TheCityUK’s Recapitalisation Group (RCG), supported by EY, has today published updated projections for levels of unsustainable debt faced by SMEs. An improved outlook for the economy, due in part to Government stimulus, has led to a fall in the projected level of unsustainable debt, but the recapitalisation of UK SMEs remains a huge challenge, which will be a drag on the long-term return to economic growth.
The RCG now estimates that the total unsustainable business debt expected by March 2021 will be c.£67-70bn, down from the c.£102bn predicted in May this year. As much as c.£20-23bn of this unsustainable debt is expected to stem from government-guaranteed lending schemes (BBLS, CBILs CLBILS), down from the c.£35bn projected previously.
Revisions to the RCG’s projections are driven by a more positive macroeconomic outlook, a greater than expected slowdown in SMEs’ uptake of the government’s lending schemes in recent months, and new, more granular, data from the British Business Bank on the regional and sectoral composition of the government loans made to date.
Recent economic indicators, including September’s UK employment numbers which show the UK’s unemployment rate up to 4.1% with payrolls down around 695,000 since March 2020, suggest businesses are already under intense pressures to maintain their operations and protect jobs. With further headwinds emerging, including the need to repay VAT and other taxes that have been deferred and loan repayment holidays and interest-free periods winding up, SMEs will be hard pressed to pay back what they owe at a time they can least afford to do so.
The RCG sets out further forbearance measures to the proposals it published in July, which aim to provide SMEs more time to recover sufficiently and repay their debts. These include an extension to the capital or repayment holiday on government scheme loans – possibly for a further 12 months. This would, on balance, reduce long-term cost to the taxpayer by reducing levels of SME defaults and the loan guarantees these would trigger.
Miles Celic, Chief Executive Officer, TheCityUK, said,
Steady progress towards economic recovery should be celebrated, but the journey is far from over. The UK has made progress, but the projected unsustainable debt is still very large, and this will slow SME recovery up and down the country. Focus must turn from immediate firefighting to addressing these longer-term challenges – and supporting the recapitalisation of millions of SMEs remains a critical issue. Our industry is determined to play its part in helping SMEs meet their obligations, and in doing so, save taxpayers billions in loan guarantees. There are no easy answers to this problem, but a great deal of creativity and innovation is going into finding a viable way to convert, restructure and repay this debt.”
Omar Ali, UK Financial Services Managing Partner at EY and Chair of TheCityUK Recapitalisation Technical Working Group, said:
The fog of economic uncertainty that descended with this crisis has started to lift, and the obstacles to economic recovery that lie ahead are coming into sharper focus. Recapitalising businesses so they can successfully relaunch and even begin to look to growth will be an essential ingredient to economic recovery. The key challenge now is how we help SMEs service the huge amounts of debt they have taken on as a consequence of the pandemic. Not finding a solution will impact SMEs up and down the country and lead to significant job losses, the majority of which would be outside of London. The industry remains united in supporting government to help businesses bounce back from the crisis.”
Since TheCityUK first highlighted industry concerns about the growing recapitalisation challenge in May, a growing list of independent organisations have also published related work, adding to the evidence that the a recapitalisation short fall is expected be a significant drag on the country’s economic recovery*. These reports demonstrate the widespread concern about this unsustainable debt problem, as well as the broad determination of industry and policy makers to take appropriate action as early as possible.
*Other organisations to publish reports warning of the recapitalisation challenge: Bank of England, Office for Budget Responsibility (OBR), House of Commons Treasury Select Committee, British Chamber of Commerce (BCC) and TSB, Onward, Social Market Foundation, Innovate Finance and Scaleup Institute and Edison.