Economic impact of coronavirus: the challenges of recovery Contents

3Corporate debt

81.This Chapter explores the issue of corporate debt. Not only is it significant in itself, there is a risk that the recession may be prolonged because businesses burdened with debt choose not to employ or recruit more people.

82.The Government has initiated different types of business loan schemes to try to avoid businesses failing as a result of the pandemic:107

83.The Government also initiated some grant schemes, which were targeted at small businesses or the hospital and leisure industry:

84.In a letter to the Chancellor,110 we asked the Government to show greater transparency about loan disbursements, as there were concerns about their access and speed in the early stages of the crisis. We also urged the Government to reconsider its position on guarantees.111

85.Dr Adam Marshall, Director General of the British Chamber of Commerce told us the CBILS and CLBILS schemes “had a bit of a slow and rocky start [ … ] Response times were rather difficult, and then a backlog appeared as well [ … ] which left a number of businesses frustrated.”112 The initiation of the Bounce Back Loan Scheme, which had a 100 per cent Government backed guarantee, meant that disbursements speeded up for the most part. Dr Marshall pointed out that “[c]ash has been getting out to the front line much more quickly from that particular scheme” and “[m]any businesses are reporting that they had a simple application process and they had the cash within 48 hours, as was expected”.113 However Giles Wilkes, Senior Fellow at the Institute for Government, thought the speed with which the Bounce Bank loans had been issued was “an incredible red flag”, with “something like 750,000 small companies and some £20 billion straight out”, and noted that it “is very rare for state money to be drawn out that quickly without it meaning something has gone slightly wrong”.114

Risk of a balance sheet recession

86.Lord O’Neill of Gately stated that he would have preferred to have “had an approach that was more grant-based” and “considered forms of potential equity injection for those that really needed it for a longer period, rather than this very wide, scattergun debt approach”. He could not “imagine how that many companies are going to be able to repay a lot of it”.115

87.We received significant evidence that there was a risk the recession could be prolonged through a balance sheet recession in which businesses, overburdened by debt, would not recruit or invest. A report on recapitalisation, (changing the structure of companies so that they are more equity based) initiated by TheCityUK concluded that “up to 3 million jobs across the UK and 780,000 SMEs are at risk if urgent action isn’t taken to tackle the projected £35bn of unsustainable debt from Covid-19 loans”.116

88.Jon Moulton, Chair of finnCap described the scale of the problem as “enormous, unless we have a very good, strong economy and very, very low interest rates”.117 Dr Marshall observed that companies could either end up “under-trading and unable to repay their debts” or “over-trading, run out of cash and find themselves in difficulty as well”.118

89.Torsten Bell from the Resolution Foundation warned that history shows that “balance sheet recessions have weaker recoveries than just straight income shock recessions.” He also pointed out that even if loans were written off in the future, lack of clarity for businesses going forward about how to resolve their debt might have a lasting effect on their behaviour over the course of the early phase of the recovery which was “deeply suboptimal”.119 Both he and Paul Johnson were concerned that market concentration would go up during the crisis, due to the failure of small firms. Paul Johnson said:

One of the biggest risks of this crisis is that we move into a world in which we have much more concentration of market power than we have had hitherto, because it is the bigger companies and very big multinationals, and indeed big national companies, that can survive because they have the balance sheets that enable them to.120

90.In contrast, the Chancellor told us he was “not completely persuaded of the scale of the problem at the moment” and gave the following reasons:

91.The Chancellor’s evidence to us contrasted with other information we received, in particular with TheCityUK’s Final Report on Recapitalisation which highlighted the following statistics:

92.TheCityUK’s report also indicated that the private sector could not provide a solution.

