MNI INSIGHT: BOE Equity Finance Push; Doubt Over Pace, Impact

With swathes of UK companies facing increased levels of debt as a result of economic fallout from Covid-19, the Bank of England is championing the case for increased equity finance, but the legacy of its own ongoing consultations may stymie any significant change in regulatory hurdles in time to allow a change in institutional mindset any time soon.

The Covid shock has put the financing difficulties of unlisted UK companies in the spotlight and the BOE is concerned debt overhang could drag on the recovery, therefore, at the Treasury's request, Threadneedle St is looking into regulatory obstacles to channeling equity finance.

One issue of concern for Alex Brazier, the Bank's Executive Director for Financial Stability, and his colleagues is tackling liquidity mismatch, where the investment industry norm has been to promote funds that offer investors instant redemption, which means in practice they steer clear of investment in relatively illiquid equities that can block withdrawals when things turn sour. Brazier has made the case for lengthening notice periods and consultations are ongoing.

ACTION NOW

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), told Market News "we don't think there needs to be any further consultation. You need to take action now".

There have been high profile scandals over the suspension of withdrawals from popular equity and property funds that advertised, but could not deliver, instant redemption. The tightrope for regulators is to ensure investors are aware of liquidity risks without tilting the scales further towards ultra-liquid investments and away from smaller firm and infrastructure projections.

The AIC advocates matching redemption terms to the liquidity of the underlying asset and regulatory are taking sounds over setting a minimum notice period.

JOB RISK

Research published in the BOE's August Financial Stability Report underlined the sheer scale of the financing challenge UK corporates are facing, estimating a total cashflow deficit, a measure of how much is likely to be needed just to survive the Covid shock, at GBP200 billion, or around 10% of GDP and many smaller firms face hardship, putting millions of jobs at risk.

Chancellor of the Exchequer Rishi Sunak told lawmakers that it would not be sensible for the government to have stakes in a whole swathe of smaller firms, and the hunt is on to attract private sector funding.

There are doubts over how much Sunak can do near term, with his Autumn Budget looming, with drives to get major institutional investors such as insurers and pension funds to put more into equities requiring cultural change.

"Realistically, I am afraid even small regulatory changes take time," Sayers said.

"Once the commitment has happened then everyone will probably work together to try and get it done as quickly as possible," Sayers said.