British finance proposes repackaging state-backed coronavirus loans

By Huw Jones

LONDON (Reuters) – Britain’s financial sector is proposing the repackaging of some 35 billion pounds ($44 billion) of state-backed coronavirus corporate relief loans to ensure taxpayers do not foot the bill.

The British government introduced the state-guaranteed loans after a coronavirus lockdown in March forced thousands of companies large and small to shut for several months.

“Many business are swimming hard to stay afloat and they can’t face up to the challenge of repaying the debt,” TheCityUK Chair Adrian Montague told a City & Financial online event.

TheCityUK said it will send its report recommending the transfer of state-guaranteed debt into an arm’s length body to Britain’s finance ministry this month.

“The debt can then be replaced either by some kind of tax paying obligation that the report recommends, or converted into long-term capital,” Lloyd’s Bank Chairman Norman Blackwell said.

The government or the new body would then have to find ways to bring in private finance and remove it from the public sector balance sheet “at an appropriate discount”, Blackwell added.

Recapitalised firms would retain control of themselves.

Repayments on the loans, which are administered by banks, are due to start in March. But a third of businesses that took them will struggle to repay unless they are recapitalised, Omar Ali of EY consultancy said.

“We are talking broadly about 35 billion pounds of lending in government schemes by that point potentially becoming unsustainable,” Ali said. Around 750,000 small and medium sized companies and over 3 million jobs are at threat.

Unsustainable corporate debt could be 100 billion pounds in total, with government-backed debt a third of that, he said.

Katharine Braddick, the finance ministry’s director general for financial services, said banks must tread carefully due to the “spectre of GRG”, a reference to the mistreatment of small firms a decade ago by Royal Bank of Scotland.

“There is challenge for banks in scaling up our business support units to be able to handle all this and to do so sensitively,” Blackwell said.

($1 = 0.7937 pounds)

(Reporting by Huw Jones; Editing by Alexander Smith)