The volume of SME equity finance is low, at under £10bn per annum, and currently only a very small fragment of UK SME equity investment is allocated to rescue/turnaround (approximately 2 per cent in 2019) with the majority focused on growth capital. There are also large differences in equity investment levels across UK regions with around 75 per cent of SME equity investment (and half of all equity deals) skewed to London.123

93.The Bank of England’s Financial Stability Report August 2020 also expressed concerns about corporate indebtedness warning that: “While the current low level of interest rates supports the sustainability of UK corporate debt”, higher leverage make the corporate sector more vulnerable to interest rate or earnings shocks.124 The Bank also indicated “equity finance likely has a role to play [to support] entry of new companies and growth of incumbents”.125

Potential solutions for smaller businesses

94.For large businesses, the Government could potentially intervene in reducing their debt levels by taking equity stakes in them and reducing their debt. However witnesses told us that it was not viable for the Government to take equity stakes in lots of small businesses. Professor Philip Booth, Senior Academic Fellow at the Institute of Economic Affairs, pointed out:

I think I am right in saying that, on average, about one in 600 microbusinesses turns into a large business. To the idea that the state should be taking an equity stake in these businesses and guiding their decisions, first, it is practically impossible.126

95.Dr Joshua Ryan-Collins, Senior Research Fellow at the University College London, rebutted:

I am obviously not suggesting that a state investment bank takes equity stakes in small firms. Small firms are clearly not suited to that type of support. They need debt and grants.127

96.The Chancellor said that he was not sure “it would necessarily be sensible for the Government to have individual equity stakes in millions of very small businesses.”128

97.In its Report on recapitalisation, TheCityUK recommended the establishment of a new state entity, a “UK Recovery Corporation”, to administer the options below:

These were very similar to options described by Jon Moulton to us in June 2020.130

98.Dr Marshall, Torsten Bell and Paul Johnson also favoured a “contingent tax-liability-type structure” for the smaller SMEs. Paul Johnson described this:

rather like student loans, in a sense. If you do well, having had the loans, you may well be asked to pay quite a lot back, but if you do not then you will not.131

99.George Osborne argued that the best way of dealing with corporate indebtedness would be a straightforward debt forgiveness programme, though he recognised that it would be unpopular with Treasury officials:

If there are loans that are just not going to be paid back, either you write them off or, as I suspect will happen in practice, every six or 12 months the Chancellor of the time announces that the lending terms are pushed out, the rates are kept very low and so on, but they still sit on a company balance sheet. A big act of debt forgiveness would be better. After all, as Alistair was saying, we lent to keep these companies going while we deliberately shut down the economy.132

100.It remains unclear how the Government expects businesses to pay back loans in the future. The crisis and the lockdown of the economy meant that businesses have largely forgone revenue which many are unlikely to make up in the future and revenue is also likely to be suppressed in some sectors for some time.

101.We are concerned that there may be a significant lack of capacity and willingness for the private sector to step in to provide solutions for corporate indebtedness especially amongst small and medium-sized enterprises (SMEs). Viable SMEs struggling with debt will prolong the recession and so the Government must develop solutions for ensuring the recapitalising of their balance sheets. The Government must outline a plan for this within the next three months. It should think creatively (as it has around other support measures) and consider a wide range of potential interventions, such as contingent tax liability or student loan type structures in relation to debt for SMEs, where repayments are conditional on them demonstrating appropriate financial health. TheCityUK has already carried out a comprehensive review on the recapitalisation of businesses, which should provide a starting-point for the Treasury’s work.

Equity stakes for larger businesses

102.For larger businesses, there is the possibility of the Treasury investing in equity stakes. Through Project Birch, the Treasury is handling bespoke bailouts of “viable companies which have exhausted all options”, including government loan schemes. Celsa, a steel company, has been granted an emergency loan of £30 million from the Government in what was believed to be the first such deal.133

103.We received mixed evidence on how interventionist the Government ought to be when investing in businesses. Professor Jagjit Chadha, Director at the National Institute of Economic and Social Research (NIESR), pointed out that the state might not be best placed to allocate capital, and if it were to actively invest in companies it might also inadvertently impede the effectiveness of the market mechanism:

