Financial institutions set out plans to help recapitalise businesses - what are your views?
Financial institutions have developed plans to help recapitalise businesses with elevated debt levels from government COVID-19 lending.
TheCityUK Recapitalisation Group raised concerns about the risk of elevated debt levels affecting business sustainability in its report Supporting economic recovery: Recapitalising businesses post COVID-19. It highlights that jobs and businesses (SME to large) are at risk if urgent action is not taken.
Financial institutions (initially banks and other lenders but also asset managers, investors and pension funds at a later stage) are being asked to review their products and to develop more innovative solutions to help reduce the risk of default. This includes options for converting, restructuring and repaying this debt and creating contingent tax liabilities as a restructuring tool to help repayments. The aim is to help de-risk businesses from the implications of higher leverage through COVID-19 government lending initiatives and tax deferrals.
Summary of main points of the report
Central to the options outlined is the founding of a new government-backed entity, a ‘UK Recovery Corporation’. This would both issue and hold, and oversee and manage, the unsustainable debt that is already government-guaranteed, in order to support funding on more manageable terms for businesses, and provide a vehicle in which the private sector could invest in over time.
Through the UK Recovery Corporation, viable SMEs would be offered the opportunity to convert their loans into new products allowing them to manage their debt in a more sustainable way and without being put into default. Depending on the size of their debt, they could either access a ‘Business Repayment Plan (BRP)’ to convert unmanageable loans into means-tested tax liabilities, or, for larger debts, use ‘Business Recovery Capital (BRC)’ to convert crisis loans into preference shares or long-term subordinated debt. Both products will ensure SMEs do not give up any equity in their business.
Also among the options presented is the creation of a new growth capital fund, or the scaling up of an existing fund, to provide businesses with growth capital to help power business recovery across the country. This will be particularly important in areas outside London, with London having historically dominated SME equity investment. Growth Shares for Business (GSB) will allow SMEs to rebuild cash reserves, invest in working capital and relaunch after the crisis. This growth capital would support the regeneration of local and regional economies and help drive forward the long-term recovery of communities across the UK.
Scottish Financial Enterprise business recovery briefing
On 22 September Scottish Financial Enterprise (SFE) held a business recovery briefing with ICAS. Chaired by SFE CEO Graeme Jones, the briefing provided an overview for those involved in finance within business, audit, tax and investment at both SMEs and large businesses.
The briefing slides are available to download and provide details about the options put forward by TheCityUK Recapitalisation Group.
Next steps
Discussions are being held with government, business groups and other stakeholders regarding the potential for implementing the report’s recommendations. The report sets out three options for the implementation of the recommendations - Light, Hybrid and Full Scale - each having a progressively longer implementation timescale, depending on complexity.
We would like to hear your views
What is the view of CAs? Are you supportive of the proposals or do you think further evidence is needed? Would you want to join a webinar to hear more? Please email us to share your views.