The Bank of England governor Andrew Bailey has been warned that £36bn of emergency coronavirus loans to small businesses risk turning toxic.
A report by industry body TheCityUK’s Recapitalisation Group that will be published tomorrow warns of “unsustainable” debts which could impede recovery.
The report, chaired by Aviva chairman Sir Adrian Montague and supported by EY, forecasts that by March 2021, UK businesses are likely to face between £97bn and £107bn of unsustainable debt, of which around half will sit with SMEs.
While the majority of the unsustainable debt will stem from existing debts, the report estimates that between £32bn and £36bn “of the total unsustainable debt will stem from the government’s Covid-19 lending schemes”.
The sectors most exposed will be property – representing 24 per cent of the total estimated unsustainable debt – accommodation (16 per cent) and construction (11 per cent).
Miles Celic, chief executive of TheCityUK, said: “SMEs are the engine of the UK economy. Lifting the debt burden from the shoulders of otherwise viable businesses will be essential to supporting a robust and sustainable economic recovery. However, this is a huge and complicated challenge. It is already clear that there won’t be a one-size-fits-all solution.”
The report, first reported on by the Sunday Times, outlines a number of solutions to the debt burden but the current focus is on equity, tax-based solutions, and forbearance.
The Recapitalisation Group said the update shows that the recapitalisation needs of SMEs are “particularly acute given the low volume of equity historically raised by SMEs – an average of £7.2bn a year between 2017 and 2019”.
Governor Andrew Bailey said: “The question of recapitalisation remains the focus of a great deal of work at the Bank. I look forward to working with TheCityUK and others as we design solutions to help support the UK’s recovery from this terrible disease.”
Last week the Institute of Directors (IoD) called on lenders and the government to tackle the burden of debt on SMEs to avoid a protracted economic recovery. In a poll of 720 company directors, just over half said the debt their business had taken on during the current crisis would have a negative impact on their recovery.