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Overindebted UK companies may need help to swap debt for equity – BoE governor

Bank of England Governor Andrew Bailey has said he is looking at options to help overindebted companies struggling because of the pandemic to swap debt for equity.

Bailey told parliamentarians on the Treasury Select Committee that he was in close contact with the Treasury and with businesses looking at the issue along with TheCityUK, which represents U.K. financial and professional services.

He said he hoped companies looking for equity funding would turn first to the market, noting that some had already done so, but if that was not possible then other options must be available.

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Bank of England Governor Andrew Bailey said "options must be available" for troubled companies.

Source: AP Photo

"We've got to have options for equity. Either those [already overindebted] companies or some companies which are taking on debt during this period who actually conclude that postcrisis they need more equity, they may need to substitute debt for equity," he said. "We need to be clear that that does need to be addressed."

TheCityUK's recapitalization group, established to consider the extent of the demand and availability of fresh capital amid the pandemic, has said banks could be on the hook for billions of pounds of unsustainable debt due to state-backed lending programs.

In a letter to Bailey on the issue, it said the level of unsustainable debt held by U.K. private nonfinancial corporations could be between £90 billion to £105 billion by March 2021, with lending from the Coronavirus Business Interruption Loans Scheme contributing up to £20 billion of that sum.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Lloyds Chairman Norman Blackwell, a member of the recapitalization group, has said the government would be better off converting loans it has already guaranteed into equity stakes or an equity-type security if loans are unsustainable.

The group said that to address this potential level of unsustainable debt, firms will probably have to raise new equity and restructure debt.

Looking initially at unlisted businesses that qualify for government-backed lending schemes, TheCityUK is currently considering how previous situations, including after the Second World War and during the financial crisis, were resolved.

In the financial crisis the government created UK Financial Investments, now UK Government Investments, to hold its stake in taxpayer bailed-out banks, and it still holds a 62% stake in Royal Bank of Scotland Group PLC, for instance.

TheCityUK is aiming to come up with recommendations by late June or early July.

The Treasury declined to comment on possible solutions to dealing with companies with unsustainable debt following coronavirus loans, noting only that it was "looking at ideas" for dealing with the fallout of the loans.

However, the Treasury has already said loans made through its £250 million Future Fund, which launched May 20, for tech start-ups will convert to equity if not repaid.

Equity funding

UK Finance, which represents the banking industry, has already suggested unpaid loans might have to be converted into equity stakes.

"Equity will also be required for those businesses that do take debt on to survive the crisis but it turns out they do not have the financial strength as they come out of the crisis to support that debt. We will need equity in order to convert some of that debt into equity," UK Finance CEO Stephen Jones told members of Parliament.

The Bank of England's Deputy Governor Sam Woods, at the same Parliamentary meeting, also said equity funding might be necessary.

"It may be that a market solution is possible. If it is not, I guess there is a choice for the government, and it is a difficult one," he said.

Pandemic loans

The latest data on take-up of the various state-sponsored loans schemes available due to the pandemic show that more than £22 billion in loans has been provided to more than 500,000 businesses.

On the Coronavirus Business Interruption Loans Scheme, which is 80% state-guaranteed with 20% of the risk taken by the banks, £7.25 billion in funding has been approved.

For the Coronavirus Large Business Interruption Loans Scheme, also only 80% backed by the state, £590 million has been provided to 86 companies. For Bounce Back Loans, aimed at the smallest companies and 100% state-guaranteed, £14.18 billion has been loaned to 464,400 businesses.

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