Asset prices give information about firms that are doing well, firms that are doing badly and how we should allocate capital. If it is felt that the state is controlling those asset prices, there would be a concern there on an ongoing basis. What kind of criteria would we use for deciding which firms we would invest in and to what extent? Who in Whitehall would we send to sit on these boards?134

104.However, Lord O’Neill argued that the state should consider taking the opportunity to deploy a more interventionist industrial strategy now, as other countries have done, by taking active investments in companies strategically, though at arm’s length:

You would have to create an arm’s-length investment body. [ … ]. The investments are undertaken by experienced professional people. Around the world there are equity-based entities where the Government are the 100 per cent shareholder, Singapore’s Temasek being one that has some parallels, but the investments are made by experienced investors. The remit is given by the Government but the actual investing is done at arm’s length.135

When challenged on whether there was expertise within Government on picking the right investments, he argued that there was capacity in the Treasury.136

105.We also received differing views on what sort of conditions the Government should impose when it invested. George Osborne expressed scepticism about imposing conditions. He pointed out that businesses needed help because they had been asked to shut down, through no fault of their own.137 However Lord O’Neill thought that Project Birch was an opportunity for the Government to use equity stakes in businesses to pursue its “levelling up” and decarbonisation agendas. He argued that:

for many of those kind of industries, this is an ideal chance to help gear them towards further appropriate financial investments, to help accelerate a move towards net zero climate goals. The second one would be very specifically, on a regional basis, to support the so-called levelling-up agenda. [ … ] For example, a bit of research has been done by a few people to suggest that advanced manufacturing, alternative energies and life sciences are three things that the north of England has, in theory, the potential to be world class in, but there were not really the resources to do it. The Government have the chance, in this mess, to do that through such a vehicle.138

106.The Chancellor made clear to us that the Government would only bail out companies in “exceptional circumstances”. He said bail outs would only occur in “situations where a company has some strategic value, clearly has a long-term viable future and the existing equity holders and creditors have shared in the burden and are not just looking for a free ride on the taxpayer”. He also indicated that there would be conditions attached to it such as on “executive pay, climate change, [and the] treatment of suppliers”.139

Need for new state structures

107.Some witnesses indicated that the crisis highlighted a need for the UK to have a state investment bank. Philip Hammond pointed out that the UK had some structures at the moment such as the British Business Bank but:

If the requirement is very widespread across huge swathes of industry for recapitalisation of companies and the markets are not in a position to do that [ … ] we might have to look at other structures.140

108.Giles Wilkes told us the UK had “always been a bit of an outlier in having such a laissez-faire system,” and argued that in the current crisis situation “the UK had to work through the private sector” which meant “quite a slow process of contracting and vetting” and not getting money out very quickly.141

109.TheCityUK’s Report on recapitalisation also supported the creation of a new state bank which it referred to as the UK Recovery Corporation which could be used to administer solutions for indebtedness in SMEs.142

110.The Treasury should evaluate whether there needs to be a new state body or a remodelling of the British Business Bank, to provide loans at speed in a crisis if required, and to also play a part in recapitalising businesses including investing strategically in large businesses.


108 Government guidance for Future Fund

109 HM Treasury Guidance on business support grants

110 Letter to the Chancellor, 11 May 2020

111 Chair comments on Chancellor’s announcement of Bounce Back Loans, Treasury Committee press release, 27 April 2020

112 Q663

113 Q663

114 Q623

115 Q663

117 Q666

118 Q666

119 Q625

120 Q635

121 Q863

124 Bank of England, Financial Stability Report, August 2020, p 19

125 Bank of England, Financial Stability Report, August 2020, p 19

126 Q497

127 Q497

128 Q864

130 Q666

131 Q635

132 Q550

133 The Financial Times, Steelmaker Celsa strikes first bespoke UK deal, 2 July 2020

134 Q496

135 Q668

136 Q676, Q672

137 Q562

138 Q673

139 Q899

140 Q561

141 Q61




Published: 11 September 2020