Pandemic could rip 105 billion pound hole in small company finances

LONDON (Reuters) – Britain’s smaller companies could be saddled with up to 105 billion pounds ($129 billion) in “unsustainable” debt by March next year that will need recapitalising, a financial services body told the Bank of England on Monday.

TheCityUK, which promotes Britain’s financial services sector, said in a letter to BoE Governor Andrew Bailey that businesses will require full-scale recapitalisation to alleviate the hit to employment from the pandemic, which is set to trigger the UK’s worst economic downturn in 300 years.

TheCityUK is assessing the likely demand for fresh capital, how much of it the private sector could provide, and explore ways with government and the BoE to plug any shortfall.

The main focus is on unlisted small and medium sized firms that all together employ 16 million people and generate turnover of over 2 trillion pounds. Many have had to close during a nationwide lockdown to combat the spread of the coronavirus and even when they reopen demand is still expected to be depressed by the economic impact of the virus.

A preliminary analysis showed that the level of unsustainable debt in the sector could be between 90 billion pounds and 105 billion pounds by March 2021, TheCityUK said.

“Our preliminary work suggests our main focus should be forbearance and restructuring and the recapitalisation of companies using equity or equity-like instruments,” it said.

Some 10 billion to 20 billion pounds of the unsustainable debt could be in the form of government-backed loans now being provided to SMEs, TheCityUK said, in an indication of size of stakes that could potentially end up in public hands.

TheCityUK said it will set out options in June for further discussion with the government and the central bank.

“We hope our work will provide a firm foundation and a transparent evidence base to support rapid action if and where needed,” it said.