on some bank stocks, and am considering shorting gold… ok, just kidding on the second.
The Fed follows the bond market, not the other way around. One day the bond vigilantes will go off the reservation much like the SJW have done and the Fed will be as powerless to control them as the police are to stop the looting…..
No disrespect Jdog. I’ve heard this for decades. I think the bond vigilanties are a myth, or a defunct memory.
(It’s hard to know if the police could stop the looting when in many cases the police made no effort to stop it; rumor has it, they were told to stand down.)
And don’t forget we have video of undercover cops INITIATING vandalism…Autozone, Minneapolis, cop smashing windows in the corner thus knowing how to best smash window, too boot!)
They will come around the backdoor and trash the currency, with deficits tripling and no revenue. Got Treasuries?
Then there’s the short version.
Fed Chair Powell: “We’re not thinking.”
The tax payer is busy worrying about equality ,virtue signaling and being educated on what statues need to be brought down. The taxpayer does not have time to worry about what happens to taxes after they are paid. The taxpayer must use all their time to focus on the next newly exposed historical evil white guy that had a street or a monument named after them. The government will take of their needs , with or with-out taxes. Taxes are so last century who cares? The Central Banks will give them what they need.
Mr Chairman was on the TV today. He said he wants for “flow” some “credit” to you. It’s for your own good. Learn to eat credit, Sir.
Please sir, may I have more? , More?, you want MORE?
you should perhaps substitute “taxpayer” with a different word …..
a whole lot of taxpayers don’t fall into the category you are putting them in
“Consideration may need to be given” to free money from taxpayers “to meet solvency or liquidity requirements,” but only “at the extreme end,” whatever that means.
The actual wording below.
Conversion to grant. At the extreme end – consideration may need to be given to grants offered by the government to meet solvency or liquidity requirement and maintain operation through the crisis.
A.9 Restructuring scheme
• Partial or full forgiveness of the debt outstanding as part of a restructuring in cases where debt is considered to be unsustainable and viability of outlook is uncertain.
• Likely only to operate in the case of very small exposures where a public policy decision is being made not to enforce on debt
Size • Smaller end – Only efficient where amount of debt to be written off is less than the cost of employing other strategies.
Viability • Less viable end – will be a last resort after considering restructure to save businesses that wouldn’t otherwise survive.
Industry • Most likely to be used in cases where public policy / industrial policy requires that companies / Industries are supported.
Preliminary perspectives and questions (for further consultation)
• Injecting finds at the bottom of the chain will help prevent the problem becoming systematic e.g. suppliers also finding themselves in trouble and so on.
• Will be a challenge to get criteria simple enough to approve at scale, but not so simple as for businesses to easily manipulate their books to get approved – Significant moral hazard risk if potential is signalled too early.
• Do you need to have an anti embarrassment / claw back clause?
The word consideration featured 53 times in the interim report.
I was at a gathering for one of the hockey leagues yesterday evening and one of the guys there manages dozens of homes in Queenstown that are long term lets.
He says he is spending endless hours re-negotiating leases as tenants are demanding lower rents.
Apparently many of the owners are on interest only or full mortgage holidays yet they are still struggling to service their mortgages — so they are resistant to much in the way of rent reductions.
As he put it – what happens when the mortgage holidays end — they’ll be facing higher monthly payments. He is with a big national RE agency and the fear there is that loads of homes will be defaulted on in 6 months time and that will crash the market and trigger a financial crisis.
The government almost has no choice but to extend these subsidies… (no getting of the highway to hell once you get on it….)
Meanwhile ongoing wage subsidies continue to foster a happy camper atmosphere — as one guy put it – I saved money during the lockdown because I didn’t go to the bars to drink — could not order takeaway food — and used almost no petrol….
If only this utopia was perpetual….
Everyone I spoke to (most are under 30) seems aware that this situation is unsustainable but they are confident that the local and global economy will pick up ‘soon’ and we will return to normal.
I nod in agreement with them… no point in raining on the parade.
Here in NZ and globally, we are in the calm before the storm — we are all sitting on multiple giant, ticking, atomic time-bombs….
Well, it’s mid-june. 6 months’ time it will be near enough Christmas.
Perhaps the great throwing in of the towel will be in January – March 2021.
Maybe so Tim, but IMHO, the towel throwing here will start right after the pres election here in USA, no matter which of the current bad choices ”wins” or whatever we call it when one ”fix/crooked process” beats another.
Said for a long time that if the riots/crashing started before the election here that our owners/oligarchy wanted incumbent pres out,,, and if starting after election they wanted him to stay in.
@ Willy W.
“The government almost has no choice but to extend these subsidies…”
Here in San Francisco, it seems it might already be happening. Here is a local headline from yesterday.
“SF Moves to Extend, Expand Moratorium on Evictions.”
I’m wondering how this does not equal outright government confiscation of private property.
Nothing goes to heck in a straight line.
There is mania on the way up, but a lot of denial (mania really) on the way down too.
Dumb cat bounce.