TheCityUK sets out work to recapitalise the post-Covid-19 economy

TheCityUK has today written to Bank of England Governor, Andrew Bailey, to share analysis on the potential level of unsustainable debt held by UK businesses in light of the Covid-19 pandemic and set out its approach to finding industry-led solutions to recapitalise these businesses and support the economic recovery.

Preliminary work undertaken by TheCityUK’s Recapitalisation Group – which brings together leaders from across the financial and related professional services industry – suggests that by March 2021, the level of unsustainable debt held by UK Private Non-Financial Corporations (PNFCs) could be up to £90 to £105 billion, of which CBILS lending could contribute £10 to £20 billion.* If left unresolved, these levels of unsustainable debt could inhibit employment, research and development, investment and ultimately a smooth economic recovery back to growth.

To address this potential level of unsustainable debt, firms will likely need to raise new equity and/or restructure debt. Historical data shows that the total amount of private equity investment in 2018 was £20.6 billion, total private equity investment into SMEs in 2018 was £6.7 billion, and bank lending flow to UK SMEs (PNFCs) in 2019 was £57 billion. Significant volumes of new, appropriately structured capital from existing or other sources will likely be required to support the future success of UK businesses and the long-term competitiveness of the economy.

Miles Celic, Chief Executive Officer, TheCityUK, said,

The economic lockdown created by the pandemic has required unprecedented interventions. Businesses have been put into suspended animation until they can safely reopen. This was absolutely the right thing to do, but it means the job is not yet done. The economy will need to be reawakened as part of its process of recovery.

“Our industry is determined to play its part in getting the country back on its feet. Working at a pace and with real determination, firms across the industry are collaborating to identify a financially viable pathway to recovery and a return to long-term growth for UK businesses.”

TheCityUK’s Recapitalisation Group is working with industry, business, government and other key stakeholders to determine the best collective response to this challenge.

The group is chaired by Sir Adrian Montague and a technical working group is being led by Omar Ali, EY’s UK Financial Services Managing Partner. It will look at options to recapitalise UK SME businesses, and resolve debt that could act as a brake on them and the rest of the economy. The aim will be to optimise the availability of capital to business. Any final recommendations are likely to include a range of options tailored to specific business needs.

The full letter is available on TheCityUK website: https://www.thecityuk.com/assets/2020/ff312db314/TheCityUK-Recapitalisation-group-initial-workplan-letter-to-the-Bank-of-England.pdf

*The limitation of this analysis should be noted and the numbers should be treated with caution. In the absence of any consistent current data, it is based on a number of key suppositions and assumptions, including; the length of the pandemic and the measures taken to relax lockdown, and on the top-down interrogation of high-level data prepared in other contexts. This analysis will be reviewed and refined as more current data becomes available.