Much of the framework of support for business during the coronavirus pandemic has focused on a variety of loan schemes – principal amongst these being the coronavirus business interruption loan scheme (CBILS) for SMEs and the Covid-19 corporate financing facility for larger companies. The debate on such schemes has tended to concentrate on whether the government guarantee to lenders should be 80% or 100%. But nobody seems to ask the obvious question of whether the loan schemes are the correct solution in the first place. Whatever the guarantee level to the lender, the loan remains 100% repayable by the borrower.
Apart from direct government support – grants, tax breaks, etc – the sources of finance a company in difficulty should consider are loan finance or equity finance. In the current situation, the choice should depend on whether Covid-19 and the lockdown has created a short term liquidity problem or an insolvency problem. If the former, debt instruments may be appropriate; if it’s the latter, equity finance is really the only viable solution. I believe that for a very large number of companies this has become an insolvency issue. Saddling them with more unsustainable debt – which they can, ridiculously, obtain under these schemes on a business model that ignores the coronavirus impact – is not a sensible solution.
There is growing support for this view. A survey by the Association of Practising Accountants showed that more than half of SMEs will run out of cash in 12 weeks. Influential lobby group The City UK claimed that unsustainable debt held by UK private companies could reach between £90bn and £105bn by March 2021, with government-backed loan schemes to SMEs accounting for between £10bn and £20bn of this. It acknowledged that private equity sources would not be sufficient for the refinancing that will be needed, and floated the possibility of state-backed intervention.
The solution, when the chickens come home to roost, will undoubtedly be a haphazard series of bailouts and loan to equity conversion schemes – without the coherent strategic plan for the structure of the economy that we would like to see emerge and develop from the crisis. What should be Labour’s response? First, we should assert that giving the already over-leveraged corporate sector loans, to infinity, is not a good idea. Instead, we should argue for state institutions to provide support by taking an equity stake.
Such equity support should be selective, focusing on companies and industries that fit with our image of a more desirable, greener post-coronavirus economy and assisting job preservation and creation in such companies. Without such an approach, there is a danger that the Covid-19 recession will, like the 2008 banking crisis, be followed by a series of haphazard bailouts. This would allow private companies to retain profits made in good times while the state – and ultimately the taxpayer – assumes the burden of losses made as a result of a crisis.
20th May 2020