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State-owned debt manager plan to save struggling firms

Lloyds Banking Group

Banks want to protect their reputation (pic: Terry Murden)

The Treasury is reviewing a radical proposal for a new state-owned body that would manage £35 billion of toxic coronavirus debt and help save up to 780,000 British businesses.

A taskforce called the Recapitalisation Group, led by EY and the lobby group TheCityUK, is recommending that a government-owned UK Recovery Corporation be established to handle a growing pile of unsustainable government-backed debt that could otherwise wipe out thousands of businesses and lead to three million job losses.

Banks have signed up for a student loan style repayment system for companies amid fears that up to 800,000 businesses could go bust in the next year if they are unable to defer repayments on government-backed loans.

The idea, proposed by the Institute of Directors last month, would allow coronavirus loans to be converted into a tax debt repayable over a decade.

Like student loans, the money would only be repayable when and if the businesses was in a position to do so.

Banks want the scheme to be administered by HM Revenue and Customs.

There has been widespread acknowledgement that many firms will struggle to repay the £46bn in loans taken out so far, under government schemes designed to help business survive the coronavirus crisis.

Daily Business 3 June

Despite Government guarantees of between 80-100% companies in trouble will still be in default and therefore likely to go bust.

The banks want a scheme in place that will not incur damage to their reputation if they have to pursue small businesses for repayment of these loans. The proposed repayment scheme would also mitigate the extent of government write-offs.

The Treasury described the proposals as “a useful contribution to discussions on how businesses can be best supported through this difficult time”.

The Institute of Directors said a student loan–style scheme could give small businesses more breathing space to invest and grow as they make repayments, while potentially lowering the risk of loan defaults.

Of those who had taken on debt, four out of ten respondents to a survey said that restructuring into the student loan format would be best for their organisation, compared with only 5% who favoured converting the debt into equity held by a public body.

The IoD says government, banks, and businesses need to work together to deal with the debt mountain firms face, to enable them to invest and heal the economy and the student loan format may be a solution.



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